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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
    FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2004
 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-20774 ACE CASH EXPRESS, INC.  Texas
    
    75-2142963(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)1231 Greenway Drive,
Suite 600 Irving, Texas
    
    75038(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code) (972) 550-5000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchangeTitle of each class
    
    on which registered
 None
 Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [   ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  As of September 7, 2004, 13,401,089 shares of Common Stock were outstanding. As
of such date the aggregate market value of voting stock (based upon the last
reported sales price in The Nasdaq Stock Market) held by nonaffiliates of the
registrant was approximately $316,046,208. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is incorporated by reference from the
registrants definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.




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ACE CASH EXPRESS, INC.
FORM 10-K
For the Year Ended June 30, 2004 Table of Contents Page #PART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    19Item 3. Legal Proceedings
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21PART IIItem 5. Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securitites
    
    
    21Item 6. Selected Financial Data
    
    
    22Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    46Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    46Item 9A. Controls and Procedures
    
    
    46Item 9B. Other Information
    
    
    47PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    47Item 11. Executive Compensation
    
    
    47Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    47Item 13. Certain Relationships and Related Transactions
    
    
    47Item 14. Principal Accountant Fees and Services
    
    
    47PART IV.Item 15. Exhibits and Financial Statement Schedules
    
    
    47SIGNATURES
    
    
    52INDEX TO EXHIBITS
    
    
    83Subsidiaries of the CompanyConsent of Grant Thornton LLPCertifications of CEO & CFO Pursuant to Section 302Certifications of CEO & CFO Pursuant to Section 906
  2




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PART I 
 ITEM 1. BUSINESS Overview We are a leading retailer of financial services, including check cashing,
short-term consumer loans and bill payment services. As of June 30, 2004, we
had a total network of 1,230 stores in 36 states and the District of Columbia,
consisting of 1,026 company-owned stores and 204 franchised stores. This makes
us the largest owner, operator and franchisor of check cashing stores in the
United States and one of the largest providers of short-term consumer loans,
also known as payday loans. We focus on serving unbanked and underbanked
consumers, many of whom seek alternatives to traditional banking relationships
in order to gain convenient and immediate access to check cashing services and
short-term consumer loans. We seek to develop and maintain the largest network
of stores in each of the markets where we operate. Our growth strategy is to
open new stores, franchise stores in new and existing markets,
opportunistically acquire stores, and introduce new services into our store
network. Our stores offer check cashing, loans and other retail financial services
at competitive rates in clean settings during hours convenient for our
customers. Our stores are located in highly visible, accessible locations,
usually in strip shopping centers, free-standing buildings and kiosks located
inside retail stores. Industry Overview Check Cashing.We operate primarily in the check cashing industry. We
believe there are approximately 11,000 check cashing stores nationally, with
five other check cashing companies operating or franchising over 100 stores and
five companies operating or franchising between 50 and 100 locations. Check cashing companies focus on and offer services to a customer segment
that banks generally do not service and operate at locations and during hours
that are typically more convenient than those traditionally offered by banks.
In addition, unlike many banks, check cashing stores are willing, for a fee, to
assume the risk that checks they cash will bounce. For instance, some banks
will refuse to cash a check for a person who does not maintain an account with
the bank. For account holders, some banks will require an account holder to
maintain sufficient funds to cover a check to be cashed or to wait several days
for the check to clear. As a result, we believe check cashing stores provide an
attractive alternative to customers with relatively small account balances or
without bank accounts. Although these customers might save money by depositing
their checks in a bank and waiting for them to clear, many prefer paying a fee
to take advantage of the convenience and availability of immediate cash offered
by check cashing stores. The fees charged for this service are intended to provide the check casher
with a profit after covering operating expenses, including any interest expense
incurred by the check casher on the funds advanced to customers, and for the
risk assumed by the check cashing store. A check cashing store assumes the risk
that the check will not be collected because of insufficient funds, stop
payment orders or fraud. In order to minimize this risk and the losses
associated with uncollected checks, many check cashing stores cash only payroll
or government entitlement checks, or charge higher fees and have stricter
approval procedures for cashing personal checks. Short-Term Consumer Loans.Short-term consumer loans provide a customer
cash in exchange for the customers check or an authorization to debit the
customers bank account, along with an agreement to defer the deposit of that
check or initiation of that debit to the customers bank account, as the case
may be, until the customers next payday, typically two to four weeks later. If
the customer returns to the store and repays the loan within that time period,
the check is returned to the customer. Short-term consumer loans provide a simple, quick and confidential way for
consumers to meet short-term cash needs between paydays while avoiding the high
cost of penalties associated with writing checks with insufficient funds and
other penalties and fees associated with making a late payment. Until the
development of the short-term consumer loan industry in the early 1990s,
customers often resorted to writing bad checks as a short-term solution to meet
immediate cash needs. We believe there are currently 22,000 short-term consumer loan stores
operating in the United States. While the majority of these stores offer only
the short-term consumer loan service, some of these stores also offer other
services such as check cashing or pawn loans. Other financial services.In addition to check cashing and short-term
consumer loan services, some stores offer customers a range of other services,
including bill payments, money orders and money transfers. Some stores also
offer public transportation passes, photocopying, fax transmission services and
postage stamps. 3




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Competitive Strengths We offer a menu of retail financial services delivered through our growing
network of 1,230 stores conveniently located in close proximity to where our
customers live and work. We believe that our store employees provide a
professional experience that our customers value, which allows us to better
understand their present and future financial service needs. We intend to
capitalize on the following competitive strengths in order to grow our company: Focus on Customer Service.Treating our customers with respect is an
integral part of our organizational culture. Unlike many of our competitors,
all of our stores display an easy-to-read menu of our services, with costs and
fees clearly stated, in order to help our customers make an informed purchasing
decision. Additionally, many of our stores located in markets with large
Hispanic populations display our services in both English and Spanish. Our
customers also receive a receipt with each transaction that details the fees
paid. Our store employees are trained to greet customers as they enter the
store, assist them in an efficient and helpful manner and thank them for their
business. Many of our employees have long-standing relationships with customers
who use our services multiple times a year. We believe that providing prompt,
friendly and knowledgeable service helps us achieve higher levels of customer
satisfaction and generate higher visit frequency. We measure and track our
customer service quality at the store and employee levels through customer
calls made to our toll-free service line and our annual customer service
survey. Efficient Operating Model.We believe that our operating model and
business practices position us to grow our revenues and increase profitability.
In our fiscal year ended June 30, 2002, we introduced our Operational Goals
program, a standardized set of best practices, to help ensure a clear and
consistent benchmark would be used to evaluate the performance of our store
employees. Our regional vice presidents, district managers and store employees
continue to be focused on their achievement of these goals. We measure their
performance on a daily, weekly, monthly and quarterly basis. Each year, we
adjust our Operational Goals and our measurement targets to encourage continued
improvement across our store base and maximize profitability. Our Operational Goals for fiscal 2005 are to:  
    
    provide quality customer service and take pride in our store appearance;
    
    reduce cash shortages in our stores;
    
    reduce forgeries;
    
    increase our in-store loan payoffs;
    
    reduce the number of times our stores open late or close early;
    
    properly staff our stores for peak schedules;
    
    increase the number of daily loan transactions
    
    reduce overtime hours;
    
    increase number of good checks cashed; and
    
    provide more customers with the ACE Prepaid Mastercard®. Since implementing our Operational Goals, we have increased comparable
store revenue and decreased store operating expenses, resulting in increased
gross margin. Proprietary Information Systems.To better service our customers and
manage our stores in the most profitable manner, we have developed proprietary
information systems, including a point-of-sale system and a management
information system, designed for the efficient delivery of our financial
services with the proper balance of corporate management. Our in-house
information systems team has built a reliable and scalable technology
infrastructure that will allow us to grow our business without significant
additional capital expenditures. Our investment in information systems has
allowed us to improve functionality, including:  
    
    moving customers in and out of the store more quickly due to faster
connectivity to our centralized risk management system; 4




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
    
    evaluating customer transaction patterns to improve our check cashing approval process;
    
    utilizing automated decision-making technology to reduce check cashing risk;
    
    monitoring daily revenue by service on a regional, store and employee basis;
    
    detecting and preventing fraud and other losses, including cash differences, forgery and employee theft;
    
    planning and managing optimal store cash levels and store personnel scheduling; and
    
    facilitating compliance with regulatory requirements. By maintaining interactive and flexible information systems, we provide
more services in a standardized and efficient manner, which we believe allows
us to operate our stores with fewer personnel than many of our competitors. Proven Acquisition Strategy.From 1991 to present, we grew from 181 to
1,026 company-owned stores, in large part, as a result of a disciplined
acquisition strategy. Of our 1,026 stores, 399 were acquired in 100 separate
transactions. Acquired stores are quickly integrated into our existing store
base following the deployment of our proprietary point-of-sale system. By
implementing our Operational Goals and information systems, we are typically
able to increase revenue and gross margin in our acquired stores and to enhance
the acquired stores service offerings. The average cost of converting an
acquired store to an ACE store consists primarily of expenditures related to
new signage, implementation of our point-of-sale system and minor store
remodeling. We believe there are opportunities to continue to improve the
results in some of our recently acquired stores. Experienced Management Team.Our executive management team is a blend of
company veterans and recent key additions that have experience in the check
cashing industry as well as other retail-based businesses. These employees have
demonstrated an ability to grow retail businesses profitably through new store
openings, acquisitions and franchising. Jay Shipowitz, our Chief Executive
Officer, who was promoted from President and Chief Operating Officer to Chief
Executive Officer on July 1, 2004, has been with us since 1997 and has managed
all areas of operations and finance during his tenure. Barry Barron, our
Executive Vice President of Operations, has been with us since 2001 and has
extensive experience operating company-owned and franchised restaurant
locations. In addition, since June 2003, we added three senior managers in
finance and operations, with more than 50 combined years of experience in their
respective areas of expertise. The additions included William McCalmont as our
Executive Vice President and Chief Financial Officer, Walter Evans as our
Senior Vice President and General Counsel and Gerard Schroepfer as our Chief
Marketing Officer. We believe that our executive management teams experience
has allowed us to deliver a consistent service offering to our customers, which
in turn has generated higher levels of customer loyalty and positioned us to
capitalize on future growth opportunities. Growth Strategy A key objective of our growth strategy is to have the most locations in
each market and to offer the broadest selection of financial services in our
industry. We believe that by offering the convenience of high-density store
locations, exceptional customer service and a broad suite of retail financial
services, we will achieve a high level of customer satisfaction. The key
elements of our growth strategy are as follows: Open Company-Owned Stores.We opened 53 company-owned stores in fiscal
2004 (including 11 ACE Cash Advance stores), compared to 14 stores in fiscal
2003 and 39 stores in fiscal 2002. Our company-owned store growth in fiscal
2003 was less than our historical new store growth primarily due to limitations
on capital expenditures imposed by our bank credit agreement through March 31,
2003. Our current bank credit agreement enables us to pursue our company-owned
store growth strategy more aggressively. We expect to open approximately 60
new company-owned stores, with a net gain of approximately 40 to 45
company-owned stores after store closures, in fiscal 2005. We are still
targeting an aggregate net gain of approximately 300 company-owned stores for
the five-year period ending June 30, 2008. Accelerate Franchise Store Development.We opened 32 franchised stores in
fiscal 2004, compared to 26 stores in fiscal 2003 and 22 stores in fiscal 2002.
Our goal is to be the industry leader in offering quality franchising
opportunities and exceptional support systems and services to existing and
potential franchisees. We believe that by offering attractive investment
opportunities and exceptional franchisee support systems and services, we will
attract potential franchisees to partner with us rather than other franchisors.
As of June 30, 2004, we had 204 franchised stores and we believe our targeted
markets could potentially support an additional 1,800 ACE franchise stores
across the United States. We expect to open approximately 50 new franchised
stores, with a net gain of approximately 40 franchised stores after store
closures, in fiscal 2005. Currently, we have franchise agreements for the
development of over 100 new franchise stores and we are still targeting an
aggregate net gain of approximately 200 franchise stores for the five year
period ending June 30, 2008. 5




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Pursue Opportunistic Acquisitions.Since 1991, we have acquired over 500
stores. We believe that our extensive experience with acquisitions allows us to
successfully integrate acquired stores into our network. We believe that growth
through acquisitions is attractive because:  
    
    acquiring stores provides access to an existing customer base and source of revenue and cash flow;
    
    introducing our proprietary information systems and Operational Goals generates operating efficiencies;
    
    offering our additional services in the acquired stores drives revenue growth; and
    
    acquiring stores allows us to enter new markets with scale or increase our share in existing markets. In evaluating potential acquisition candidates, we consider a number of factors, including:  
    
    strategic fit and desirability of location in both new and existing markets;
    
    existing customer base, revenue history and rent;
    
    ability to improve productivity and profitability; and
    
    anticipated returns on investment. Introduce New Services.In addition to our current broad service
offering, we continuously evaluate new services for possible introduction into
our stores. For example, in fiscal 2002, we introduced prepaid debit cards into
our stores through a relationship with NetSpend Corporation, a prepaid payments
company. NetSpends All-Access® MasterCard® Debit Card allows our customers to
load cash onto a MasterCard debit card and use it wherever MasterCard debit
cards are accepted. We receive a fee when customers purchase the card, load
cash on the card, use it for a purchase, or use it at an automated teller
machine for a cash withdrawal. During fiscal 2004, we and our franchisees sold
approximately 149,000 cards and loaded a total face value of more than $268
million. We believe that our distribution network, with 1,230 network stores in
36 states and the District of Columbia, makes us an ideal partner for financial
service companies seeking to gain immediate access to our customer base. Our
distribution network allows us to offer our customers new services through
third parties, without incurring the costs associated with a proprietary
research and development process. Continue Comparable Store Revenue Growth.We believe we have an
opportunity to continue comparable store revenue growth. To increase
comparable store revenues, we employ a variety of advertising and marketing
programs, with a focus on in-store programs that allow us to combine the
selling efforts of store personnel with various selling messages displayed on
point-of-purchase material. We also employ seasonal marketing campaigns around
specific annual events, such as a loan program around the holidays and a tax
season promotion at the beginning of the calendar year. In addition to adding
new services, we seek to attract additional customers. For example, we
recognize the importance of the growing Hispanic demographic and have designed
specific advertising and point-of-purchase materials to meet their needs. Improve Operating Efficiency.As our business grows, we seek to further
improve our operating efficiency. We have outlined a list of Operational Goals
to maximize the profitability potential of our stores. Our employees are
evaluated and compensated, in part, based on their achievement of these goals,
which we adjust each year to account for the continued improvement in our
business. We believe that by focusing on these specific goals and tying them to
employee compensation, we can further enhance the operating efficiency of our
stores as well as overall operating margins. As a result of continued
improvement in our operating model, we increased our gross margin by over 50
basis points during fiscal 2004 as compared to fiscal 2003. Our Customers We primarily serve the nations approximately 60 million unbanked and
underbanked individuals with services to help them manage their day-to-day
financial needs. Our customers generally do not participate in the traditional
banking and financial services system and require alternative solutions to gain
convenient and immediate access to cash, short-term consumer loans, bill
payments, money transfers and prepaid debit cards. Our customer profile is diverse. Based on a recent survey of our
customers, we believe the demographic composition of our customer base to be as
follows:  
    
    approximately 50% Caucasian; 25% Hispanic; 20% African American; 5% Other; 6




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
    
    a majority ranging in age from 25 to 45;
    
    an average household annual income of approximately $30,000, with approximately 40% above $40,000;
    
    approximately half are male and half are female, with our check
cashing customers skewed towards younger males and our short-term
consumer loan customers skewed towards older females;
    
    generally rent their housing and move more frequently than the national average; and
    
    pay bills with walk-in payments or money orders. We believe that the Hispanic population, while an estimated 25% of our
customer base today, offers significant growth potential for us. According to
the U.S. Census Bureau, Hispanics are the largest minority group in the United
States, numbering approximately 39 million and representing the fastest growing
demographic segment in the United States, with 58% population growth between
1990 and 2000. Our Services We offer convenient, fee-based services to meet the needs of our
customers, including check cashing, short-term consumer loans, bill payment,
money transfer and money order services and other retail financial services.
The following table reflects the major categories of services that we currently
offer and the revenues (in thousands) from these services for the indicated
fiscal years: Fiscal Year Ended June 30,Revenue Category
    
    2004
    
    2003
    
    2002Check cashing
    
    $
    129,194
    
    
    $
    125,703
    
    
    $
    118,907Short-term consumer loans
    
    
    77,029
    
    
    
    70,806
    
    
    
    74,197Bill payments
    
    
    16,961
    
    
    
    13,507
    
    
    
    10,156Money transfers
    
    
    11,136
    
    
    
    10,898
    
    
    
    10,998Money orders
    
    
    6,330
    
    
    
    6,960
    
    
    
    7,554Franchising
    
    
    2,774
    
    
    
    2,346
    
    
    
    2,199Other fees
    
    
    3,235
    
    
    
    4,069
    
    
    
    5,255Total revenue
    
    $
    246,659
    
    
    $
    234,289
    
    
    $
    229,266
 Check cashing.Our primary business is cashing checks for a fee. We
primarily cash payroll checks, but we also cash government assistance, tax
refund and insurance checks or drafts. Subject to market conditions at
different locations, our check cashing fees for payroll checks are
approximately 2.3% of the face amount of the check. We may charge higher rates
for cashing out-of-state checks, handwritten checks, money orders and insurance
checks or drafts, depending on risk and market factors. Unlike many of our
competitors, we display our check cashing fees in full view of our customers on
a menu board in each store and provide a detailed receipt for each transaction.
Although we have established guidelines for approving check cashing
transactions, we have no preset limit on the size of the checks we will cash. During fiscal 2004, we cashed approximately 13.2 million checks with an
aggregate face amount of approximately $5.1 billion. The face amount of the
average check was $388 and our average fee per check was $9.91, or 2.6%, of the
average check. If a check cashed by us is not paid for any reason, we account for the
amount of the check as a loss in the period in which it is returned. We then
transfer the check to our collection department, which contacts the maker and
payee of each returned check to initiate the collection process. Our collection
department utilizes a proprietary automated tracking system to monitor the
status of all returned items. For the fiscal years ended June 30, 2004, 2003
and 2002, our net write-off as a percentage of the face amount of checks cashed
was 0.15%, 0.14% and 0.16%, respectively. Short-term consumer loans.We are engaged in the short-term consumer loan
business because we believe that many consumers have limited access to other
sources of consumer credit. In general, the short-term consumer loans offered
at our stores involve providing a customer with cash in exchange for the
customers check or an authorization to debit the customers bank account,
along with an agreement to defer the deposit of that check or the initiation of
that debit on the customers account, as the case may be, until the customers
next payday, typically two to four weeks later. If the customer returns to the
store and repays the loan, we return the check to the customer. If the customer
fails to repay the loan, we deposit the check or debit the customers checking
account. If the check is returned or the debit is rejected for insufficient
funds or any other reason, we contact the customer and initiate collection
efforts. Customers must have a checking account in 7




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order to apply for a short-term consumer loan. The amount of the customers check or debit authorization is the amount of
the cash provided to the customer plus our fee. Our short-term consumer loans
are authorized by statute or rule in the states in which we offer them and are
subject to extensive regulation. The scope of that regulation, including the
terms on which short-term consumer loans may be made, by the states is not
consistent. All states in which we offer short-term consumer loans establish
maximum allowable fees and other charges to consumers for these short-term
consumer loans. In addition, many of the states regulate the maximum amount,
maturity and renewal or extension of these short-term consumer loans. To comply
with the laws and regulations of the states in which short-term consumer loans
are offered at our stores, the terms of our short-term consumer loans must vary
from state to state. As required, we are licensed to offer short-term consumer
loans under the laws and regulations of the states. Since January 1, 2003, all of the short-term consumer loans offered at our
company-owned stores have consisted of either short-term consumer loans made by
us or short-term consumer loans made by Republic Bank & Trust Company, a
Kentucky state-chartered bank. As of June 30, 2004, we were offering short-term
consumer loans in 561 of our owned stores and Republic Bank was offering
short-term consumer loans in 359 of our company-owned stores in Texas,
Pennsylvania and Arkansas. As of June 30, 2004, we did not offer short-term
consumer loans in 106 of our company-owned stores in Alabama, Georgia, Maryland
and North Carolina due to an unfavorable regulatory environment in those
states. During the fiscal year ended June 30, 2004, we made approximately 1.4
million short-term consumer loans and Republic Bank made approximately 541,000
short-term consumer loans through our stores. The average advance provided to
a customer in our short-term consumer loan transactions was $269 and the
average finance charge paid to us was $39.40. The average advance provided to a
customer by Republic Bank loan made through our stores was $296 and the average
finance charge was $52.11. As of June 30, 2004, the gross receivable for
short-term consumer loans made by us was approximately $27.7 million. In
addition, we are obligated to pay Republic Bank for loan losses in an amount up
to the total outstanding amount of Republic Bank loans recorded on Republic
Banks financial statements, which was $9.4 million as of June 30, 2004. For the short-term consumer loans we offer, the customers application
data is electronically transmitted to our centralized computer system, which
scores the loan with a proprietary loan-scoring system. An approval or denial
is communicated back to the store, where the required loan documentation or
adverse action form is printed for the customer. Loans made by Republic Bank
are scored in a similar process, but Republic Bank is responsible for reviewing
each loan application and determining whether such application is approved for
a loan. We are not involved in the loan approval process or the determination
of the Republic Bank loan approval procedures or criteria. For our fiscal year
ended June 30, 2004, our provision for loan losses as a percentage of matured
loan volume for our loans and for Republic Bank loans combined was 4.7%. Bill payments.Our stores serve as payment locations for customers to pay
many of their utility, telephone and other bills to third parties and also
serve as a distribution point for bank-issued prepaid debit cards. Upon acceptance of the customers bill payment in cash, we remit the
amount owed to the third party under an agreement with that payee and either
receive a service fee from the payee or collect a fee from the consumer. We
offer these services primarily through agreements directly with various product
and service providers, such as Verizon, Sprint, TXU (a Texas utility company),
and Baltimore Gas & Electric. In fiscal 2004 and 2003, we processed
approximately 8.6 million and 6.8 million bill payment transactions,
respectively. Our stores also offer NetSpends ACE MasterCard debit card, which allows
customers to load cash onto a MasterCard debit card and use it wherever
MasterCard debit cards are accepted. We receive a fee when customers purchase
the card, load cash on the card, use it for a purchase or use it at an
automated teller machine for a cash withdrawal. During fiscal 2004, we and our
franchisees sold more than 149,000 cards and loaded more than $268 million onto
these cards, compared to fiscal 2003, when we and our franchisees sold more
than 34,000 cards and loaded more than $59 million onto these cards. Money transfers.We are an agent for the transmission and receipt of wire
transfers through the MoneyGram® network, the second largest wire transfer
provider after Western Union. Through this network, our customers can transfer
funds electronically to any of approximately 60,000 MoneyGram agent locations
worldwide, including our stores. MoneyGram establishes the fees for this
service and pays us a commission. Money orders.We sell money orders issued by Travelers Express in any
amount up to $1,000. These money orders are generally used by our customers for
bill payments, rent payments and other general disbursements. We sold
approximately 8.8 million money orders during fiscal 2004. The fees charged for
money orders depend on local market conditions and the size of the money order.
We remit the face amount of each money order sold to Travelers Express. Our
money order revenues include the fee paid by our customers and the recognition
of deferred revenue related to contract incentive payments. 8




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Franchising.We sell several types of ACE franchises, including: a
standard store franchise; a store-within-a-store or kiosk franchise; a small
market franchise for market areas with a population under 15,000; and a
conversion franchise that permits an existing check cashing business to convert
to an ACE franchisee. Our franchise revenues consist of an initial franchise
fee of up to $30,000 and monthly royalties of up to 6% of revenue. There were
204 company-franchised stores in operation as of June 30, 2004, compared to 200
as of June 30, 2003, and we currently have franchise agreements with
franchisees to develop over 100 new franchise stores. We franchise our stores in order to complement our company-owned growth
and network expansion plans in a cost effective manner. By expanding into new
geographic markets, we increase our brand awareness and create further
purchasing power with our vendors and a pipeline for future acquisition
opportunities. Typically, we have a right of first refusal to purchase the
franchised store. Since fiscal 1996, we have acquired over 100 franchised
stores from franchisees. Other services.In many company-owned stores, we offer a variety of other
retail financial services to our customers, such as public transportation
passes, photocopying, fax transmission services, postage stamps and various
prepaid services, including long-distance telephone cards. We have developed self-service machines, which are able to cash checks,
sell prepaid long-distance telephone cards, sell money orders and process
third-party bill payments. As June 30, 2004, we had eight machines in
company-owned locations, and we placed 219 self-service machines in H&R Block
retail locations for use during the 2004 tax season (i.e., January through
March.) The machines in H&R Block locations only cash refund anticipation loan
checks issued to customers of H&R Block. As of June 30, 2004, we had 61 bill
payment self-service machines located at a third-party service providers
locations. New Store Economics The capital cost of opening a new store varies depending on the size and
type of store, but is typically in the range of $65,000 to $75,000, before the
Moneygram incentive. This capital cost includes leasehold improvements,
signage, computer equipment and security systems. MoneyGram pays us an
incentive for each new location opened, which is accounted for as deferred
revenue that is recognized over the remaining life of the MoneyGram contract.
During fiscal 2004, we opened 53 company-owned stores, including 11 ACE Cash
Advance stores. In addition, the typical store requires working capital of
$80,000 to $100,000 to fund operating cash and the stores loan portfolio. It
typically takes approximately one year for a store to break even on a store
margin basis. First-year losses typically average $15,000 to $25,000 per store. 9




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##### Table of Contents



The following tables show the average annual store revenues and the
average gross margin for company-owned stores (excluding acquired stores) which
were opened in the year indicated and were open as of June 30, 2004: Average Store RevenuesNumber of
    
    Year Ended June 30,Stores Open atYear Opened:
    
    June 30, 2004
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)1995 and earlier
    
    
    252
    
    
    $
    286.3
    
    
    $
    272.4
    
    
    $
    275.7
    
    
    $
    242.6
    
    
    $
    199.81996
    
    
    25
    
    
    
    274.6
    
    
    
    269.2
    
    
    
    264.4
    
    
    
    246.1
    
    
    
    194.41997
    
    
    34
    
    
    
    268.2
    
    
    
    245.3
    
    
    
    239.6
    
    
    
    206.1
    
    
    
    159.61998
    
    
    46
    
    
    
    250.0
    
    
    
    240.7
    
    
    
    226.5
    
    
    
    189.7
    
    
    
    132.11999
    
    
    63
    
    
    
    211.5
    
    
    
    204.1
    
    
    
    199.4
    
    
    
    162.9
    
    
    
    93.12000
    
    
    61
    
    
    
    206.7
    
    
    
    188.6
    
    
    
    178.0
    
    
    
    125.3
    
    
    
    26.72001
    
    
    41
    
    
    
    215.3
    
    
    
    187.9
    
    
    
    143.2
    
    
    
    34.3
    
    
    
    2002
    
    
    39
    
    
    
    175.3
    
    
    
    123.6
    
    
    
    32.7
    
    
    
    
    
    
    
    2003
    
    
    13
    
    
    
    154.2
    
    
    
    33.8
    
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    53
    
    
    
    27.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    627Acquired stores
    
    
    3991,026
 Average Store Gross
MarginNumber of
    
    Year Ended June 30,Stores Open atYear Opened:
    
    June 30, 2004
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)1995 and earlier
    
    
    252
    
    
    $
    119.4
    
    
    $
    111.9
    
    
    $
    116.2
    
    
    $
    80.7
    
    
    $
    86.61996
    
    
    25
    
    
    
    108.9
    
    
    
    106.2
    
    
    
    107.9
    
    
    
    91.1
    
    
    
    82.01997
    
    
    34
    
    
    
    98.2
    
    
    
    88.1
    
    
    
    87.8
    
    
    
    55.2
    
    
    
    41.91998
    
    
    46
    
    
    
    77.7
    
    
    
    82.4
    
    
    
    79.7
    
    
    
    43.4
    
    
    
    27.01999
    
    
    63
    
    
    
    59.3
    
    
    
    59.1
    
    
    
    56.5
    
    
    
    16.9
    
    
    
    (11.3
    )2000
    
    
    61
    
    
    
    52.3
    
    
    
    45.9
    
    
    
    43.2
    
    
    
    (7.9
    )
    
    
    (12.9
    )2001
    
    
    41
    
    
    
    52.0
    
    
    
    39.4
    
    
    
    8.4
    
    
    
    (21.3
    )
    
    
    2002
    
    
    39
    
    
    
    32.1
    
    
    
    (5.3
    )
    
    
    (24.9
    )
    
    
    
    
    
    
    2003
    
    
    13
    
    
    
    13.8
    
    
    
    (17.6
    )
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    53
    
    
    
    (30.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    627Acquired stores
    
    
    3991,026
 Our store construction and facilities planning staff reviews and
negotiates leases for store locations, supervises the construction of new
stores and the remodeling of existing stores and performs lease management
services once the leases are executed. Since many of our stores are built
within existing retail space, the work area of each store is a modular-designed
unit that can be customized to meet the varying size and other requirements of
each location while giving it a consistent appearance. We close stores in the normal course of business for various reasons,
including inadequate operating performance, lease expirations and shopping
center closings. During fiscal 2004 and 2003, we closed 24 and 28
company-owned stores, respectively. 10




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##### Table of Contents



Company-Owned Store Locations and Operations The following map illustrates the number and location of company-owned
stores in operation as of June 30, 2004: (MAP) The following table illustrates the development of company-owned stores
since June 30, 2000: Company-Owned StoresAs of June 30,Market Area
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Texas
    
    
    340
    
    
    
    328
    
    
    
    329
    
    
    
    326
    
    
    
    309California
    
    
    87
    
    
    
    85
    
    
    
    88
    
    
    
    90
    
    
    
    30Arizona
    
    
    72
    
    
    
    75
    
    
    
    72
    
    
    
    75
    
    
    
    73Colorado
    
    
    66
    
    
    
    53
    
    
    
    56
    
    
    
    53
    
    
    
    52Florida
    
    
    63
    
    
    
    68
    
    
    
    91
    
    
    
    91
    
    
    
    90Georgia
    
    
    44
    
    
    
    46
    
    
    
    50
    
    
    
    50
    
    
    
    54Tennessee
    
    
    39
    
    
    
    18
    
    
    
    18
    
    
    
    19
    
    
    
    26Maryland
    
    
    38
    
    
    
    39
    
    
    
    39
    
    
    
    40
    
    
    
    48Louisiana
    
    
    35
    
    
    
    27
    
    
    
    27
    
    
    
    25
    
    
    
    25Virginia
    
    
    32
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    27Indiana
    
    
    28
    
    
    
    26
    
    
    
    25
    
    
    
    25
    
    
    
    25Ohio
    
    
    27
    
    
    
    25
    
    
    
    24
    
    
    
    18
    
    
    
    11Oklahoma
    
    
    20
    
    
    
    21
    
    
    
    23
    
    
    
    23
    
    
    
    12North Carolina
    
    
    18
    
    
    
    16
    
    
    
    16
    
    
    
    16
    
    
    
    17Pennsylvania
    
    
    16
    
    
    
    16
    
    
    
    16
    
    
    
    9
    
    
    
    3Washington,
D.C.
    
    
    16
    
    
    
    16
    
    
    
    16
    
    
    
    16
    
    
    
    18Nevada
    
    
    15
    
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    14Washington
    
    
    14
    
    
    
    13
    
    
    
    13
    
    
    
    13
    
    
    
    14New Mexico
    
    
    13
    
    
    
    11
    
    
    
    10
    
    
    
    10
    
    
    
    8Missouri
    
    
    11
    
    
    
    11
    
    
    
    11
    
    
    
    11
    
    
    
    11South Carolina
    
    
    10
    
    
    
    10
    
    
    
    13
    
    
    
    13
    
    
    
    17Arkansas
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8Oregon
    
    
    7
    
    
    
    8
    
    
    
    8
    
    
    
    7
    
    
    
    9Kansas
    
    
    6
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Alabama
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    3Kentucky
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Utah
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Total
    
    
    1,026
    
    
    
    968
    
    
    
    1,003
    
    
    
    988
    
    
    
    915
 We typically locate our company-owned stores in highly visible, accessible
locations and operate during convenient hours for our customers. We locate
stores on high traffic streets or intersections. Our stores occupy
approximately 1,200 square feet on average and are located in strip shopping
centers and free-standing buildings. As of June 30, 2004, we also operate 80
smaller kiosks located inside retail stores. We are focused on increasing the
customers awareness of ACE by using consistent signage and store design at
each location. All but two of our company-owned stores are leased. 11




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##### Table of Contents



Normal business hours of our company-owned stores are from 9:00 a.m. until
7:00 p.m., Monday through Thursday, 9:00 a.m. until 8:00 p.m. on Friday and
9:00 a.m. until 6:00 p.m. on Saturday. Approximately 190 stores are also open
on Sunday, generally from 10:00 a.m. until 5:00 p.m. The business hours of any
store may be changed due to local market conditions. We are open on all
holidays except for Thanksgiving, Christmas and New Years Day. Franchised Store Locations The following map illustrates the states in which our franchisees operate
stores and the number of stores in operation as of June 30, 2004: (MAP) We are the largest franchisor of check cashing stores in the United
States. Our franchises are marketed through a dedicated sales force,
supplemented by advertising in newspapers, trade journals and other media. 12




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##### Table of Contents



The following table illustrates the development of franchised stores since
June 30, 2000: Franchised StoresAs of June 30,Market Area
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Texas
    
    
    51
    
    
    
    55
    
    
    
    56
    
    
    
    55
    
    
    
    48Ohio
    
    
    20
    
    
    
    18
    
    
    
    16
    
    
    
    14
    
    
    
    9South Carolina
    
    
    14
    
    
    
    13
    
    
    
    8
    
    
    
    8
    
    
    
    7Florida
    
    
    13
    
    
    
    16
    
    
    
    14
    
    
    
    13
    
    
    
    12Oklahoma
    
    
    11
    
    
    
    11
    
    
    
    11
    
    
    
    9
    
    
    
    11Arizona
    
    
    9
    
    
    
    5
    
    
    
    3
    
    
    
    2
    
    
    
    2California
    
    
    9
    
    
    
    10
    
    
    
    11
    
    
    
    12
    
    
    
    15North Carolina
    
    
    8
    
    
    
    6
    
    
    
    7
    
    
    
    7
    
    
    
    5Tennessee
    
    
    8
    
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    2Colorado
    
    
    7
    
    
    
    6
    
    
    
    4
    
    
    
    3
    
    
    
    3Kansas
    
    
    6
    
    
    
    5
    
    
    
    4
    
    
    
    1
    
    
    
    Louisiana
    
    
    6
    
    
    
    12
    
    
    
    12
    
    
    
    12
    
    
    
    13Missouri
    
    
    6
    
    
    

    4
    
    
    
    3
    
    
    
    3
    
    
    
    3Oregon
    
    
    5
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    3Georgia
    
    
    4
    
    
    
    6
    
    
    
    6
    
    
    
    7
    
    
    
    6Kentucky
    
    
    3
    
    
    
    3
    
    
    
    2
    
    
    
    2
    
    
    
    2Alabama
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Arkansas
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    2Delaware
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1Idaho
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    1Indiana
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Maine
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Minnesota
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Wisconsin
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Hawaii
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Michigan
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    Mississippi
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    New Jersey
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Pennsylvania
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    South Dakota
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    Virginia
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Wyoming
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Connecticut
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Massachusetts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Utah
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Washington
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total
    
    
    204
    
    
    
    200
    
    
    
    184
    
    
    
    175
    
    
    
    157
 We are planning to accelerate our expansion through the sale of new
franchises and the opening of additional stores under existing franchise
agreements. Advertising and Marketing Our marketing efforts are designed to grow revenues by creating customer
loyalty and introducing new customers to the ACE brand. We achieve this by
developing services and promotions that create high perceived value, supported
by excellent customer service. We have been effective in marketing our services through in-store programs
with high-impact, consumer relevant point-of-purchase materials. We implement
additional promotions to maximize key seasonal revenue opportunities, including
holidays and tax season. In fiscal 1996, we introduced a loyalty and retention program called ACE
Plus, which rewards customers with free phone cards or free check cashing based
on a customers check cashing transactions. Since inception, approximately 6.6
million customers have joined the ACE Plus program. Approximately 2 million
customers have used their ACE Plus card in the last 12 months. By the end of
calendar 2004, we plan on introducing a significantly enhanced loyalty program
encompassing all customer transactions. We are currently testing the effectiveness of a new advertising campaign
that includes mass media (primarily radio) in English and Spanish, and enhanced
bilingual in-store communications. 13




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##### Table of Contents



Information Systems Our information systems include a proprietary point-of-sale system in our
stores and a management information system that together form the foundation of
our operating model. The point-of-sale system is fully operational in all stores and is
licensed to our franchisees. It is designed to facilitate customer service and
risk management in a logical and straight-forward manner for our store
employees. The point-of-sale system:  
    
    records and monitors the details of every transaction, including the
service type, amount, fees, employee, time, actions taken and duration;
    
    integrates a proprietary and extensive customer/maker risk management
database with an automated decision methodology to guide our employees
through the transaction and to better manage risk in check cashing
transactions;
    
    provides services in a standardized and efficient manner, which we
believe allows us to operate our stores with fewer personnel than many
of our competitors (many of our stores are operated by only one person);
    
    reduces the risk of transaction errors by automatically recalling
customer data and calculating fees; and
    
    provides fully automated, immediate and statistically validated loan
application decisions that help ensure standardization and compliance
with state and federal lending regulations. On at least a daily basis, and in many cases on a real-time basis, all
transaction data are transmitted to our centralized database at our
headquarters and are integrated into our management information system. This
system is designed to provide summary and detailed information to district
managers, regional vice presidents and corporate managers at any time through
internet connectivity. The system allows us to:  
    
    monitor daily revenue by service on a company, regional, store and
employee basis;
    
    monitor and manage daily store exception reports, which record, for
example, any cash shortages and late store opening times;
    
    identify cash differences between bank statements and our records,
such as differences resulting from missing checks and deposits;
    
    determine, on a daily basis, the amount of cash needed at each store
location, allowing centralized cash management personnel to maintain the
optimal amount of cash inventory in each store;
    
    electronically transmit information and documents to third-party providers of services offered at our stores;
    
    develop a standardized labor scheduling methodology by store, by day;
    
    facilitate compliance with regulatory requirements; and
    
    post revenue and some expenses to our general ledger system. Our information systems department has a staff of approximately 55
employees. Our development staff primarily focuses on designing and testing
new point-of-sale enhancements as well as ongoing development of the management
information systems infrastructure. Our store and customer help desk staff
provides assistance to our store managers related to transaction procedures, as
well as directly answering customer questions. We operate a wide area data communications network for our stores that has
reduced customer waiting times, increased reliability and allowed the
implementation of new service enhancements. Each of our stores has from two to
four networked PCs that run the Windows NT® operating system on standard
Intel-based PCs. We run our proprietary point-of-sale software on each of the
PCs in order to control and record all retail transactions at the store.
Connected to each PC are several peripherals, including a money order
dispenser, receipt printer, laser printer, check scanner, cash drawer and debit
card PIN pad. Each store is connected to our host system using either a DSL or frame
relay connection that allows the store to quickly access our centralized
corporate databases and risk management resources. All transaction posting,
processing and storage is 14




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##### Table of Contents



performed on the host system, an IBM iSeries (previously known as an
AS/400) mid-range computer with over two terabytes of disk storage. We maintain and test a comprehensive disaster recovery plan for all
critical host systems. The disaster recovery plan is routinely updated to
reflect new requirements and business systems and, as part of the plan, we have
a contract with a third party at an off-site location to provide us immediate
access to needed technologies, if necessary. Security Employee safety is critical to us. Almost all company-owned store
employees work behind bullet-resistant Plexiglas® and steel-reinforced
partitions. Each company-owned stores security measures include safes, alarm
systems monitored by third parties, teller area entry control, perimeter
opening entry detection and tracking of all employee movement in and out of
secured areas. All stores are currently using a centralized security system
through a third-party provider. The centralized security system includes
identical alarm systems in all stores, remote control activated alarms,
arming/disarming and changing user codes and mechanically and electronically
controlled time-delay safes. Our business requires our stores to maintain a significant supply of cash.
We are therefore subject to the risk of cash shortages resulting from employee
and non-employee theft and employee errors. Although we have implemented
various programs to reduce these risks and provide security for our facilities
and employees, there can be no assurance that these problems will be
eliminated. During fiscal 2004, 2003 and 2002, cash shortages from employee
errors and from theft were approximately $0.9 million (0.4% of revenues), $1.3
million (0.6% of revenues) and $2.1 million (0.9% of revenues), respectively. Our point-of-sale system allows management to detect cash shortages on a
daily basis. In addition to other procedures, district managers conduct audits
of each company-owned stores cash position and inventories on an unannounced,
random basis. Daily transportation of currency and checks is provided by
professional armored carriers. Our employees generally do not transport
currency or checks. Human Resources Our operations are organized into regions. Each region has a regional vice
president who reports to one of two division vice presidents of operations and
is responsible for the operations, administration, training and supervision of
company-owned stores in his or her region. We currently have 12 regional vice
presidents (including the vice president responsible for ACE Cash Advance
stores) who are responsible for the operations of approximately 85 stores each.
We currently have 78 district managers, each of whom reports to the regional
vice president for his or her region and is directly responsible for the
general management of up to 20 stores within his or her territory. These
district managers are responsible for hiring, scheduling, store operations,
local marketing and employee relations. Each store manager reports to a
district manager and has direct responsibility over his or her stores
operations. Each region also has a human resources manager that coordinates
recruiting, hiring and training (initial and on-going) within the region. In
2002, we committed to hiring only nationally certified human resources
managers. Currently, nine of our 12 managers are certified and the remaining
three are preparing for the certification tests in 2004 and 2005. All human
resources managers attend an annual three-day conference at the corporate
office and must complete 60 hours of continuing education every three years to
maintain their national certification. Training.Service associates, store managers, district managers and
regional vice presidents must complete formal training programs. Those training
programs include:  
    
    an annual management training program with all regional vice
presidents, district managers and human resource managers which covers
employee hiring, progressive discipline, retention, sexual harassment,
compensation, equal employment opportunity compliance and leadership;
    
    an annual three-day district manager conference at our corporate
headquarters which covers topics such as customer service, loss
reduction, safety and security, better delivery of services and
compliance with legal and regulatory requirements;
    
    quarterly regional vice president meetings that focus on operational
goal achievement and human resource issues; and
    
    store employee training which consists of classroom and on-the-job
training with experienced store employees for a minimum of three weeks. 15




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##### Table of Contents



The regional human resources manager also coordinates on-going training
for store employees to review customer service, compliance and service-focused
issues. Hiring and Retention.District managers, human resource managers and team
leaders, who are experienced store managers, are responsible for store employee
recruitment. To facilitate this process, we use an internet-based automated
recruitment system that pre-screens all applicants to ensure they meet our
position requirements. We believe the automated recruitment system also allows
us to identify employee characteristics and recruiting sources that can lead to
long-term, successful employees. All store employees undergo a thorough criminal background check, social
security check, credit check, employment verification, drug screening and
two-step interview process before employment. In 2001, we created a
compensation and career path program to provide employees with a competitive
pay rates and opportunities for advancement. We offer a complete and
competitive benefits package to attract and retain employees. Employees At June 30, 2004, we had 2,387 employees, including 920 service associates
at company-owned stores, 1,090 store managers, 78 district managers, 12
regional vice presidents, 185 regional support personnel (located in regional
offices and the corporate headquarters), 95 corporate employees and seven
franchise personnel. We use third-party firms to conduct background checks,
credit checks and drug tests of all of our prospective employees. We consider our employee relations to be good. Our employees are not
covered by a collective bargaining agreement, and we have never experienced any
organized work stoppage, strike, or labor dispute. Competition We believe that the principal competitive factors in the check cashing and
short-term consumer loan (also known as payday loan) industry are location,
customer service, fees, convenience, range of services offered, speed and
confidentiality. We face intense competition and believe that the check cashing
and short-term consumer lending markets are becoming more competitive as these
industries mature and consolidate. We compete with other check cashing stores,
grocery stores, banks, savings and loan institutions, short-term consumer
lenders, other financial services entities and any retail businesses that cash
checks, sell money orders, provide money transfer services, or offer other
similar financial services. Some retailers cash checks without charging a fee
under limited circumstances. Some of our competitors have larger and more
established customer bases and substantially greater financial, marketing and
other resources. Our stores have also recently been facing competition from
automated check cashing machines deployed in supermarkets, convenience stores
and other public venues by large financial services organizations, as well as
retail financial services that our competitors offer over the internet. We
cannot assure you that we will be able to compete successfully with our
competitors. Relationship with Republic Bank We are party to a marketing and servicing agreement with Republic Bank.
Under this agreement, we provide various services to Republic Bank in
connection with our marketing and servicing of Republic Banks short-term
consumer loans in exchange for which we are paid fees by Republic Bank. As of
June 30, 2004, Republic Bank was offering its loans in 359 of our company-owned
stores in Arkansas, Pennsylvania and Texas. Approximately 9.7% and 3.9% of our
total revenues in fiscal 2004 and 2003, respectively, were derived from fees
paid to us by Republic Bank. Although we market and service these Republic Bank loans, Republic Bank is
responsible for reviewing each loan application and determining whether such
application is approved for a loan. We are not involved in the loan approval
process or the determination of the loan approval procedures or criteria, nor
do we acquire or own any participation interest in these loans. Consequently,
Republic Bank loans are not included in our loan portfolio or in our loans
receivable. Under our agreement with Republic Bank we are obligated to reimburse
Republic Bank by paying it an amount equal to the net amount charged off by
Republic Bank, less Republic Banks established reserves. We could be obligated
to pay Republic Bank for loan losses in an amount up to the total outstanding
amount of Republic Bank loans recorded on Republic Banks financial statements,
which was $9.4 million as of June 30, 2004. Because of our economic exposure for losses related to the Republic Bank
loans, we maintain a payable to Republic Bank at levels to cover the
anticipated liability for Republic Bank loan losses. We determine our allowance
for loan losses and our payable to Republic Bank based upon a review of
historical and recent loan losses and the loan portfolio. For the year ended
June 30, 2004, we provided approximately $7.4 million for losses on Republic
Bank loans and charged-off $6.5 million related to these loans. The balance of
the liability for Republic Loan losses reported in accrued liabilities as of
June 30, 2004 16




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was $0.7 million. Regulation General.We are subject to regulation in some jurisdictions in which we
operate, including jurisdictions that regulate check cashing fees or require
the registration of check cashing companies or money transmission agents. We
are also subject to federal and state regulation relating to the recording and
reporting of certain financial transactions and relating to the privacy of
customer information. Further, our loan-related activities are subject to state
regulation and, in certain respects, federal regulation. State Regulations.In some states, check cashing companies or money
transmission agents are required to meet minimum bonding or capital
requirements and are subject to record-keeping requirements. We operate in 18
states or jurisdictions that have licensing and/or fee regulations regarding
check cashing: Arizona, Arkansas, California, Florida, Georgia, Indiana,
Kentucky, Louisiana, Maryland, Nevada, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Virginia, Washington and the District of Columbia.
We are licensed in each of the states or jurisdictions in which a license is
currently required for us to operate as a check cashing company. To the extent
these states have adopted ceilings on check cashing fees, those ceilings are in
excess of or equal to the fees we charge. In those states in which we operate as a short-term consumer or payday
lender, we are licensed as such and are subject to the various state
regulations governing the terms of short-term consumer loans. Typically, the
state regulations limit the amount that a lender or service-provider may lend
or provide and, in some cases, the number of loans or transactions that a
lender or service-provider may make, to any customer at one time, restrict the
amount of finance or service charges or fees that the lender or service
provider may assess in connection with any loan or transaction and limit a
customers ability to renew any loans or transactions. The lender or service
provider must also comply with various consumer disclosure requirements, which
are typically similar or equivalent to the federal Truth in Lending Act and
corresponding federal regulations, in connection with the loans or
transactions. Collection activities regarding past due loans or similar
transactions may also be subject to consumer-debt-collection laws and
regulations adopted by the various states. We are subject to franchising laws and regulations in the states in which
we offer and sell franchises. Those laws and regulations vary by state, but
generally include filing or registration requirements, record-keeping
requirements and mandated disclosures to prospective franchisees. Federal Regulations.Under the Bank Secrecy Act regulations of the U.S.
Department of the Treasury, we must report transactions involving currency in
an amount greater than $10,000, and we must retain records for five years for
purchases of monetary instruments for cash in amounts from $3,000 to $10,000.
In general, every financial institution, including us, must report each
deposit, withdrawal, exchange of currency or other payment or transfer, whether
by, through or to the financial institution, that involves currency in an
amount greater than $10,000. In addition, multiple currency transactions must
be treated as single transactions if the financial institution has knowledge
that the transactions are by, or on behalf of, any person and result in either
cash in or cash out totaling more than $10,000 during any one business day.
Management believes that our point-of-sale system and employee-training
programs permit us to comply with these requirements. The Bank Secrecy Act also requires us to register as a money services
business with the Treasury Department. This registration is intended to enable
governmental authorities to better enforce laws prohibiting money laundering
and other illegal activities. We are registered as a money services business
with the Treasury Department and must re-register with the Financial Crimes
Enforcement Network of the Treasury Department, or FinCEN, by December 31,
2005, and at least every two years thereafter. We must also maintain a list of
names and addresses of, and other information about, our stores and must make
that list available to any requesting law enforcement agency (through FinCEN).
That store list must be updated at least annually. We do not believe that
compliance with these existing requirements has had or will have any material
impact on our operations. In addition, federal regulations require us to report suspicious
transactions involving at least $2,000 to FinCEN. The regulations generally
describe three classes of reportable suspicious transactionsone or more
related transactions that the money services business knows, suspects, or has
reason to suspect (1) involve funds derived from illegal activity or are
intended to hide or disguise such funds, (2) are designed to evade the
requirements of the Bank Secrecy Act, or (3) appear to serve no business or
lawful purpose. Because of our point-of-sale system and employee-training
programs, we do not believe that compliance with the existing reporting
requirement and the corresponding record keeping requirements, has had or will
have any material impact on our operations. The Gramm-Leach-Bliley Act and its implementing federal regulations
require us to generally protect the confidentiality of our customers nonpublic
personal information and to disclose to our customers our privacy policy and
practices, including those regarding sharing the customers nonpublic personal
information with third parties. That disclosure must be made to 17




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customers at the time that the customer relationship is established and at
least annually thereafter. Federal anti-money-laundering laws make it a criminal offense to own or
operate a money transmitting business without the appropriate state licenses.
In addition, the USA PATRIOT Act of 2001 and its implementing federal
regulations require us, as a financial institution, to establish and maintain
an anti-money-laundering program. Such a program must include (1) internal
policies, procedures and controls designed to identify and report money
laundering, (2) a designated compliance officer, (3) an ongoing
employee-training program and (4) an independent audit function to test the
program. Because of our compliance with other federal regulations having
essentially a similar purpose, we do not believe that compliance with these
requirements has had or will have any material impact on our operations. Short-term Consumer Loans.Short-term consumer loans, also known as
payday loans, are strictly regulated by federal guidance and state laws and
regulations. The Office of the Comptroller of the Currency, which supervises
national banks, took action in 2002 to effectively prohibit certain national
banks from offering and making short-term consumer loans because of various
risks it believes short-term consumer lending poses to those banks. Also,
during the last few years, legislation has been introduced in the U.S. Congress
and in certain state legislatures, and regulatory authorities have proposed or
publicly addressed the possibility of proposing regulations, that would
prohibit or severely restrict short-term consumer loans. For example, in
December 2002, we ceased offering short-term consumer loans at our stores in
Alabama, Georgia and North Carolina as a result of laws enacted restricting
short-term consumer loans in those states. As a result of more recently
enacted laws in Alabama permitting short-term consumer loans, beginning July
2004, we have resumed offering short-term consumer loans at our store in that
state. More recently, the Georgia state legislature passed a proposed law
banning short-term consumer loans in that state. We intend to continue, with
others in the short-term consumer loan industry, to inform and educate
legislators and to oppose legislative or regulatory action that would prohibit
or severely restrict short-term consumer loans. Nevertheless, if legislative or
regulatory action with that effect were taken on the federal level or in states
in which we have a significant number of stores, that action would have a
material adverse effect on our loan-related activities and revenues. Moreover,
similar action by states where we are not currently conducting business could
result in us having fewer opportunities to pursue our growth strategy. Since January 1, 2003, all of the short-term consumer loans offered at our
stores have consisted of either (1) short-term consumer loans we made, or (2)
short-term consumer loans Republic Bank made. Our activities as a short-term
consumer lender obligate us to comply with the consumer-disclosure requirements
of the federal Truth in Lending Act and Regulation Z adopted under that act.
Our activities as a collection agent for our past-due loans and past-due
Republic Bank loans obligate us to comply with the federal Fair Debt Collection
Practices Act and corresponding regulations and to register as a collection
agency in certain states. Republic Bank is subject to supervision and regular examinations by the
Kentucky Department of Financial Institutions and the FDIC. In July 2003, the
FDIC issued guidelines governing permissible arrangements between a
state-chartered bank and a marketer and servicer of its short-term consumer
loans, also know as payday loans. Those guidelines apply to our marketing and
servicing agreement with Republic Bank regarding the offering of Republic Bank
loans at our stores in Arkansas, Pennsylvania and Texas and our servicing
activities regarding those loans. The guidelines describe the FDICs
expectations for a banks prudent risk-management practices regarding
short-term consumer loan marketing and servicing relationships. They address
bank capital requirements, allowances for loan losses and loan classifications
as well as income recognition, collection-recovery practices and compliance
with consumer protection laws when a bank engages in short-term consumer
lending. We do not believe that the FDICs guidelines will have a material
impact on our existing relationship with Republic Bank. Nevertheless, if the
FDICs implementation of those guidelines or the promulgation of any additional
guidelines were to ultimately restrict the ability of all or certain
state-chartered banks, including Republic Bank, to maintain relationships with
short-term consumer loan servicers like us, it could have a material adverse
impact on our loan-related activities and revenues. As a result of our agreement with Republic Bank, our activities regarding
the Republic Bank loans are also subject to examination by the FDIC and the
other regulatory authorities to which Republic Bank is subject. To the extent
an examination involves review of the Republic Bank loans and related
processes, the regulatory authority may require us to provide requested
information and to grant access to our pertinent locations, personnel and
records. Relationships with the Money Order and MoneyGram Suppliers Money Order Agreement.We are a party to a money order agreement with
Travelers Express Company, Inc., which became effective December 17, 1998 and
expires December 31, 2007. Under this agreement, we exclusively sell Travelers
Express money orders that bear our logo. The money order agreement obligates
us to make prompt remittances of money order proceeds. Our payment and other
obligations to Travelers Express under the money order agreement and the
MoneyGram Agreement (described below) are secured by a subordinated lien on our
assets in accordance with security agreements described in Note 3 of Notes to
Consolidated Financials Statements. 18




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In conjunction with the money order agreement, we received $3 million from
Travelers Express in April 1998, and $400,000 in each of 1999 through 2003, for
a total of $5 million. When the term of the money order agreement was extended
in October 2003, we received a signing bonus of approximately $2 million and
have and will receive annual incentive bonuses of $350,000 on January 1 each of
2004 through 2007. The signing bonus and each annual incentive bonus will be
amortized on a straight-line basis over the period for and during which that
bonus is paid. If the money order agreement is terminated before its
expiration under certain circumstances, we will be obligated to repay Travelers
Express a portion of the amendment signing bonus (without interest). See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources and Note 3 of Notes to
Consolidated Financial Statements. MoneyGram Agreement.We act as an agent for the receipt and transmission
of wire transfers of money through the MoneyGram network in accordance with a
money transfer agreement with Travelers Express and MoneyGram Payment Systems,
Inc., an affiliate of Travelers Express, that became effective on January 1,
2001 and expires on December 31, 2007. We agreed to offer and sell only
MoneyGram wire transfer services during the seven-year term of this MoneyGram
Agreement. Under the MoneyGram Agreement, we earn commissions for each
transmission and receipt of money through the MoneyGram network effected at a
company-owned location; those commissions equal varying percentages of the fees
charged by MoneyGram Payment Systems to consumers for the MoneyGram services. Under the MoneyGram Agreement, we are also entitled to receive a total of
approximately $12.5 million in bonuses, payable in equal monthly installments
(without interest) over the seven-year term. The amount of those monthly
installments will be subject to reduction if we close or sell a significant
number of those locations at which MoneyGram services were offered at the
beginning of the MoneyGram Agreement. In addition, we will be entitled to
receive certain incentive payments regarding new MoneyGram service locations
that we open or acquire during the term of the MoneyGram Agreement. Relationship with H&R Block/SSM Arrangements We are a party to a multi-year license agreement with H&R Block Tax
Services, Inc. under which we may place our self-service machines (SSMs) in
various H&R Block retail offices during the tax season (i.e., January through
March) of each year. Those SSMs are available to cash only tax refund and tax
refund anticipation loan checks for H&R Blocks customers. We receive
check-cashing fees from customers who use those SSMs, and we pay H&R Block fees
that vary according to the value of the checks cashed in those SSMs. We placed
over 200 SSMs in H&R Block retail offices during the 2004 tax season, and
anticipate placing between 50 and 150 SSMs at H&R Block retail offices during
the 2005 tax season. The arrangements by which we obtained cash or currency for the SSMs in the
H&R Block retail offices are described in Managements Discussion and Analysis
of Financial Condition and Results of Operations  Liquidity and Capital
Resources  Self-Service Machine Funding Arrangements. 
 ITEM 2. PROPERTIES Our average store size is approximately 1,200 square feet. Our stores are
located in strip shopping centers, free-standing buildings and kiosks located
inside retail stores. All but two of our stores are leased, generally under
leases providing for an initial term of three years and optional renewal terms
of three to six years. We own the land and building at one store in
Indianapolis, Indiana and one store in Tampa, Florida. Our corporate
headquarters in Irving, Texas, a suburb of Dallas, occupies approximately
56,000 square feet under a lease that expires in 2008. 
 ITEM 3. LEGAL PROCEEDINGS Settlement of Goleta Loan-Related Proceedings We have been a defendant in a number of lawsuits regarding our former
arrangements with Goleta National Bank under which Goleta offered short-term
consumer loans to our customers at or through most of our owned stores before
January 1, 2003. These lawsuits alleged that we, rather than Goleta, should
have been properly regarded as the lender for the loans because of our services
in connection with the loans and our purchase of participation interests in
those loans and that the loans, including the interest charge, should be
governed by the laws of the respective states in which the borrowers reside.
On May 12, 2003, however, we entered into a settlement agreement to settle and
terminate the nationwide class-action Goleta loan-related lawsuit, Purdie v.
Ace Cash Express, Inc. et al., that was pending in the United States District
Court in Dallas, Texas, and on December 15, 2003, the federal court entered a
final judgment and order granting final approval of the settlement agreement.
Because of the broad nature of the class described in the settlement agreement
approved by the court, we believe that the settlement not only disposes of
those claims brought against us in the Purdielawsuit, but also disposes of
those claims brought in the other Goleta loan-related lawsuits, as well as any
future claims brought on the same grounds. 19




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In the settlement agreement, we agreed to pay:  
    
    at least $2.5 million as refunds to former borrowers who have
repaid all of their Goleta loans and who timely submit claims for
refunds or, if the refunds and certain other amounts paid by us total
less than $2.5 million, the amount of the shortfall to certain
consumer-advocacy organizations;
    
    up to $2.1 million as attorneys fees to the plaintiffs counsel in
the Purdieand other Goleta loan-related lawsuits being settled and
terminated; and
    
    notice and other administrative costs in connection with the settlement. In the settlement agreement, we also agreed:  
    
    To ensure that any of our short-term consumer loans or
deferred-deposit transactions made under state law during the two years
ended December 31, 2004 are made only in compliance with any applicable
state short-term consumer-lending laws, except that we may rely on
federal-preemption rules in connection with acting as marketing and
servicing agent for the Republic Bank deferred-deposit loans made at or
through certain of our stores; and
    
    For the two years following the date on which we made the
settlement payments, to make specified disclosures to borrowers of our
short-term consumer loans regarding the expense of those loans and
regarding certain collection-related expenses to which borrowers might
become subject and to abide by specified restrictions on activities to
collect our short-term consumer loans through automated clearinghouse
debits and on credit reporting regarding borrowers of our short-term
consumer loans. The refund payable by us to each eligible former borrower who filed a
refund claim is approximately five percent of the interest or finance charges
paid by that borrower, but not less than $7.50 or more than $45.00. Based on estimates of anticipated claims by eligible borrowers and of
administrative and other costs related to the settlement, we recorded a $5.0
million charge for our settlement payment obligations in our financial
statements in the third quarter of fiscal 2003. During the quarter ended
September 30, 2003, we expensed an additional $0.1 million for administrative
costs related to the settlement. In the fourth quarter of fiscal 2003, we
recovered $4.7 million from liability insurance coverage for claims related to
various Goleta loan-related lawsuits. In March 2004, we mailed to the former Goleta loan borrowers, and remitted
to the consumer-advocacy organizations and plaintiffs counsel, the amounts
required by the settlement agreement. Fewer than 80 persons did not
participate in, or elected to opt out of, the settlement reached in Purdie. We
believe that the claims of, or any legal proceedings involving, those persons
will not result in a material impact on our financial condition and results of
operations. Settlement of Acquisition Related Proceeding On November 27, 2001, we filed a lawsuit in Texas state court in Travis County,
Texas, against Valley Check Cashiers, Inc., Jeffrey Silverman and Morris
Silverman seeking damages relating to the defendants misrepresentations and
breaches of warranties in an Asset Purchase Agreement between us and the
defendants, and certain other entities affiliated with the defendants dated as
of November 10, 2000. Under the Asset Purchase Agreement, we acquired the
assets of 107 check-cashing and retail financial services locations owned and
managed by the defendants and their affiliated entities for a total purchase
price of $29.7 million in cash. Eleven of the acquired locations were in
third-party grocery stores, operated under the Handy Andy name, in and around
San Antonio, Texas. Following the foreclosure and sale of those grocery stores
by the secured creditor of the grocery store operator, we (in cooperation with
the sellers under the Asset Purchase Agreement) instituted litigation against
that creditor and its purchaser in January 2001 to maintain our right to
operate in those locations. At a trial in April 2001, the court found that the
lease agreement under which we claimed the right to occupy those eleven
locations, which had been assigned to us by the defendants and their affiliated
entities, was not enforceable under Texas law. The court therefore ordered us
to vacate those eleven locations, which we did in June 2001. Because of the
courts finding, we filed this lawsuit to recover the damages suffered in
connection with, and as a result of, the loss of those eleven locations. In
May 2004, we settled the lawsuit with the defendants, and on June 3, 2004, the
presiding judge entered an agreed order of dismissal with prejudice. As a
result, in May 2004, we authorized payment of the note payable, which had been
held in escrow and we received a settlement payment of $434,000, which is
recorded in other (income expenses. Other Incidental Proceedings We are also involved from time to time in various legal proceedings
incidental to the conduct of our business. We believe that these legal
proceedings will not result in any material impact on our financial condition
and results of operations. 20




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our shareholders during the fourth
quarter of fiscal 2004. 
 PART II 
  ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Our Common Stock is quoted on The Nasdaq Stock Market (NASDAQ) under the
symbol AACE. At September 7, 2004, there were approximately 131 holders of
record of the Common Stock, and there were approximately 1,500 beneficial
holders of the Common Stock held in nominee or street name. The following table sets forth the high and low sale prices of the Common
Stock as reported by NASDAQ for the past two fiscal years: High
    
    LowFiscal 2003Quarter ended September 30, 2002
    
    $
    10.00
    
    
    $
    7.80Quarter ended December 31, 2002
    
    
    9.25
    
    
    
    7.48Quarter ended March 31, 2003
    
    
    10.04
    
    
    
    8.70Quarter ended June 30, 2003
    
    
    11.65
    
    
    
    9.09Fiscal 2004Quarter ended September 30, 2003
    
    $
    14.99
    
    
    $
    10.70Quarter ended December 31, 2003
    
    
    23.50
    
    
    
    14.45Quarter ended March 31, 2004
    
    
    34.50
    
    
    
    21.45Quarter ended June 30, 2004
    
    
    32.60
    
    
    
    20.25
 On September 7, 2004, the last reported sale price of the Common Stock on
NASDAQ was $27.64 per share. We have never paid dividends on the Common Stock and have no plans to pay
dividends in the foreseeable future. 21




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ITEM 6. SELECTED FINANCIAL DATA Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share and store data)Statement of Earnings Data:Revenue
    
    $
    246,659
    
    
    $
    234,289
    
    
    $
    229,266
    
    
    $
    196,775
    
    
    $
    140,636Store expenses:Salaries and benefits
    
    
    59,593
    
    
    
    58,170
    
    
    
    57,864
    
    
    
    51,969
    
    
    
    38,639Occupancy
    
    
    30,563
    
    
    
    29,194
    
    
    
    28,207
    
    
    
    26,439
    
    
    
    21,507Provision for loan losses and doubtful accounts
    
    
    24,235
    
    
    
    22,892
    
    
    
    22,064
    
    
    
    24,825
    
    
    
    4,177Depreciation
    
    
    7,563
    
    
    
    6,966
    
    
    
    7,180
    
    
    
    6,697
    
    
    
    5,429Other
    
    
    40,066
    
    
    
    38,192
    
    
    
    36,512
    
    
    
    35,085
    
    
    
    24,916Total store expenses
    
    
    162,020
    
    
    
    155,414
    
    
    
    151,827
    
    
    
    145,015
    
    
    
    94,668Gross margin
    
    
    84,639
    
    
    
    78,875
    
    
    
    77,439
    
    
    
    51,760
    
    
    
    45,968Region expenses
    
    
    19,251
    
    
    
    17,056
    
    
    
    17,495
    
    
    
    14,127
    
    
    
    11,119Headquarters expenses
    
    
    18,681
    
    
    
    17,133
    
    
    
    16,594
    
    
    
    10,328
    
    
    
    8,247Franchise expenses
    
    
    1,196
    
    
    
    1,225
    
    
    
    993
    
    
    
    1,017
    
    
    
    1,063Other depreciation and amortization
    
    
    3,893
    
    
    
    5,423
    
    
    
    7,570
    
    
    
    5,087
    
    
    
    3,798Interest expense
    
    
    10,231
    
    
    
    16,004
    
    
    
    14,934
    
    
    
    12,016
    
    
    
    6,123Other (income) expenses:Restructuring
    
    
    
    
    
    
    
    
    
    
    (163
    )
    
    
    7,710
    
    
    
    Legal settlements
    
    
    
    
    
    
    1,050
    
    
    
    1,984
    
    
    
    350
    
    
    
    584Loss on early extinguishment of debt
    
    
    4,858
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    Other (income) expense (including store closing expense)
    
    
    (1,893
    )
    
    
    264
    
    
    
    1,006
    
    
    
    108
    
    
    
    371Total other expenses
    
    
    2,965
    
    
    
    1,584
    
    
    
    2,827
    
    
    
    8,168
    
    
    
    955Income from continuing operations before income taxes and
Cumulative effect of accounting change (1)
    
    
    28,422
    
    
    
    20,450
    
    
    
    17,026
    
    
    
    1,017
    
    
    
    14,663Provision for income taxes
    
    
    11,370
    
    
    
    8,174
    
    
    
    6,913
    
    
    
    406
    
    
    
    5,797Income from continuing operations before cumulative
effect of accounting change
    
    
    17,052
    
    
    
    12,276
    
    
    
    10,113
    
    
    
    611
    
    
    
    8,866Gain on sale of discontinued operations, net of income tax (2)
    
    
    
    
    
    
    499
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change, net of income tax (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (603
    )Net income
    
    $
    17,052
    
    
    $
    12,775
    
    
    $
    10,113
    
    
    $
    611
    
    
    $
    8,263Diluted earnings per share
    
    $
    1.49
    
    
    $
    1.25
    
    
    $
    1.00
    
    
    $
    0.06
    
    
    $
    0.82Weighted average number of diluted shares
    
    
    11,477
    
    
    
    10,206
    
    
    
    10,141
    
    
    
    10,158
    
    
    
    10,361Balance Sheet Data:Cash and cash equivalents
    
    $
    123,041
    
    
    $
    108,110
    
    
    $
    116,264
    
    
    $
    129,186
    
    
    $
    105,577Loans receivable, net
    
    
    17,047
    
    
    
    13,000
    
    
    
    17,356
    
    
    
    14,386
    
    
    
    18,695Total assets
    
    
    273,647
    
    
    
    258,768
    
    
    
    267,062
    
    
    
    276,197
    
    
    
    221,423Revolving advances
    
    
    60,000
    
    
    
    83,900
    
    
    
    97,500
    
    
    
    109,800
    
    
    
    95,000Term advances (current portion)
    
    
    
    
    
    
    3,833
    
    
    
    48,350
    
    
    
    1,125
    
    
    
    3,469Term advances (noncurrent portion)
    
    
    
    
    
    
    34,436
    
    
    
    
    
    
    
    51,875
    
    
    
    15,031Shareholders equity
    
    
    166,430
    
    
    
    78,984
    
    
    
    66,139
    
    
    
    54,726
    
    
    
    55,159
 22




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##### Table of Contents



SELECTED FINANCIAL DATA (continued) Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000Operating Data:Company-owned stores in operation:Beginning of year
    
    
    968
    
    
    
    1,003
    
    
    
    988
    
    
    
    915
    
    
    
    798Acquired
    
    
    34
    
    
    
    2
    
    
    
    8
    
    
    
    133
    
    
    
    36Opened
    
    
    53
    
    
    
    14
    
    
    
    39
    
    
    
    49
    
    
    
    99Sold
    
    
    (5
    )
    
    
    (23
    )
    
    
    
    
    
    
    (4
    )
    
    
    (1
    )Closed (3)
    
    
    (24
    )
    
    
    (28
    )
    
    
    (32
    )
    
    
    (105
    )
    
    
    (17
    )End of year
    
    
    1,026
    
    
    
    968
    
    
    
    1,003
    
    
    
    988
    
    
    
    915Franchised stores in operations:Beginning of year
    
    
    200
    
    
    
    184
    
    
    
    175
    
    
    
    157
    
    
    
    120Opened
    
    
    32
    
    
    
    26
    
    
    
    22
    
    
    
    30
    
    
    
    56Acquired by ACE
    
    
    (13
    )
    
    
    (2
    )
    
    
    (8
    )
    
    
    (4
    )
    
    
    (7
    )Closed
    
    
    (15
    )
    
    
    (8
    )
    
    
    (5
    )
    
    
    (8
    )
    
    
    (12
    )End of year
    
    
    204
    
    
    
    200
    
    
    
    184
    
    
    
    175
    
    
    
    157Total store network
    
    
    1,230
    
    
    
    1,168
    
    
    
    1,187
    
    
    
    1,163
    
    
    
    1072Percentage increase in comparable company-owned store
revenues from prior year: (4)Total revenue
    
    
    5.0
    %
    
    
    1.9
    %
    
    
    17.2
    %
    
    
    25.5
    %
    
    
    7.2
    %Check fees excluding tax check fees
    
    
    5.2
    %
    
    
    8.0
    %
    
    
    6.0
    %
    
    
    2.3
    %
    
    
    7.3
    %Loan fees and interest
    
    
    7.8
    %
    
    
    (4.4
    %)
    
    
    36.1
    %
    
    
    176.9
    %
    
    
    16.0
    %Capital expenditures (in thousands)
    
    $
    7,950
    
    
    $
    4,771
    
    
    $
    7,127
    
    
    $
    12,655
    
    
    $
    12,255Cost of net assets acquired (in thousands)
    
    $
    6,403
    
    
    $
    673
    
    
    $
    1,177
    
    
    $
    35,841
    
    
    $
    11,359Check Cashing Data:Face amount of checks cashed (in millions)
    
    $
    5,103
    
    
    $
    5,040
    
    
    $
    4,843
    
    
    $
    4,498
    
    
    $
    3,839Face amount of average check
    
    $
    388
    
    
    $
    383
    
    
    $
    378
    
    
    $
    358
    
    
    $
    339Average fee per check
    
    $
    9.91
    
    
    $
    9.65
    
    
    $
    9.36
    
    
    $
    8.38
    
    
    $
    7.92Fees as a percentage of average check
    
    
    2.55
    %
    
    
    2.52
    %
    
    
    2.48
    %
    
    
    2.34
    %
    
    
    2.33
    %Number of checks cashed (in thousands)
    
    
    13,151
    
    
    
    13,148
    
    
    
    12,821
    
    
    
    12,580
    
    
    
    11,317Collections Data:Face amount of returned checks (in thousands)
    
    $
    21,705
    
    
    $
    24,087
    
    
    $
    23,637
    
    
    $
    26,536
    
    
    $
    16,548Collections (in thousands)
    
    
    13,947
    
    
    
    16,935
    
    
    
    16,090
    
    
    
    17,717
    
    
    
    10,788Net write-offs (in thousands)
    
    $
    7,758
    
    
    $
    7,152
    
    
    $
    7,547
    
    
    $
    8,819
    
    
    $
    5,760Collections as a percentage of returned checks
    
    
    64.3
    %
    
    
    70.3
    %
    
    
    68.1
    %
    
    
    66.8
    %
    
    
    65.2
    %Net write-offs as a percentage of revenues
    
    
    3.1
    %
    
    
    3.1
    %
    
    
    3.3
    %
    
    
    4.5
    %
    
    
    4.1
    %Net write-offs as a percentage of the face amount
of checks cashed
    
    
    0.15
    %
    
    
    0.14
    %
    
    
    0.16
    %
    
    
    0.20
    %
    
    
    0.15
    %
 23




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##### Table of Contents



SELECTED FINANCIAL DATA (continued) Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000Combined Small Consumer Loans Operating Data:Volume  new loans and refinances
    
    $
    527,723
    
    
    $
    484,026
    
    
    $
    502,013
    
    
    $
    396,783
    
    
    $
    137,015Average advance
    
    $
    278
    
    
    $
    274
    
    
    $
    269
    
    
    $
    269
    
    
    $
    240Average finance charge
    
    $
    43.71
    
    
    $
    44.55
    
    
    $
    45.61
    
    
    $
    42.30
    
    
    $
    34.51Number of loan transactions  new loans and refinances
    
    
    1,909
    
    
    
    1,798
    
    
    
    1,866
    
    
    
    1,477
    
    
    
    557Matured loan volume
    
    $
    516,741
    
    
    $
    488,940
    
    
    $
    489,887
    
    
    $
    370,559
    
    
    $
    129,548Loan fees and interest
    
    $
    77,029
    
    
    $
    70,806
    
    
    $
    74,197
    
    
    $
    54,771
    
    
    $
    17,872Loan loss provision
    
    $
    24,280
    
    
    $
    22,293
    
    
    $
    21,924
    
    
    $
    24,825
    
    
    
    Gross margin on loans
    
    
    68.5
    %
    
    
    68.5
    %
    
    
    70.5
    %
    
    
    54.7
    %
    
    
    Loan loss provision as a percent of matured loan volume
    
    
    4.7
    %
    
    
    4.6
    %
    
    
    4.5
    %
    
    
    6.7
    %
    
    
    ACE Loans(5):Volume  new loans and refinances
    
    $
    368,031
    
    
    $
    420,129
    
    
    $
    502,013
    
    
    $
    396,783
    
    
    $
    137,015Average advance
    
    $
    269
    
    
    $
    268
    
    
    $
    269
    
    
    $
    269
    
    
    $
    240Average finance charge
    
    $
    39.40
    
    
    $
    42.71
    
    
    $
    45.61
    
    
    $
    42.30
    
    
    $
    34.51Number of loan transactions  new loans and refinances
    
    
    1,368
    
    
    
    1,587
    
    
    
    1,866
    
    
    
    1,477
    
    
    
    557Matured loan volume
    
    $
    359,723
    
    
    $
    432,900
    
    
    $
    489,887
    
    
    $
    370,559
    
    
    $
    129,548Loan fees and interest
    
    $
    52,993
    
    
    $
    61,769
    
    
    $
    74,197
    
    
    $
    54,771
    
    
    $
    17,872Loan loss provision
    
    $
    16,890
    
    
    $
    19,361
    
    
    $
    21,924
    
    
    $
    24,825
    
    
    
    Loans Processed for Republic Bank(6):Volume  new loans and refinances
    
    $
    159,692
    
    
    $
    63,897
    
    
    
    
    
    
    
    
    
    
    
    Average advance
    
    $
    296
    
    
    $
    302
    
    
    
    
    
    
    
    
    
    
    
    Average finance charge
    
    $
    52.11
    
    
    $
    53.35
    
    
    
    
    
    
    
    
    
    
    
    Number of loan transactions  new loans and refinances
    
    
    541
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    Matured loan volume
    
    $
    157,018
    
    
    $
    56,040
    
    
    
    
    
    
    
    
    
    
    
    Loan fees and interest
    
    $
    24,036
    
    
    $
    9,037
    
    
    
    
    
    
    
    
    
    
    
    Provision for loan losses payable to Republic Bank
    
    $
    7,390
    
    
    $
    2,932
    
    
    
    
    
    
    
    
    
    
    
    Balance Sheet Data (in thousands):Gross loans receivable

    
    $
    27,663
    
    
    $
    21,734
    
    
    $
    29,569
    
    
    $
    27,768
    
    
    $
    18,695Less: Allowance for losses on loans receivable
    
    
    10,616
    
    
    
    8,734
    
    
    
    12,213
    
    
    
    13,382
    
    
    
    Loans receivable, net of allowance
    
    $
    17,047
    
    
    $
    13,000
    
    
    $
    17,356
    
    
    $
    14,386
    
    
    $
    18,695Allowance for losses on loans receivable:Beginning of period
    
    $
    8,734
    

    
    $
    12,213
    
    
    $
    13,382
    
    
    $
    
    
    
    $
    Provision for loan losses
    
    
    16,890
    
    
    
    19,361
    
    
    
    21,924
    
    
    
    26,429
    
    
    
    Charge-offs
    
    
    (15,295
    )
    
    
    (23,729
    )
    
    
    (24,519
    )
    
    
    (13,510
    )
    
    
    Recoveries
    
    
    287
    
    
    
    889
    
    
    
    1,426
    
    
    
    463
    
    
    
    End of period
    
    $
    10,616
    
    
    $
    8,734
    
    
    $
    12,213
    
    
    $
    13,382
    
    
    $
    Allowance as a percent of gross loans receivable
    
    
    38.3
    %
    
    
    40.2
    %
    
    
    41.3
    %
    
    
    48.2
    %
    
    
    
  (1)
    
    Before a cumulative effect of accounting change recorded in the three
months ended September 30, 1999, of $0.6 million, net of a $0.4 million
tax benefit, relating to the adoption of Statement of Position 98-5,
Reporting on the Costs of Start-up Activities.  (2)
    
    Discontinued operations related to our sale of 19 underperforming stores
in Florida for a pre-tax gain of $0.8 million and an after-tax gain of
$0.5 million recorded in the three months ended December 31, 2002.  (3)
    
    Includes the 85 stores closed in the fourth quarter of fiscal 2001
resulting from a plan established and executed by management during the
third quarter of fiscal 2001.  (4)
    
    Calculated based on changes in revenue for all company-owned stores open
in both periods and open for at least 13 months.  (5)
    
    Operating data for ACE loans include short-term consumer loans made by
Goleta National Bank at our company-owned stores until we discontinued
offering Goleta loans on December 31, 2002.  (6)
    
    Republic Bank loans are short-term consumer loans made by Republic Bank &
Trust Company at our company-owned stores in Arkansas, Pennsylvania and
Texas since January 1, 2003. 24




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Business Overview We are a leading retailer of financial services, including check cashing,
short-term consumer loans and bill payment services. As of June 30, 2004, we
had a total network of 1,230 stores in 36 states and the District of Columbia,
consisting of 1,026 company-owned stores and 204 franchised stores. This makes
us the largest owner, operator and franchisor of check cashing stores in the
United States and one of the largest providers of short-term consumer loans,
also known as payday loans. We focus on serving unbanked and underbanked
consumers, many of whom seek alternatives to traditional banking relationships
in order to gain convenient and immediate access to check cashing services and
short-term consumer loans. We seek to develop and maintain the largest network
of stores in each of the markets where we operate. Our growth strategy is to
open new stores, franchise stores in new and existing markets,
opportunistically acquire stores, increase our customer base and introduce new
services into our store network. Our stores offer check cashing, loans and other retail financial services
at competitive rates in clean settings during hours convenient for our
customers. Our stores are located in highly visible, accessible locations,
usually in strip shopping centers, free-standing buildings and kiosks located
inside retail stores. For our check cashing services, we charge our customers fees that are
usually equal to a percentage of the amount of the check being cashed and are
deducted from the cash provided to the customer. For our short-term consumer
loans we receive interest on the loans. For the Republic Bank loans offered at
certain of our stores, we receive origination and servicing fees from Republic
Bank. Our expenses primarily relate to the operations of our stores, including
salaries and benefits for our employees, occupancy expense for our leased real
estate, security expenses, returns and cash shortages, loan loss provisions,
depreciation of our assets and corporate and other expenses, including costs
related to store openings and closings. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from our estimates. We
believe our application of accounting policies, and the estimates inherently
required therein, are reasonable. Revenue Recognition.Approximately 97% of our revenue results from
transactions at the point-of-sale with our customers, and approximately 66% of
our revenue is effectively recognized when the transaction is completed at the
point-of-sale. These transactions include check cashing, bill payment, money
transfer, money order sales and other miscellaneous services grouped in other
fees. We act in an agency capacity regarding some of the services offered and
sold at our stores and therefore record as revenue the amounts received from
customers less amounts remitted to the provider. For short-term consumer loans that we make, for the Republic Bank loans
for which we act only as marketing agent and servicer for a fee from the lender
and, during the fiscal year ended June 30, 2003, for our participation
interests in Goleta National Bank loans, revenue constituting loan fees and
interest (whether paid by the customer or the lender) is recognized ratably
over the term of each loan, which is generally 14 days. We recognize contractual revenue guarantees from product or service
providers in accordance with the terms of the contracts under which they are
paid. Any bonus or incentive payments from product or service providers are
amortized over the term or duration of the contracts under which they are made. Franchise revenue consists of up-front franchise fees charged for opening
the franchised store and on-going royalty fees. We recognize franchise fees,
which are the initial fees paid by the franchisees, when the franchised
location has been identified, the lease has been obtained, the training has
occurred, the building has been built or leasehold improvements have been
completed, the proprietary point-of-sale system has been installed and the
store has been opened. Franchise royalty fees, which are based on a percentage
of each franchisees revenues, are recognized and payable monthly. Loan Loss Provision.We believe that the most significant estimate made
in the preparation of the accompanying consolidated financial statements
relates to the determination of our allowance for loan losses. We maintain an
allowance for loan losses and a payable to Republic Bank at levels we consider
sufficient to cover the anticipated losses in the collection of our loan
portfolio and our liability for Republic Bank loan losses. The allowance for
loan losses and our payable to Republic 25




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##### Table of Contents



Bank are determined based upon a review of historical and recent loan
losses and the loan portfolio. Management periodically reviews the allowance
for loan losses and payable to Republic Bank and any changes are reflected in
current operations. Actual loan losses may be materially different from the
recorded allowance for loan losses or recorded amount payable to Republic Bank. Summary of Annual Results Our fiscal 2004 total revenue was approximately $12.4 million, or 5.3%,
higher than our fiscal 2003 total revenue. This increase resulted primarily
from an approximate $6.2 million, or 8.8%, increase in loan-related revenue, an
approximate $3.5 million, or 2.8%, increase in check cashing fees, and an
approximate $3.5 million, or 25.6%, increase in bill-payment (including debit
card) revenue. Our 2004 net income was approximately $17.1 million, with
diluted earnings per share of $1.49, compared to our 2003 net income of
approximately $12.8 million, with diluted earnings per share of $1.25.
Comparable store check-cashing fees (excluding tax check fees) and comparable
store loan-related revenues, as well as comparable gross margin, increased in
fiscal 2004 from fiscal 2003. Results of Operations Revenue Analysis Year Ended June 30,(in thousands)
    
    (percentage of revenue)2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Check cashing fees
    
    $
    129,194
    
    
    $
    125,703
    
    
    $
    118,907
    
    
    
    52.4
    %
    
    
    53.7
    %
    
    
    51.9
    %Loan fees and interest
    
    
    77,029
    
    
    
    70,806
    
    
    
    74,197
    
    
    
    31.2
    
    
    
    30.2
    
    
    
    32.4Bill-payment services
    
    
    16,960
    
    
    
    13,507
    
    
    
    10,156
    
    
    
    6.9
    
    
    
    5.8
    
    
    
    4.4Money transfer services
    
    
    11,136
    
    
    
    10,898
    
    
    
    10,998
    
    
    
    4.5
    
    
    
    4.6
    
    
    
    4.8Money order fees
    
    
    6,330
    
    
    
    6,960
    
    
    
    7,554
    
    
    
    2.6
    
    
    
    3.0
    
    
    
    3.3Franchise revenues
    
    
    2,774
    
    
    
    2,346
    
    
    
    2,199
    
    
    
    1.1
    
    
    
    1.0
    
    
    
    0.9Other fees
    
    
    3,236
    
    
    
    4,069
    
    
    
    5,255
    
    
    
    1.3
    
    
    
    1.7
    
    
    
    2.3Total revenue
    
    $
    246,659
    
    
    $
    234,289
    
    
    $
    229,266
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Average revenue per store
(excluding franchise revenues)
    
    $
    247.8
    
    
    $
    235.5
    
    
    $
    227.3
 Fiscal 2004 Compared to Fiscal 2003.Our total revenue growth resulted from a
$10.7 million, or 5.0%, increase in comparable company-owned store revenues
(945 stores) and a $1.7 million increase from stores that were not open for
both of the full periods compared. The number of company-owned stores
increased by 58, or 6%, to 1,026 stores open at June 30, 2004 from 968 stores
open at June 30, 2003. During fiscal 2004, we opened 53 newly constructed
stores, acquired 34, sold 5, and closed 24 company-owned stores. Check cashing fees, including tax check fees, increased because of a 1%
increase in the average size check and a 3% increase in the average fee per
check. Same store check cashing fees increased 4.1% in fiscal 2004 from fiscal
2003. Tax check fees of $20.8 million for fiscal 2004 decreased by $0.7
million, from $21.5 million in fiscal 2003. We received $4.3 million of tax
check fees from our over 200 self-service machines (SSMs) located in H&R
Block offices in fiscal 2004, compared to $4.7 million of tax check fees from
240 SSMs in H&R Block offices in 2003. The increase in loan fees and interest in fiscal 2004 resulted from a 9%
increase in loan volume in both the ACE loan product and the Republic loan
product. Over half of the increase in bill payment fees in fiscal 2004 was a result
of growth in revenues from our services related to prepaid debit cards ($1.9
million). Also, we continue to add new payees to the bill payment program and
benefit from growth from existing payees. Money order fees decreased in fiscal
2004 primarily because of the sale of fewer money orders, which in turn was
primarily because of increased customer usage of electronic bill-payment
services. Other fees decreased in fiscal 2004 as a result of the
discontinuation of certain miscellaneous products. Franchise revenues consist of royalties and initial franchise fees.
Franchise revenues increased in fiscal 2004 as a result of the increased number
of franchised store openings. During fiscal 2004, we opened 32 franchised
stores, acquired 13 former franchised stores, and closed 15 franchised stores. Fiscal 2003 Compared to Fiscal 2002.Our total revenue growth of $5.0 million,
or 2%, in fiscal 2003 from fiscal 2002 resulted from a $4.1 million, or 1.9%,
increase in comparable company-owned store revenues (952 stores) and a $0.9
million increase from stores that were not open for both of the full periods
compared. The number of company-owned stores 26




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##### Table of Contents



decreased by 35, or 3%, to 968 stores open at June 30, 2003 from 1,003 stores
open at June 30, 2002. During fiscal 2003, we opened 14 newly constructed
stores, acquired two, sold 23 (including 19 underperforming stores in Florida
during the second fiscal quarter), and closed 28 company-owned stores. Check cashing fees, including tax check fees, increased $6.8 million, or
6%, in fiscal 2003 from fiscal 2002 because of a 1% increase in the average
size check and a 2% increase in the number of checks cashed. Same store check
cashing fees increased 5.4% in fiscal 2003 from fiscal 2002. Tax check fees of
$21.5 million for fiscal 2003 increased by $0.2 million, from $21.3 million in
fiscal 2002. We received $4.7 million of tax check fees from over 240 SSMs
located in H&R Block offices in fiscal 2003, compared to $3.8 million of tax
check fees from 100 SSMs in H&R Block offices in fiscal 2002. Loan fees and interest decreased by 5%, in fiscal 2003 from fiscal 2002
primarily from discontinuing our loan-related business in Georgia, North
Carolina, and Alabama and from transitioning from offering short-term loans
made by Goleta, which ended December 31, 2002, to offering state-regulated
short-term loan products. Bill payment fees increased by 33%, from fiscal 2002, primarily as a
result of the addition of 14 new payees to the bill-payment program and growth
from existing payees. Money order fees decreased by 8% in fiscal 2003 from
fiscal 2002, primarily because of the sale of fewer money orders, which in turn
was primarily because of increased customer usage of electronic bill-payment
services. Other fees decreased by 23% in fiscal 2003 from fiscal 2002 as a
result of the discontinuation of certain products, such as lottery ticket sales
and the sale of regional publications. Franchise revenues increased by 7% in fiscal 2003 from fiscal 2002, as a
result of the increased number of franchised store openings. During fiscal
2003, we opened 26 franchised stores, acquired two former franchised stores,
and closed eight franchised stores, resulting in a total of 200 franchised
stores as of June 30, 2003, compared to 184 franchised stores as of June 30,
2002. Store and SSMExpense Analysis Year Ended June 30,(in thousands)
    
    (percentage of revenue)2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Salaries and benefits
    
    $
    59,593
    
    
    $
    58,170
    
    
    $
    57,864
    
    
    
    24.2
    %
    
    
    24.8
    %
    
    
    25.2
    %Occupancy
    
    
    30,563
    
    
    
    29,194
    
    
    
    28,207
    
    
    
    12.4
    
    
    
    12.5
    
    
    
    12.3Provision for loan losses and
doubtful accounts
    
    
    24,235
    
    
    
    22,892
    
    
    
    22,064
    
    
    
    9.8
    
    
    
    9.8
    
    
    
    9.6Depreciation
    
    
    7,563
    
    
    
    6,966
    
    
    
    7,180
    
    
    
    3.1
    
    
    
    3.0
    
    
    
    3.1Other:Armored and security
    
    
    7,954
    
    
    
    7,782
    
    
    
    7,708
    
    
    
    3.2
    
    
    
    3.3
    
    
    
    3.4Returns and cash shorts
    
    
    9,350
    
    
    
    9,896
    
    
    
    10,390
    
    
    
    3.8
    
    
    
    4.2
    
    
    
    4.6Information services
    
    
    5,860
    
    
    
    3,831
    
    
    
    1,953
    
    
    
    2.4
    
    
    
    1.6
    
    
    
    0.8Bank charges
    
    
    5,093
    
    
    
    5,314
    
    
    
    5,207
    
    
    
    2.1
    
    
    
    2.3
    
    
    
    2.3Store supplies
    
    
    4,219
    
    
    
    4,063
    
    
    
    3,995
    
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.7Telecommunications
    
    
    2,211
    
    
    
    3,027
    
    
    
    3,845
    
    
    
    0.9
    
    
    
    1.3
    
    
    
    1.7Advertising and marketing
    
    
    2,072
    
    
    
    564
    
    
    
    159
    
    
    
    0.8
    
    
    
    0.2
    
    
    
    0.1Miscellaneous
    
    
    3,307
    
    
    
    3,715
    
    
    
    3,255
    
    
    
    1.3
    
    
    
    1.6
    
    
    
    1.4Other
    
    
    40,066
    
    
    
    38,192
    
    
    
    36,512
    
    
    
    16.2
    
    
    
    16.2
    
    
    
    16.0Total store expense
    
    $
    162,020
    
    
    $
    155,414
    
    
    $
    151,827
    
    
    
    65.7
    %
    
    
    66.3
    %
    
    
    66.2
    %Average per store expense
(including SSM expenses)
    
    $
    164.6
    
    
    $
    157.8
    
    
    $
    152.0Average per
store gross margin
(including SSM expenses)
    
    $
    83.2
    
    
    $
    77.7
    
    
    $
    75.3
 Fiscal 2004 Compared to Fiscal 2003.Total store and SSM expenses increased
as a result of the expenses related to the increased number of stores, and
additional loan provision related to the growth in the loan business. Salaries and benefits expenses increased because of an increase in
employees corresponding with the growth in the number of stores and increased
performance bonuses for store operations personnel. Occupancy costs and
armored and security expenses combined increased because of the increase in the
number stores. Returned checks, net of collections, and cash shortages
decreased due to continued improvements in operational procedures and controls.
Returned checks, net of 27




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##### Table of Contents



collections, and cash shortages as a percentage of revenues also
decreased, to 3.8% in fiscal 2004 from 4.2% in fiscal 2003. Loan loss
provision increased primarily due to growth of both the ACE and Republic Bank
loan business. The allowance for loan losses of $10.6 million at June 30,
2004, represented 38.3% of gross loans receivable, an increase from the
allowance for loan losses of $8.7 million, representing 40.2% of gross loans
receivable, at June 30, 2003. Loan losses are charged to this allowance, which
is reviewed for adequacy (and may be adjusted) on a quarterly basis.
Depreciation expense increased as a result of the increased number of stores
and the replacement of store signage throughout Texas. Other store and SSM
expenses increased due to incremental lease expense of $1.4 million related to
the buyout of 105 self-service machine leases. Fiscal 2003 Compared to Fiscal 2002.Total store and SSM expenses increased
in fiscal 2003 over fiscal 2002 primarily as a result of increased lease
expense related to the addition of over 100 SSMs placed in H&R Block retail
offices during the 2003 tax season. Total store and SSM expenses increased
slightly as a percentage of revenues in fiscal 2003 from fiscal 2002 due to a
reduction in loan fees and interest. Salaries and benefits expenses increased due to slightly higher wages and
bonuses, offset by improved personnel scheduling and fewer stores. Occupancy
costs and armored and security expenses combined increased primarily as a
result of maintenance expense related to the SSMs located in the H&R Block
offices ($0.6 million) and scheduled increases in lease expense ($0.4 million).
Returned checks, net of collections, and cash shortages decreased in fiscal
2003 as compared to fiscal 2002 due to continued improvements in operational
procedures and controls. Returned checks, net of collections, and cash
shortages as a percentage of revenues also decreased, to 4.2% in fiscal 2003
from 4.5% in fiscal 2002. Loan loss provision increased $0.8 million, or 4%,
in fiscal 2003 from fiscal 2002 primarily due to the increase in the number of
loans maturing as a result of the our discontinuing loan-related business in
Georgia, North Carolina, and Alabama, and our transition from offering the
Goleta loans, which ended December 31, 2002, to offering state-regulated
short-term loan products. The overall collectability of the short-term loans
improved slightly in fiscal 2003 compared to fiscal 2002. The allowance for
loan losses of $8.7 million at June 30, 2003, represented 40.2% of gross loans
receivable, a decrease from the allowance for loan losses of $12.2 million,
representing 41.3% of gross loans receivable, at June 30, 2002. Loan losses
are charged to this allowance, which is reviewed for adequacy (and may be
adjusted) on a quarterly basis. Other store and SSM expenses increased
primarily as a result of additional lease costs for the increased number of
SSMs placed at H&R Block offices, increases in licensing fees related to the
transition to a state-regulated short-term loan products, and increases in
advertising expenses. Other Expenses Analysis Year Ended June 30,(in thousands)
    
    (percentage of revenue)2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Region expenses
    
    $
    19,251
    
    
    $
    17,056
    
    
    $
    17,495
    
    
    
    7.8
    %
    
    
    7.3
    %
    
    
    7.6
    %Headquarters expenses
    
    
    18,681
    
    
    
    17,133
    
    
    
    16,594
    
    
    
    7.6
    
    
    
    7.3
    
    
    
    7.2Franchise expenses
    
    
    1,196
    
    
    
    1,225
    
    
    
    993
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.4Other depreciation and amortization
    
    
    3,893
    
    
    
    5,423
    
    
    
    7,570
    
    
    
    1.6
    
    
    
    2.3
    
    
    
    3.3Interest expense, net
    
    
    10,231
    
    
    
    16,004
    
    
    
    14,934
    
    
    
    4.1
    
    
    
    6.8
    
    
    
    6.5Loss on early extinguishment of debt
    
    
    4,858
    
    
    
    270
    
    
    
    
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    Other (income) expenses, net
    
    
    (1,893
    )
    
    
    1,314
    
    
    
    2,827
    
    
    
    (0.8
    )
    
    
    0.6
    
    
    
    1.2Total other expenses
    
    $
    56,217
    
    
    $
    58,425
    
    
    $
    60,413
    
    
    
    22.8
    %
    
    
    24.9
    %
    
    
    26.2
    %
 Region Expenses Fiscal 2004 Compared to Fiscal 2003.Region expenses increased primarily
because of increases in salaries and benefits expense resulting from additional
staffing in collections, facilities and real estate development related to
supporting the growth in the number of stores. Fiscal 2003 Compared to Fiscal 2002.Region expenses decreased because of a
reduction in salaries and benefits expense resulting from a smaller average
number of regional employees throughout the year. Headquarters Expenses Fiscal 2004 Compared to Fiscal 2003.Headquarters expenses increased $1.5
million in fiscal 2004. Increased salaries and benefits related to the
addition of professional personnel (including an assistant vice president of
internal audit, a vice president of compliance, chief marketing officer, and
general counsel) constituted approximately $1.5 million of the increase;
employee-performance bonus expense constituted $0.5 million of the increase;
increased professional fees constituted $0.6 million of the increase; and
expense related to restricted stock granted under our 1997 Stock Incentive Plan
constituted $0.5 million of the increase; and these increases were partially
offset by a reduction in legal expenses regarding our prior litigation of $1.7
million. 28




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##### Table of Contents



Fiscal 2003 Compared to Fiscal 2002.Headquarters expenses increased $0.5
million in fiscal 2003. Increased salaries and benefits related to the
addition of professional personnel near the end of the fiscal year (including
an assistant vice president of internal audit, a compliance officer, and chief
marketing officer) constituted $0.3 million of the expense increase;
employee-performance bonus expense constituted $0.3 million of the increase;
telephone expense constituted $0.3 million of the increase; and insurance
expense constituted $0.1 million of the increase; and these increases were
partially offset by a reduction in legal and professional expenses of $0.3
million. Franchise Expenses Fiscal 2004 Compared to Fiscal 2003.Franchise expenses relate to the
salaries, benefits, and other franchisee support costs for the sales and
support personnel in our ACE Franchise Group. Franchise expenses in fiscal
2004 remained unchanged from fiscal 2003. Fiscal 2003 Compared to Fiscal 2002.Franchise expenses increased $0.2
million, or 23%, in fiscal 2003 over fiscal 2002 as a result of changes in
departmental staffing, and increased travel, legal, and professional expenses. Other Depreciation and Amortization Fiscal 2004 Compared to Fiscal 2003.Other depreciation and amortization
decreased because of the decrease in the amount of debt financing costs
amortized in fiscal 2004 compared to fiscal 2003. Fiscal 2003 Compared to Fiscal 2002.Other depreciation and amortization
decreased because of the decrease in the amount of debt financing costs
amortized in fiscal 2003 compared to fiscal 2002. Interest Expense Fiscal 2004 Compared to Fiscal 2003.Interest expense decreased because of
reductions in the effective interest rates on the term debt and revolving
advances after the amendment of the credit agreement in March 2003 and the
repayment of the term debt in May 2004, along with lower interest expense from
lower average revolver advances and term note balances during fiscal 2004. Fiscal 2003 Compared to Fiscal 2002.Interest expense increased because of an
increase in the effective interest rate on the term debt ($2.5 million) and
higher interest and cash usage fees for the increase of more than 100 SSMs at
H&R Block offices ($1.5 million), which were partially offset by lower interest
expense from lower average revolver advances and term note balances ($2.4
million) and lower interest paid on senior secured notes payable ($0.5
million). Loss on Early Extinguishment of Debt Fiscal 2004 Compared to Fiscal 2003.In May 2004, we used the net proceeds
from our sale of shares of common stock to repay the entire principal amount
outstanding of our term notes issued to American Capital Strategies, Ltd. We
paid a cash prepayment fee of approximately $700,000 and incurred a non-cash
charge of approximately $4.1 million related to the write-off of deferred
financing fees associated with those notes. There was no expense or payment
related to the termination of the interest rate swap agreement associated with
those notes. Fiscal 2003 Compared to Fiscal 2002.In March 2003, immediately before
executing our amended credit agreement and note purchase agreement, we prepaid
the remaining $4 million principal installment of our 9.03% Senior Secured
Notes due November 15, 2003 that were issued to Principal Life Insurance
Company in November 1996. The total of $4.3 million that we paid to discharge
those notes included accrued and unpaid interest and a prepayment premium of
$270,000 under the terms of the agreement with Principal Life Insurance
Company. 29




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##### Table of Contents



Other (Income) Expenses, Net Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Gain on sale of warrants issued by Netspend Corporation
    
    $
    (1,049
    )
    
    $
    
    
    
    $
    Settlements (1)
    
    
    (138
    )
    
    
    5,750
    
    
    
    1,984Insurance recovery resulting from claims related to the
Goleta loan-related lawsuits
    
    
    
    
    
    
    (4,700
    )
    
    
    Gain on sale of stores to franchisees
    
    
    (649
    )
    
    
    (888
    )
    
    
    Store lease buyout (2)
    
    
    (450
    )
    
    
    
    
    
    
    Store closing expense
    
    
    410
    
    
    
    534
    
    
    
    1,029Gain on sale of land in North Carolina
    
    
    (95
    )
    
    
    
    
    
    
    Loss on liquidation of ePacific investment
    
    
    
    
    
    
    703
    
    
    
    Restructure provision
    
    
    
    
    
    
    
    
    
    
    (163
    )Other
    
    
    78
    
    
    
    (85
    )
    
    
    (23
    )Total other (income) expenses, net
    
    
    ($1,893
    )
    
    $
    1,314
    
    
    $
    2,827
  (1)
    
    Fiscal 2004 consists of $106,000 for additional administrative
costs related to the settlement of substantially all claims in the
Goleta loan-related lawsuits, $190,000 for a state regulatory
settlement and the recovery of $434,000 resulting from the settlement
of the Silverman lawsuit. Fiscal 2003 consists of a $5 million
charge for settlement and release of substantially all claims in the
Goleta loan-related lawsuits and payments of $500,000 and $250,000 to
resolve state and federal regulatory matters, respectively.  (2)
    
    We received payment to terminate a store lease in Arizona to
allow another retailer to occupy the location. Fiscal 2004 Compared to Fiscal 2003.
In each of fiscal 2004 and fiscal 2003, we recognized a gain on sale of certain
stores to franchisees and expense incurred in connection with closing certain
other stores. The net amount of these two components in fiscal 2004 were less
than the amounts in fiscal 2003. Otherwise, the components of Other (income)
expense differed in those two fiscal years. Over half of the Other (income) in
fiscal 2004 consisted of gain from the exercise of a warrant to purchase shares
of common stock of NetSpend Corporation and the sale of those shares. We
received that warrant in January 2004 in connection with entering into an
agreement with NetSpend to distribute stored-value or debit cards at our
stores. We exercised that warrant and sold the shares in May 2004. In
addition, in fiscal 2004, we received a payment to terminate a store lease in
Arizona to allow another retailer to occupy that location. Fiscal 2003 Compared to Fiscal 2002.Other expenses decreased by $1.2 million
in fiscal 2003 from fiscal 2002 due primarily to a decrease in the expenses of
settling various lawsuits after giving effect to the insurance recovery related
to the Goleta loan-related lawsuits, and a decrease in store closing expense. Income Taxes Fiscal 2004 Compared to Fiscal 2003.A provision of $11.4 million was recorded
for income taxes for fiscal 2004, compared to $8.5 million for fiscal 2003.
The provision for income taxes was calculated based on a statutory federal
income tax rate of 35%, plus a provision for state income taxes. The effective
income tax rate was 40.0% for both fiscal 2004 and 2003. Fiscal 2003 Compared to Fiscal 2002.A provision of $8.5 million was recorded
for income taxes for fiscal 2003, compared to $6.9 million for fiscal 2002.
The provision for income taxes was calculated based on a statutory federal
income tax rate of 35%, plus a provision for state income taxes. The effective
income tax rate was 40.0% for fiscal 2003 compared to 40.6% for fiscal 2002. Gain on Sale of Discontinued Operations Fiscal 2003 Compared to Fiscal 2002.We sold 19 underperforming stores in
Florida in late-November 2002 for a pre-tax gain of $0.8 million and an
after-tax gain of $0.5 million. The operating results of the 19 stores had no
material impact on current or historical net income or cash flow for or during
the years ended June 30, 2003 or 2002. Balance Sheet Variations Cash and cash equivalents, money orders payable and revolving advances
vary because of seasonal and day-to-day requirements resulting primarily from
maintaining cash for cashing checks and making small consumer loans, receipts
of cash from the sale of money orders and remittances on money orders sold,
receipts of cash for wire transfers, and remittances for wire transfers and
receipts of cash for electronic bill payments and remittances for bill
payments. During fiscal 2004, we also we completed a public offering of
2,411,622 shares of our common stock at an offering price of $27.00 per share.
We 30




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##### Table of Contents



used the net proceeds of approximately $61.4 million from our sale of
shares in the offering to repay in full the outstanding amount (approximately
$30.4 million of principal and interest) of our senior subordinated secured
promissory notes issued to American Capital Strategies, Ltd. With that
repayment, we also paid a cash prepayment fee of approximately $700,000. We
also incurred non-cash charges in the fourth quarter of fiscal 2004 of
approximately $4.1 million related to the write-off of deferred financing fees
associated with those notes. After repayment of those notes, we used the
remaining net proceeds to pay down our revolving credit facilities pending use
for general corporate purposes, including potential acquisitions, capital
expenditures and working capital. For the year ended June 30, 2004, cash and
cash equivalents increased $14.9 million, compared to a decrease of $8.2
million for year ended June 30, 2003. Accounts receivable, net, at June 30, 2004 decreased $3.9 million from
June 30, 2003 primarily due to collection of the $4.7 million receivable
recorded in June 2003 related to the recovery of insurance claims regarding the
Goleta loan-related lawsuits, partially offset by increases in receivables from
Republic Bank related to growth in their loan product currently offered at
certain of our stores. Loans receivable, net, at June 30, 2004 increased $4.0 million from June
30, 2003 due to the increased volume of our loan product. As of June 30, 2004,
we offered our loan product in 561 of our company-owned stores, compared to 512
company-owned stores as of June 30, 2003. Loans receivable, net, does not
include any of the Republic Bank deferred-deposit loans available through our
stores in Arkansas, Pennsylvania and Texas, because we serve only as marketing
and servicing agent for Republic Bank regarding those loans and do not acquire
or own any participation interest in any of those loans. Our agreement with
Republic Bank provides for us to receive agency fees from Republic Bank, though
such fees are subject to reduction or offset by the losses from uncollected
Republic Bank loans. Property and equipment, net, at June 30, 2004 decreased $1.6 million from
June 30, 2003 as a result of depreciation expense ($8.8 million) and fixed
asset retirements ($0.8 million), offset by fixed asset additions of $8.0
million (including $0.6 million for capitalized software development.)
Goodwill, net, at June 30, 2004 increased $6.1 million from June 30, 2003 as a
result of the 34 stores acquired during fiscal 2004. Other assets at June 30, 2004 decreased $4.6 million from June 30, 2003 as
a result of the write-off of deferred financing costs related to the senior
subordinated secured notes to American Capital Strategies, Ltd. that were paid
in full in May 2004. Revolving advances at June 30, 2004 decreased by $23.9 million from June
30, 2003 due to reduced average daily usage of the revolving credit facility,
which in turn resulted from continued improvements in cash forecasting and
operational procedures regarding store cash deliveries and more efficient
management of working capital during fiscal 2004, along with the use of the net
proceeds from our sale of common stock. Accounts payable, accrued liabilities, and other current liabilities at
June 30, 2004 decreased by $8.1 million from June 30, 2003, as indicated by the
following: For the Year Ended June 30,2004
    
    2003
    
    Change(in thousands)Accrued salaries and benefits
    
    $
    9,782
    
    
    $
    7,675
    
    
    $
    2,107Accounts payable  trade
    
    
    8,911
    
    
    
    10,857
    
    
    
    (1,946
    )Money transfer payable
    
    
    2,132
    
    
    
    4,223
    
    
    
    (2,091
    )Deferred revenue
    
    
    1,900
    
    
    
    1,322
    
    
    
    578Income taxes payable
    
    
    1,621
    
    
    
    106
    
    
    
    1,515Payable to Republic Bank
    
    
    1,584
    
    
    
    6,773
    
    
    
    (5,189
    )Accrued self-service machine write-off
    
    
    1,400
    
    
    
    
    
    
    
    1,400Interest-rate swap
    
    
    
    
    
    
    398
    
    
    
    (398
    )Deferred gain on sale of stores
    
    
    159
    
    
    
    
    
    
    
    159Interest payable
    
    
    138
    
    
    
    423
    
    
    
    (285
    )Accrued litigation
    
    
    104
    
    
    
    5,139
    
    
    
    (5,035
    )Restructuring accrual
    
    
    28
    
    
    
    203
    
    
    
    (175
    )Other
    
    
    4,919
    
    
    
    3,637
    
    
    
    1,282$
    32,678
    
    
    $
    40,756
    
    
    
    ($8,078
    )
 Term advances decreased by a total of $38.3 million at June 30, 2004, as
compared to June 30, 2003, as the result of the repayment of the notes to
American Capital Strategies, Ltd. in May 2004 with net proceeds of our sale of
shares and free cash flow. 31




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##### Table of Contents



Loan Portfolio We have established a loan loss allowance for our loans receivable,
consisting of our short-term consumer loans and, only until June 30, 2003, our
participation interests in outstanding Goleta loans, at a level that our
management believes to be adequate to absorb known or probable losses from
short-term consumer loans made by us and from our participation interests in
outstanding Goleta loans. In the first six months of fiscal 2003, we gradually
ceased to offer Goleta loans and began to offer state-regulated short-term
consumer loans at our owned stores. As of December 31, 2002, Goleta loans were
no longer offered at any of our stores, though we continued to collect
outstanding Goleta loans until June 30, 2003. Because our short-term consumer
loans are substantially similar to the Goleta loans formerly offered, our
method for determining our loan loss allowance for both types of loans is the
same. Our current policy for determining the loan loss allowance is based on
historical experience, as well as the results of managements review and
analysis of the payment and collection of the loans within the last fiscal
quarter. We have determined, based on recent operating history, that we receive
payment of approximately 94.5% (for loans maturing in the first, second and
fourth fiscal quarters) or 95.5% (for loans maturing during tax refund season
in the third fiscal quarter) of the loan volume, or principal amount of the
loans. Therefore, the loan loss allowance is approximately 5.5% of the
principal amount of the loans maturing in the first, second and fourth fiscal
quarters and approximately 4.5% of the principal amount of the loans maturing
in the third fiscal quarter. Our policy is to charge off all of our short-term
consumer loans, or participation interests in Goleta loans, which are 180 days
or more past due or delinquent. Charge-offs are applied as a reduction to the
loan loss allowance, and any recoveries of previously charged-off loans or
participation interests in Goleta loans are applied as an increase to the loan
loss allowance. At the end of each fiscal quarter, we analyze the loan loss provision and
the allowance that has been computed based on the activity described above to
determine if the allowance is adequate based on our understanding of what is
occurring in the stores with customers, past loan loss experience, current
economic conditions, volume and growth of the loan portfolio, timing of
maturity, as well as collections experience. For this purpose, we treat each
renewal of a loan in which no additional principal is advanced as a
continuation of the initial loan and we include only our participation
interests in the Goleta loans instead of the entire amount of the Goleta loans.
If necessary, we make adjustments to the provision and the allowance. An analysis of the loan loss allowance with reference to our gross loans
receivable (which does not include any Republic Bank loans) is as follows: Year Ended June 30,2004
    
    2003(in thousands)Gross loans receivable
    
    $
    27,663
    
    
    $
    21,734Less: Allowance for losses on loans receivable
    
    
    10,616
    
    
    
    8,734Loans receivable, net of allowance
    
    $
    17,047
    
    
    $
    13,000Allowance for losses on loans receivable:Beginning of period
    
    $
    8,734
    
    
    $
    12,213Provision for loan losses
    
    
    16,890
    
    
    
    19,361Charge-offs
    
    
    (15,295
    )
    
    
    (23,729
    )Recoveries
    
    
    287
    
    
    
    889End of period
    
    $
    10,616
    
    
    $
    8,734Net loan charge-offs as a percent of volume
    
    
    4.1
    %
    
    
    5.4
    %Allowance as a percent of gross loans receivable
    
    
    38.3
    %
    
    
    40.2
    %
 The schedule below indicates the progression of receipts or collections of
each quarterly portfolio of loans, consisting of both our short-term consumer
loans and participation interests in Goleta loans. In this case, a quarterly
portfolio is our interests in all of the loans that matured in a particular
fiscal quarter. We can track the payment rates at different points of time for
each quarterly portfolio. We have established the following targets regarding each quarterly
portfolio:  
    
    Receive or collect 91% (or 93% in our third fiscal quarter) of the
total volume, or principal amount of loans, by the end of the current
quarter (i.e., by December 31 for the short-term consumer loans maturing
between October 1 and December 31).  
    
    Receive or collect a cumulative 92.9% (or 94.5% in our third fiscal
quarter) by 90 days out (i.e., by March 31 for the same quarterly
portfolio). 32




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##### Table of Contents




    
    Receive or collect a cumulative 94.5% (or 95.5% in our third fiscal
quarter) by 180 days out (i.e., by June 30 for the same quarterly
portfolio). We charge-off our short-term consumer loans when they become
delinquent for 180 days. The assumed higher rate of payment in our third fiscal quarter is a result
of improved collections during the annual tax season because of borrowers
receipt of tax refunds. Collection Progression for Quarterly Loan Portfolios Collection PercentageActualDays Following Quarter
    
    Target
    
    Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002First Quarter30
    
    
    91.0
    %
    
    
    92.8
    %
    
    
    92.4
    %
    
    
    91.4
    %90
    
    
    92.9
    %
    
    
    94.9
    %
    
    
    94.7
    %
    
    
    93.3
    %180
    
    
    94.5
    %
    
    
    95.1
    %
    
    
    95.1
    %
    
    
    94.5
    %Second Quarter30
    
    
    91.0
    %
    
    
    93.9
    %
    
    
    93.1
    %
    
    
    92.9
    %90
    
    
    92.9
    %
    
    
    95.5
    %
    
    
    95.9
    %
    
    
    95.0
    %180
    
    
    94.5
    %
    
    
    95.8
    %
    
    
    96.1
    %
    
    
    95.8
    %Third Quarter30
    
    
    93.0
    %
    
    
    94.7
    %
    
    
    93.5
    %
    
    
    94.4
    %90
    
    
    94.5
    %
    
    
    96.0
    %
    
    
    95.9
    %
    
    
    96.1
    %180
    
    
    95.5
    %
    
    
    
    
    
    
    96.1
    %
    
    
    96.5
    %Fourth Quarter30
    
    
    91.0
    %
    
    
    93.2
    %
    
    
    93.4
    %
    
    
    92.4
    %90
    
    
    92.9
    %
    
    
    
    
    
    
    95.4
    %
    
    
    95.1
    %180
    
    
    94.5
    %
    
    
    
    
    
    
    95.6
    %
    
    
    95.4
    %
 Off-Balance Sheet Arrangement with Republic Bank We are party to a marketing and servicing agreement with Republic Bank.
Under this agreement, we provide various services to Republic Bank in
connection with our marketing and servicing of Republic Banks short-term
consumer loans in exchange for which we are paid fees by Republic Bank. We also
earn additional fees if Republic Banks quarterly loan loss rate for these
short-term consumer loans is below specified levels. As of June 30, 2004,
Republic Bank was offering its Republic Bank loans in 359 of our company-owned
stores in Arkansas, Pennsylvania and Texas. Approximately $24.0 million, or
9.7% of our total revenues, in fiscal 2004 and approximately $9.0 million, or
3.9% of our total revenues, in fiscal 2003 were derived from fees paid to us by
Republic Bank. Although we market and service these Republic Bank loans, Republic Bank is
responsible for reviewing each loan application and determining whether such
application is approved for a loan. We are not involved in the loan approval
process, including with respect to determining the loan approval procedures or
criteria, nor do we acquire or own any participation interest in these loans.
Consequently, Republic Bank loans are not included in our loan portfolio or in
our loans receivable and are not reflected on our balance sheet. Under our
agreement, however, we are obligated to reimburse Republic Bank by paying it an
amount equal to the net amount charged off by Republic Bank, less Republic
Banks established reserves, regarding its loans in our stores. Therefore, we
could be obligated to pay Republic Bank for loan losses in an amount up to the
total outstanding amount of Republic Bank loans recorded on Republic Banks
financial statements, which was $9.4 million as of June 30, 2004. Because of our economic exposure for losses related to the Republic Bank
loans, we have established a payable to reflect our anticipated losses related
to uncollected Republic Bank loans that are 180 days or more past due. Though
we have not had any long-term experience with Republic Bank loans, we believe
that the loss experience with Republic Bank loans will be similar to the loss
experience with those other loans. Accordingly, the payable for amounts due to
Republic Bank for losses regarding Republic Bank loans has been established at
a level similar to the loan loss allowance for our other loan services. We
cannot assure you, however, that our estimates will be accurate, and if the
Republic Bank loan losses are materially greater than our recorded amount
payable to Republic Bank, our financial condition could be materially adversely
affected. 33




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For the year ended June 30, 2004, we provided approximately $7.4 million
for losses on Republic Bank loans and charged-off $6.5 million related to these
loans. The balance of the liability for Republic Loan losses reported in
accrued liabilities as of June 30, 2004 was $0.7 million. Liquidity and Capital Resources Cash Flows from Operating Activities During fiscal 2004, 2003, and 2002, we had net cash provided by operating
activities of $25.6 million, $34.7 million, and $18.4 million, respectively.
The decrease in cash flows provided from operating activities in fiscal 2004
compared to fiscal 2003 was due to a combination of payments of the settlement
of the Goleta loan-related lawsuits at the end of fiscal 2003 and a reduction
in the liabilities to various agents including MoneyGram and Republic Bank. During fiscal 2004, 2003, and 2002, we recognized $2.0 million, $2.2
million, and $2.2 million, respectively, in deferred revenue. The MoneyGram
Agreement provides incentive bonuses for opening new locations at which
MoneyGram services are offered as well as certain other performance incentives.
Incentive bonuses are recognized as revenue over the term of the agreement.
(See Business  Relationships with the Money Order and MoneyGram Suppliers.) Cash Flows from Investing Activities During fiscal 2004, 2003, and 2002, we used $8.0 million, $4.8 million,
and $7.1 million, respectively, for purchases of property and equipment related
principally to new store openings and remodeling existing stores. Expenditures
related to acquisitions were $6.4 million, $0.7 million, and $1.2 million, for
the fiscal years ended June 30, 2004, 2003, and 2002, respectively. Cash Flows from Financing Activities During fiscal 2004, we had net cash provided by financing activities of
$3.6 million. During fiscal 2003 and fiscal 2002, we had net cash used by
financing activities of $38.8 million and $23.0 million, respectively. Since
June 30, 2003, we reduced the money orders payable by $2.4 million, reduced the
balance of the revolving advances by $23.9 million, and reduced the balance of
the term advances by $38.3 million. The average amount borrowed on our
revolving line-of-credit facility was $81.0 million for fiscal 2004, compared
to $96.3 million for fiscal 2003. In April 2004, we completed an underwritten registered public offering of
2,411,622 shares of our common stock at an offering price of $27.00 per share.
We used the net proceeds from our sale of shares in the offering, totaling
approximately $61.4 million, to repay in full the outstanding amount
(approximately $30.4 million of principal and interest) of our senior
subordinated secured promissory notes issued to American Capital Strategies,
Ltd. With that repayment, we also paid a cash prepayment fee of approximately
$700,000. There was no income or expense resulting from the termination of the
interest-rate swap agreement associated with those notes. After repayment of
those notes, we used the remaining net proceeds to pay down our revolving
credit facilities pending use for general corporate purposes, including
potential acquisitions, capital expenditures and working capital. Certain Contractual Cash Commitments During the fourth quarter of fiscal 2004, we repaid approximately $30.4
million of principal and interest under our senior subordinated secured notes.
The table below summarizes our cash obligations for certain leases and
acquisition notes payable outstanding as of June 30, 2004: Payments Due by June 30,2008 andTotal
    
    2005
    
    2006
    
    2007
    
    Thereafter(in thousands)Operating leases
    
    $
    42,882
    
    
    $
    17,767
    
    
    $
    12,506
    
    
    $
    7,644
    
    
    $
    4,965Acquisition notes payable
    
    
    108
    
    
    
    33
    
    
    
    36
    
    
    
    39
    
    
    
    Total
    
    $
    42,990
    
    
    $
    17,800
    
    
    $
    12,542
    
    
    $
    7,683
    
    
    $
    4,965
 As part of our growth strategy, we intend to open new stores in existing
and new markets. During fiscal 2004, we opened 53 company-owned stores,
including 11 ACE Cash Advance stores. We expect to open approximately 60 new
company-owned stores, resulting in a net gain of approximately 40 to 45
company-owned stores, in fiscal 2005. 34




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The capital cost of opening a new store varies depending on the size and
type of store, but is typically in the range of $65,000 to $75,000. This
capital cost includes leasehold improvements, signage, computer equipment and
security systems. MoneyGram Payment Systems, Inc. pays us a cash incentive for
each new location opened, which is accounted for as deferred revenue that is
recognized over the remaining life of the MoneyGram Agreement. In addition, the
typical store requires working capital of $80,000 to $100,000 to fund operating
cash and the stores loan portfolio. For the year ended June 30, 2004, we spent $8.0 million on capital
expenditures. Our total capital expenditures, excluding acquisitions, are
anticipated to be approximately $15.0 million during our fiscal year ending
June 30, 2005, in connection with the opening of 60 new stores, the relocation
or remodeling of certain existing stores, maintenance, and ongoing upgrades of
our information system. The actual amount of capital expenditures will depend
in part on the number of new stores opened, the number of stores acquired, and
the number of existing stores that are relocated or remodeled. We believe that
our existing resources, anticipated cash flows from operations, and credit
facilities will be sufficient to finance its anticipated capital expenditures
and operational requirements during fiscal 2005. The 60 new stores, after
closings and dispositions, will require approximately $4.0 million of working
capital to fund operating cash and additions to our loan portfolio. Existing Credit Facilities Our existing credit facilities are provided under a First Amended and
Restated Credit Agreement with a syndicate of banks led by Wells Fargo Bank,
National Association, as administrative agent for itself and the other lenders
thereunder. The existing credit agreement, which we entered into on July 30,
2004, amended and restated the credit agreement that we originally entered into
on March 31, 2003 and that was effective (as amended) throughout fiscal 2004,
as described under  Fiscal 2004 Credit Facilities below. The existing credit agreement provides two revolving line-of-credit
facilities that expire June 30, 2008:  
    
    a $140 million primary revolving credit facility that is
available throughout the four-year term ; and  
    
    a $60 million seasonal revolving credit facility that is
available during each calendar-year-end holiday and tax season (i.e.,
December 15 through March 15) during the four-year term. The revolving line-of-credit facilities include, subject to certain
conditions, a letter-of-credit facility from Wells Fargo Bank of up to $10
million. Borrowings under the existing credit agreement bear interest at a variable
annual rate equal to, at our discretion, either:  
    
    The sum of (a) the greatest of (i) the prime rate publicly announced
by Wells Fargo Bank, (ii) one percent plus the rate of interest on the
secondary market for three-month certificates of deposit reported by the
Board of Governors of the Federal Reserve System (the Board of
Governors), multiplied by a fraction, the numerator of which is one and
the denominator of which is one minus the maximum reserve percentages
required by the Board of Governors to which Wells Fargo Bank is subject
for new negotiable nonpersonal time deposits in dollars of over $100,000
with maturities of approximately three months plus the annual assessment
rate that is payable by a member of the Bank Insurance Fund classified
as well capitalized, and (iii) the federal funds rate plus 0.5%; plus
(b) a margin that varies from 1.25% to 2.25% per annum based on our
debt-to- EBITDA ratio. (For this ratio, EBITDA is our earnings before
interest, taxes, depreciation, and amortization.) This interest rate
adjusts on a daily basis.  
    
    The sum of (a) the London Interbank Offered Rate (LIBOR) for (at
our discretion) one-, two-, three- or six-month maturities, multiplied
by a fraction, the numerator of which is one and the denominator of
which is one minus the maximum reserve percentages required by the Board
of Governors to which Wells Fargo Bank is subject for Eurocurrency
funding, plus (b) a margin that varies from 2.25% to 3.25% per annum
based on our debt-to-EBITDA ratio. This interest rate adjusts, at our
discretion, at one-, two-, three-, or six-month intervals, in accordance
with the corresponding LIBOR.  
    
    The sum of (a) LIBOR for one-month maturities, plus (b) a margin that
varies from 2.25% to 3.25% per annum based on our debt-to-EBITDA ratio.
This interest rate adjusts on a daily basis. We have initially selected the third alternative described above as the
annual interest rate for our current borrowings, and as of the end of September
2004, that interest rate will be calculated using LIBOR plus 2.25%, which was
the margin that the lenders agreed we could use when our debt-to-EBITDA ratio
is calculated upon delivery of this Report. Upon an event of default under the
existing credit agreement, the applicable annual interest rate is increased by
three hundred basis points. Interest on the outstanding principal amount borrowed under the existing
credit agreement is payable monthly. The 35




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outstanding principal amount borrowed and all interest accrued under the
primary revolving line-of-credit facility is payable on June 30, 2008. The
outstanding principal amount and all interest accrued under the seasonal
revolving line-of-credit facility is payable on March 15 of each year. At the
end of each fiscal quarter, beginning September 30, 2004, we must pay the
lenders a commitment fee equal to 0.5% per annum of the average daily unused
portion of the credit available under the existing credit agreement (which is
the unused portion of the $140 million throughout the year and the unused
portion of the $60 million seasonal facility from December 15 through March 15
each year). We must also pay Wells Fargo Bank an annual agency fee of $60,000
in advance on each July 30. We paid $1.2 million in arrangement fees and
up-front fees relating to the existing credit agreement. We may (a) at any
time reduce, in whole or in part (in $5 million increments), the available
amount of the credit facilities provided in the existing credit agreement and
(b) subject to certain conditions, prepay, in whole or in part, the revolving
credit facilities provided by the existing credit agreement without penalty or
premium. The existing credit agreement may be terminated before the stated
expiration or maturity date of the revolving credit facilities  requiring all
unpaid principal and accrued interest to be paid to the lenders  upon any
event of default as defined in the existing credit agreement. The events of
default in the existing credit agreement include (a) nonpayment of amounts due
under the existing credit agreement, (b) the failure to observe or perform
covenants set forth in the existing credit agreement and in the documents
ancillary thereto that are not cured, (c) a change in control of us, and (d)
any event or circumstance that has a material adverse effect on the collateral
secured under the existing credit agreement or on our business, assets,
liabilities, condition (financial or otherwise), or prospects. We are subject to various restrictive covenants stated in the existing
credit agreement. Those restrictive covenants, which are typical of those
found in credit agreements of these types, include restrictions on the
incurrence of indebtedness from other sources, restrictions on advances to or
investments in other persons or entities, restrictions on the payment of
dividends to shareholders and on the repurchase of shares, and the requirement
that various financial ratios be maintained. Certain of the covenants in the
existing credit agreement require us:  
    
    to limit our capital expenditures during each fiscal year to $20
million;  
    
    to limit any single acquisition of assets or capital stock of an
entity in the retail financial services business to a purchase price of
no more than $10 million and to assets or entities that have a positive
cash flow for the 12 months preceding such acquisition, unless otherwise
agreed upon by the lenders;  
    
    to reduce our risk of increases in interest rates by entering into
one or more interest-rate swap agreements to convert to fixed-rate
obligations our floating- or variable-rate interest obligations with
respect to the lesser of (a) $30 million and (b) 50% of the average
amount of the unpaid loans outstanding during the prior month; and  
    
    to maintain the following financial coverage ratios:  -
    
    our consolidated net worth at any time cannot be less than
$133.7 million plus 75% of all net income earned in a calendar
quarter, without deduction for any quarterly losses, plus 100% of the
proceeds of any equity offering;-
    
    at the end of any fiscal quarter, our debt-to-EBITDA ratio
cannot be more than 2.75-to-1.00 through December 31, 2005 and
2.50-to-1.00 thereafter;-
    
    at the end of each fiscal quarter, our cash flow coverage ratio
cannot be less than 1.25-to-1.00. The payment and performance of our obligations under the existing credit
agreement and the documents ancillary thereto are secured by liens on all or
substantially all of our and its subsidiaries (other than Ace Funding, LLCs)
assets. All of our subsidiaries (other than Ace Funding, LLC) guaranteed our
obligations under the existing credit agreement. The collateral arrangements
entered into by us and our guarantor subsidiaries are substantially similar for
each of Wells Fargo Bank, as administrative agent for the lenders, and
Travelers Express Company, Inc., which has a subordinate lien to secure the
payment and performance of our obligations under the money order agreement and
under the MoneyGram Agreement. We and all of our secured creditors or agents
for them entered into a First Amended and Restated Intercreditor Agreement
dated as of July 30, 2004 that includes agreements regarding the priority of
distributions to the lenders and Travelers Express upon foreclosure and
liquidation of the collateral subject to the security agreements executed by us
and our guarantor subsidiaries and certain other intercreditor arrangements.
This intercreditor agreement replaced the Intercreditor Agreement dated as of
March 31, 2003, as amended, that was in effect with our prior credit agreement. Fiscal 2004 Credit Facilities During the year ended June 30, 2004, we were party to:  
    
    a credit agreement with a syndicate of banks led by Wells Fargo Bank
Texas, National Association, as administrative agent for itself and
other lenders, that provided for revolving credit facilities of up to
$175 million; and 36




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##### Table of Contents




    
    a note purchase agreement with American Capital Financial Services,
Inc., as agent for its affiliate American Capital Strategies, Ltd., in
the amount of $40 million of our senior subordinated secured promissory
notes. The terms of those agreements are described in Note 3 of Notes to
Consolidated Financial Statements. As described above, the bank credit
agreement was amended and restated on July 30, 2004, and the notes issued to
American Capital Strategies, Ltd. were fully repaid in May 2004. As of June 30, 2004, we had borrowed $60 million under our revolving
line-of-credit facility. The average amount borrowed on our revolving
line-of-credit facility was $81.0 million and $96.3 million for the years ended
June 30, 2004 and 2003, respectively. The prime rate effective on June 30, 2004
was 4.25% and LIBOR effective on that date was 1.375%. Swap Agreements To reduce our risk of greater interest expense because of interest-rate
fluctuations, we enter into interest-rate swap agreements from time to time,
which effectively convert a portion of our floating-rate interest obligations
to fixed-rate interest obligations. On April 23, 2003, we entered into an interest-rate swap agreement with JP
Morgan Chase Bank, regarding a notional amount of $60 million, associated with
the revolving advance facility under our bank credit agreement, to be effective
until March 31, 2006. On May 31, 2004, the notional amount was reduced from
$60 million to $30 million and will increase to $45 million on January 1, 2005.
The fixed rate effective on June 30, 2004, prior to adding the applicable
margin, was 1.715%. On June 2, 2003, we entered into an interest-rate swap agreement with
National City Bank regarding a notional amount of $20 million, corresponding to
our term notes, to be effective until March 31, 2006. In May 2004, we paid the
notes in full and terminated the swap agreement. There was no material gain or
loss recorded as a result of the swap termination. Self-Service Machine Funding Arrangements We placed 219 of our self-service check cashing machines in certain retail
offices of H&R Block Tax Services, Inc. during the 2004 tax season. In
accordance with our existing multi-year license agreement between with H&R
Block, the self-service machines are made available to cash only tax refund
anticipation loan checks of H&R Block customers. For the 2004 tax season, we had the right to obtain a maximum of $330
million of cash or currency for the self-service machines placed in the H&R
Block retail offices through two arrangements. One of the arrangements,
originally entered into on January 7, 2003 and amended on December 22, 2003,
was with Ace Funding LLC, our wholly owned subsidiary, as borrower, DZ Bank AG
Deutsche Zentral-Genossenschaftsbank Frankfurt am Main, a German bank, as
arranger and liquidity agent, and Autobahn Funding Company LLC, as lender. The
other arrangement, which was entered into on December 30, 2003, was with Texas
Capital Bank, National Association, a national bank that is a subsidiary of
Texas Capital Bancshares, Inc. In accordance with the first amendment to the existing agreement among us,
Ace Funding, DZ Bank and Autobahn Funding, up to a $190 million revolving
line-of-credit facility was made available to Ace Funding to provide the cash
or currency to certain of the self-service machines in H&R Block retail offices
during the 2004 tax season. For financial reporting purposes, Ace Funding is
our consolidated subsidiary and all borrowings by Ace Funding under this
arrangement, all amounts paid by Ace Funding under this arrangement and all
check cashing fees received by us from the self-service machines subject to
this arrangement will be reflected in our consolidated financial statements. Under the cash services agreement with Texas Capital Bank for the 2004 tax
season, we had available up to $140 million in cash or currency for certain of
the self-service machines in H&R Block retail offices. For the use of Texas
Capital Banks cash, as well as corresponding transportation and custodial
services provided by the bank, we agreed to pay fees to the bank that vary
depending on the volume of checks cashed in the self-service machines and our
use of corresponding services. The cash in the self-service machines, as well
as the cashed checks deposited in the self-service machines in exchange for
that cash, are not our assets but assets of Texas Capital Bank. Under the cash
services agreement, our access to the cash or currency was subject to any need
of the bank for that property for its own business or purposes. We agreed to
maintain, during the term of this agreement (i.e., the 2004 tax season), a
deposit account at Texas Capital Bank of at least $1 million, pledged as
assurance of our performance of our obligations under the cash services
agreement. We are entitled to all of the check cashing fees earned from the
self-service machines subject to this arrangement upon the expiration of this
agreement, subject to and after the payment to the bank of all amounts to which
it is entitled. This agreement expired on March 31, 2004. 37




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Effects of Financing Arrangements We believe that our long-term credit facilities under the existing credit
agreement, our funding arrangements for the self-service machines in H&R Block
offices during the tax season and our anticipated cash flows from operations
will provide adequate working capital for our operations. Although the credit
agreement places restrictions on capital expenditures and acquisitions, we
believe that these restrictions do not prohibit us from pursuing our growth
strategy as currently planned. Stock Repurchase Program In fiscal 2000, our board of directors authorized the repurchase from time
to time of up to approximately $5 million of our common stock in the open
market or in negotiated transactions. During fiscal 2000 and 2001, we
repurchased 211,400 shares at an average price of $12.81 per share. During
fiscal 2002, 2003 and 2004, no shares were repurchased. This stock repurchase
program will remain in effect, however, until discontinued by our board of
directors. Litigation Expenses We have been required in the past to defend ourselves and, in some
matters, our directors, officers and others in various lawsuits and state
regulatory proceedings regarding our current and past loan-related activities.
We incurred significant legal expenses in conducting that defense. In
accordance with our bylaws, we paid the expenses of defense for our directors,
officers and other employees named as additional defendants in these lawsuits.
We also paid, in accordance with our agreement with Goleta National Bank, all
of the expenses of Goleta as a party in these proceedings. We expensed an
additional $0.1 million during fiscal 2004 for administrative expenses related
to the settlement of the Purdielawsuit. Critical Estimates, Uncertainties or Assessments in the Financial Statements Critical Estimates, Uncertainties or Assessments in the Financial Statements The preparation of our financial statements in conformity with generally
accepted accounting principles in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In applying the accounting principles, we must
often make individual estimates and assumptions regarding expected outcomes or
uncertainties. As might be expected, the actual results or outcomes are
generally different than the estimated or assumed amounts. These differences
are usually minor and are included in our consolidated financial statements as
soon as they are known. Estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates. Actual results related to the estimates and assumptions made in preparing
our consolidated financial statements will emerge over periods of time, such as
estimates and assumptions underlying the determination of allowance for loan
losses and self-insurance liabilities. These estimates and assumptions are
monitored and periodically adjusted as circumstances warrant. For instance, our
liability for self-insurance related to workers compensation, general
liability and medical liability may be adjusted based on higher or lower actual
loss experience. Although there is greater risk with respect to the accuracy of
these estimates and assumptions because of the period over which actual results
may emerge, such risk is mitigated by the ability to make changes to these
estimates and assumptions over the same period. We periodically review the carrying value of goodwill and other intangible
assets when events and circumstances warrant such a review. One of the methods
used for this review is performed using estimates of future cash flows. If the
carrying value of goodwill or other intangible assets is considered impaired,
an impairment charge is recorded for the amount by which the carrying value of
the goodwill or intangible assets exceeds its fair value. We believe that the
estimates of future cash flows and fair value are reasonable. Changes in
estimates of such cash flows and fair value, however, could affect the
evaluation. Based on an assessment of our accounting policies and the underlying
judgments and uncertainties affecting the application of those policies, we
believe that our consolidated financial statements provide a meaningful and
fair perspective of us. We do not suggest that other risk factors, such as
those discussed elsewhere or incorporated by reference in this prospectus as
well as changes in growth objectives, could not adversely impact our
consolidated financial position, results of operations and cash flows in future
periods. 38




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##### Table of Contents



Seasonality Our business is seasonal to the extent of the impact of cashing tax refund
checks and tax refund anticipation loan checks. The impact of these services
is in the third and fourth quarters of our fiscal year. Our loan business
declines slightly in the third fiscal quarter as a result of the customers
receipt of tax refund checks and tax refund anticipation loans. Impact of Inflation We believe that our results of operations are not dependent upon the levels of
inflation. Forward-looking Statements This Report contains, and from time to time we or certain of our
representatives may make, forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are generally
identified by the use of words such as anticipate, expect, estimate,
believe, intend, plan, should, would, and terms with similar
meanings. Although we believe that the current views and expectations reflected in
these forward-looking statements are reasonable, those views and expectations,
and the related statements, are inherently subject to risks, uncertainties, and
other factors, many of which are not under our control and may not even be
predictable. Those risks, uncertainties, and other factors could cause the
actual results to differ materially from these in the forward-looking
statements. Those factors are described under Risk Factors below. We expressly disclaim any obligation to update or revise any of these
forward-looking statements, whether because of future events, new information,
a change in our views or expectations, or otherwise. We make no prediction or
statement about the performance of our common stock. Risk Factors Our current business and future results may be affected by a number of
risks and uncertainties, including those described below. The risks and
uncertainties described below are not the only risks and uncertainties we face.
Additional risks and uncertainties not currently known to us or that we
currently deem immaterial also may impair our business operations. If any of
the following risks actually occur, our business, results of operations and
financial condition could suffer. The risks discussed below also include
forward-looking statements and our actual results may differ substantially from
those discussed in these forward-looking statements. Risks Related to Our Business We have significant existing debt, and the restrictive covenants under our debt
agreements may limit our ability to expand or pursue our business strategy. In
addition, if we are forced to pay some or all of this debt following an event
of default, our financial condition and results of operations would be severely
and adversely affected. Our business requires significant amounts of cash for services and
inventory. Much of that cash is obtained through borrowing. Therefore, we have,
and we expect to have, a significant amount of outstanding debt and may incur
additional debt in the future as we seek to expand our business. As of June 30,
2004, our short-term debt was $60 million, and we had no material long-term
debt. Our debt agreements require us to maintain compliance with numerous
financial covenants. The covenants restrict our ability to take certain actions
to some extent, including our ability to:  
    
    incur additional indebtedness;  
    
    pay dividends and make distributions in respect of our capital stock;  
    
    repurchase our capital stock;  
    
    make capital expenditures;  
    
    make investments or other restricted payments; 39




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
    
    engage in transactions with shareholders and affiliates;  
    
    create liens;  
    
    sell or otherwise dispose of assets;  
    
    make payments on our debt, other than in the ordinary course; and  
    
    engage in mergers and acquisitions. As long as our indebtedness remains outstanding, the restrictive covenants
could impair our ability to expand or pursue our growth strategy. In addition,
the breach of any covenants or any payment obligations in any of these debt
agreements will result in an event of default under the applicable debt
instrument. If there is an event of default under one of our debt agreements,
the holders of the defaulted debt could cause all amounts outstanding with
respect to that debt to be due and payable, subject to applicable grace
periods. This could trigger cross-defaults under our other debt agreements. We
cannot assure you that our assets or cash flow would be sufficient to repay
fully borrowings under our outstanding debt agreements if accelerated upon an
event of default, or that we would be able to refinance or restructure the
payments on any of those debt agreements. Further, if we are unable to repay,
refinance or restructure our indebtedness under our secured debt agreements,
the lenders under such agreements could proceed against the collateral securing
that indebtedness. Substantially all of our assets are pledged to secure the
outstanding indebtedness. Forced repayment of some or all of our indebtedness
would reduce our available cash and have an adverse impact on our financial
condition and results of operations. Our existing and future debt obligations could adversely affect our results of
operations and financial condition as we may be required to secure additional
financing to meet our future capital needs and cannot assure you that we will
be able to do so on favorable terms, if at all. Our significant amount of debt could have important consequences. For
example, it could:  
    
    make it more difficult for us to satisfy our obligations to the
holders of our outstanding debt;  
    
    make us vulnerable to interest rate increases, because a significant
portion of our borrowings is, and will continue to be, at variable rates
of interest;  
    
    require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt obligations, which will reduce our
funds available for working capital, capital expenditures and other
general corporate expenses;  
    
    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;  
    
    place us at a disadvantage compared to our competitors that have proportionately less debt;  
    
    restrict our operational flexibility, because of restrictive
covenants that will limit our ability to make acquisitions, explore
certain business opportunities, dispose of assets and take other
actions; and  
    
    limit our ability to borrow additional funds in the future, if we
need them, due to applicable financial and restrictive covenants in our
debt agreements. If our debt levels increase, the related risks that we face will also
increase. If we fail to generate sufficient cash flow from future operations to
meet our debt service obligations, we may need to seek refinancing of all or a
portion of our indebtedness or obtain additional financing in order to meet our
obligations with respect to our indebtedness. We cannot assure you that we will
be able to refinance any of our indebtedness or obtain additional financing on
satisfactory terms or at all, particularly because of our high levels of debt
and the debt-incurrence restrictions imposed by our current debt agreements. If we do not generate a sufficient amount of cash, which depends on many
factors beyond our control, our liquidity and our ability to service our
indebtedness and fund our operations would be harmed. Based on our current level of operations and anticipated revenue growth,
we believe our cash flow from operations, available cash, including from the
net proceeds of our recent common stock offering, and available borrowings
under our credit facilities will be adequate to meet our future liquidity
needs. However, we have substantial working capital needs, contractual
commitments and debt service obligations. We cannot assure you that our
business will generate sufficient cash flow from operations, that our
anticipated revenue growth will be realized or that future borrowings will be
available to us 40




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under credit facilities in amounts sufficient to enable us to pay our
existing indebtedness or fund our other liquidity needs. In addition, if we
undertake expansion efforts in the future, our cash requirements may increase
significantly. The industry in which we operate is strictly regulated at both the federal and
state level. Changes in current laws and regulations, or the application of
future laws and regulations, may have a significant negative impact on our
business, results of operations and financial condition. Our business is subject to numerous state and certain federal laws and
regulations which are subject to change and which may impose significant costs
or limitations on the way we conduct or expand our business. These regulations
govern or affect, among other things:  
    
    check cashing fees;  
    
    licensing and posting of fees;  
    
    lending practices, such as truth in lending;  
    
    interest rates and usury;  
    
    currency reporting;  
    
    recording and reporting of certain financial transactions;  
    
    franchising in the states in which we offer and sell franchises;  
    
    privacy of personal consumer information; and  
    
    prompt remittance of proceeds for the sale of money orders. As we develop new services, we may become subject to additional federal
and state regulations. In addition, changes in current laws and future laws or
regulations may restrict our ability to continue our current methods of
operation or expand our operations and may have a material adverse effect on
our business, results of operations and financial condition. States may also
seek to impose new licensing requirements or interpret or enforce existing
requirements in new ways. Short-term consumer loan services have come under increased scrutiny and
regulation. If the restrictions created by such regulations increase, or if
short-term consumer loans become prohibited in the states where we offer these
loans, our business would be materially adversely affected. A significant portion of our revenues is based on loan interest and fees
from short-term consumer loans, also known as payday loans, that we offer in
our owned stores. Short-term consumer loans have come under increased scrutiny
and regulation in recent years. For example, in October 2002, the Federal Trade
Commission sent an Information and Documentation Request to several national
companies that offer short-term consumer loans, including us. This
industry-wide review may result in recommendations regarding the short-term
consumer loan industry or specific conclusions about us, either of which may
negatively affect our operations. Also, during the last few years, legislation has been introduced in the
United States Congress and in certain state legislatures, and regulatory
authorities have proposed or publicly addressed the possibility of proposing
regulations, that may prohibit or severely restrict short-term consumer loans.
For example, in December 2002, we ceased offering short-term consumer loans at
our stores in Alabama, Georgia and North Carolina as a result of laws enacted
restricting short-term consumer loans in those states. As a result of more
recently enacted laws in Alabama permitting short-term consumer loans, we have
recently resumed offering short-term consumer loans at our store in that state.
We intend to continue, with others in the short-term consumer loan industry,
to inform and educate legislators and to oppose legislative or regulatory
action that may prohibit or severely restrict short-term consumer loans.
Nevertheless, if legislative or regulatory action with that effect were taken
on the federal level or in states in which we have a significant number of
stores, that action may have a material adverse effect on our loan-related
activities and revenues. Moreover, similar action by states in which we are not
currently offering short-term consumer loans could result in us having fewer
opportunities to pursue our growth strategy. In 2002, the Office of the Comptroller of the Currency, which supervises
national banks, took action to effectively prohibit certain national banks from
offering and making short-term consumer loans because of the agencys view that
they posed various risks to those banks. As a result, we discontinued offering
Goleta loans in our stores on December 31, 2002. 41




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In addition, Republic Bank & Trust Company, a Kentucky state-chartered
bank for which we act as marketer and servicer of its short-term consumer
loans, is subject to federal and state banking regulations. The State of
Kentucky is the primary regulator of Republic Bank, and the Federal Deposit
Insurance Corporation, or FDIC, is the back-up federal regulator of Republic
Bank. If the State of Kentucky or the FDIC were to order Republic Bank to cease
or significantly curtail its short-term consumer lending services, our revenues
derived from fees from Republic Bank would be adversely affected, unless we
could secure an agreement to provide similar services with another bank not
subject to similar regulations. We cannot assure you that we would be
successful in finding such a replacement bank, especially as arrangements like
ours with Republic Bank are coming under increasing political and regulatory
scrutiny. Lawsuits filed against banks offering these short-term consumer
loans, such as one recently filed by the New York State Attorney Generals
office discussed below, may hinder our ability to partner with a replacement
bank or to establish relationships with new banks in other states as part of
our growth strategy. Any agreement with a replacement bank or new bank may also
not be on terms as favorable to us as our current agreement with Republic Bank. Republic Bank is also subject to FDIC inspection and authority, and as a
result of our marketing servicing activities, we too are subject to such
inspection and authority. We cannot assure you that the regulatory scheme
affecting Republic Bank, or FDIC inspection or authority with respect to
Republic Bank or us, will not negatively impact our operations. Potential litigation and regulatory proceedings regarding our short-term
consumer loans could materially adversely affect our financial condition. During the last few years, we and our competitors have been subject to
regulatory proceedings, class action lawsuits and other litigation regarding
the offering of short-term consumer loans. In our case, such litigation and
regulatory proceedings primarily involved attempts by plaintiffs to
recharacterize us as the true lender of short-term consumer loans made by
Goleta National Bank through our stores, in part because we acquired
participations in the Goleta loans. Although our relationship with Goleta has
been terminated and we have settled the related class action lawsuit, we cannot
assure you that we will not be subject to future lawsuits associated with our
short-term consumer loan services. In particular, we may become subject to litigation or regulatory
proceedings focusing on our relationship with Republic Bank. If we were to be
recharacterized as the lender of these Republic Bank loans, then the interest
charged for these loans would violate most of the applicable states usury laws
which impose maximum rates of interest or finance charges that a non-bank
lender may charge, and any resulting refunds or penalties we would likely incur
would materially adversely affect our results of operations and financial
condition. While there are differences between the Goleta loans and the
Republic Bank loans, principally that we do not acquire participations in
Republic Bank loans, and while we believe we are not the lender under this
arrangement with Republic Bank, we cannot assure you that a regulator or a
borrower will not try to recharacterize us as the true lender. For example,
although we do not offer short-term consumer loans in New York, recently the
New York State Attorney Generals office filed a lawsuit against a Delaware
state-chartered bank and the companies servicing its short-term consumer loans
through a structure that is in some respects similar to our agreement with
Republic Bank. Media reports and public perception of short-term consumer loans as being
predatory or abusive could materially adversely affect our business. Over the past few years, consumer advocacy groups and certain media
reports have advocated governmental action to prohibit or severely restrict
short-term consumer loans. The consumer groups and media reports typically
focus on the cost to a consumer for this type of loan, which is higher than the
interest typically charged by credit card issuers to a more creditworthy
consumer. This difference in credit cost is more significant if a consumer does
not promptly repay the loan, but renews, or rolls over, that loan for one or
more additional short-term periods. The consumer groups and media reports
typically characterize these short-term consumer loans as predatory or abusive
toward consumers. If this negative characterization of our short-term consumer
loan service becomes increasingly accepted by consumers, demand for our
short-term consumer loans could significantly decrease, which could materially
adversely affect our results of operations and financial condition. Negative perception of our short-term consumer loans or other activities
could also result in us being subject to more restrictive laws and regulations.
For example, a short-term consumer loan prohibition law was recently passed by
the Georgia state legislature. In addition, we may become subject to lawsuits
against us for our short-term consumer loans or the Republic Bank loans. If
changes in the laws affecting our short-term consumer loans or the Republic
Bank loans are enacted, or if we become subject to such lawsuits, our financial
condition and results of operations would be materially adversely affected. If our estimates of our loan losses are not adequate to absorb known or
probable losses, our financial condition may be materially adversely affected. 42




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We maintain an allowance for loan losses at levels to cover the
anticipated losses in the collection of our loan portfolio. We determine our
allowance for loan losses based upon a review of historical loan losses and the
loan portfolio. Our allowance for loan losses is periodically reviewed by our
management. For the year ended June 30, 2004, our loan loss provision was $16.9
million, and we charged-off $15.0 million related to our loans. Our loan loss
provision, however, is an estimate, and if actual loan losses are materially
greater than our loan loss provision, our financial condition could be
materially adversely affected. With respect to the Republic Bank loans, we are obligated to reimburse
Republic Bank for loan losses on a quarterly basis. As a result, we could be
potentially obligated to pay Republic Bank for loan losses in an amount up to
the total outstanding amount of Republic Bank loans recorded on Republic Banks
financial statements, which was $9.4 million as of June 30, 2004. This amount
is not included on our balance sheet. For the year ended June 30, 2004, we
provided a payable of approximately $7.4 million for losses on Republic Bank
loans and charged-off $6.5 million related to Republic Bank loans. The balance
of the liability for Republic Loan losses reported in accrued liabilities as of
June 30, 2004 was $0.7 million. The payable to Republic Bank is, however, an
estimate. If actual loan losses are materially greater than our recorded amount
payable to Republic Bank, our financial condition could be materially adversely
affected. A significant portion of our consumer lending business is derived from our
relationship with Republic Bank, and a loss of that relationship could
adversely affect our liquidity and profits. Under our marketing and servicing agreement with Republic Bank, we provide
various services to the bank in connection with our marketing and servicing of
Republic Banks short-term consumer loans in exchange for which we are
compensated by Republic Bank through payment of fees. As of June 30, 2004,
Republic Bank was offering its Republic Bank loans in 359 of our company-owned
stores in Arkansas, Pennsylvania and Texas. Approximately 9.7% and 3.9% of our
total revenues in fiscal 2004 and 2003, respectively, were derived from fees
paid to us by Republic Bank. The FDIC has set limits on the dollar amount of short-term consumer loans
Republic Bank can have outstanding at any given time based on its capital. If
the FDIC were to reduce these limits or other events involving Republic Bank
outside of our control were to occur, our ability to grow this portion of our
business could be materially adversely affected. In addition to customary
termination provisions, our agreement with Republic Bank can be terminated by
either party if the quarterly loan loss rate of Republic Bank loans exceeds a
specified level. If a termination of or significant adverse change in our relationship with
Republic Bank occurred, we could be required to seek replacement relationships
with new financial institutions. We cannot assure you that we would be able to
secure new relationships or that the terms of any such new relationships would
be as favorable to us as those of our existing relationship with Republic Bank.
As a result, any significant changes in our relationship with Republic Bank
could cause us to change the way we conduct business in certain states or
adversely affect our results of operations. If Republic Banks loan approval process is flawed and more loans go
uncollected, our revenues could be adversely affected. Our agreement with Republic Bank provides for us to market and service
Republic Banks loans offered at our owned stores. Republic Bank is responsible
for reviewing each loan application and determining whether such application is
approved for a loan. We are not involved in the loan approval process,
including with respect to determining the loan approval procedures or criteria.
However, under our agreement with Republic Bank, we are required to reimburse
Republic Bank for loan losses on a quarterly basis. If Republic Banks loan
approval process is flawed and an increased number of loans that are made are
uncollected, our results of operations could be adversely affected. We are subject to franchise law and regulations that govern our status as a
franchisor and regulate some aspects of our franchise relationships. Our
ability to develop new franchised stores and to enforce contractual rights
against franchisees may be adversely affected by these laws and regulations,
which could cause our franchise revenues to decline and adversely affect our
growth strategy. We are subject to federal and state laws and regulations, including the
regulations of the Federal Trade Commission as well as similar authorities in
individual states, in connection with the offer, sale and termination of
franchises and the regulation of the franchisor-franchisee relationship. Our
failure to comply with these laws could subject us to liability to franchisees
and to fines or other penalties imposed by governmental authorities. In
addition, we may become subject to litigation with, or other claims filed with
state or federal authorities by, franchisees based on alleged unfair trade
practices, implied covenants of good faith and fair dealing, payment of
royalties, location of stores, advertising expenditures, franchise renewal
criteria or express violations of franchise agreements. We cannot assure you
that we will not encounter compliance problems from time to time, or that
material disputes will not arise with one or more franchisees. Accordingly, our
failure to 43




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comply with applicable franchise laws and regulations, or disputes with
franchisees, could have a material adverse effect on our results of operations
financial condition and growth strategy. Our current and future business growth strategy involves new store acquisitions
and new store openings, and our failure to manage our growth or integrate or
manage new store acquisitions may adversely affect our business, prospects,
results of operations and financial condition. Our expansion strategy consists principally of combining acquisitions and
new store openings (both company-owned and franchised stores) and increasing
comparable store sales of existing services. Acquisitions may entail numerous
integration risks and impose costs on us, including:  
    
    difficulties in assimilating acquired operations or services,
including the loss of key employees from acquired businesses;  
    
    diversion of managements attention from our core business;  
    
    dilutive issuances of our equity securities (if necessary to finance acquisitions or new stores);  
    
    incurrence of additional indebtedness (if necessary to finance acquisitions or new stores);  
    
    assumption of contingent liabilities;  
    
    the potential impairment of acquired assets; and  
    
    incurrence of significant immediate write-offs. Our continued growth is dependent upon a number of factors, including the
availability of adequate financing and suitable store locations, acquisition
opportunities and experienced management employees, the ability to obtain any
required government permits and licenses and other factors, some of which are
beyond our control. We cannot assure you that we will be able to grow our
business successfully through acquisitions and new store openings. Our failure
to grow or complete the integration of any acquired business could have a
material adverse effect on our business, prospects, results of operations and
financial condition. If we lose key management or are unable to attract and retain the talent
required for our business, our operating results and growth could suffer. Our future success depends to a significant degree upon the members of our
senior management, particularly Jay Shipowitz, our President and Chief
Executive Officer. The loss of the services of Mr. Shipowitz or other members
of senior management could harm our business and development. Our continued
growth also will depend upon our ability to attract and retain additional
skilled management personnel. If we are unable to attract and retain personnel
as needed in the future, our operating results and growth could suffer. Competition in the retail financial services industry is intense and could
cause us to lose market share and revenues. The industry in which we operate is highly fragmented and very
competitive. In addition, we believe that the market will become more
competitive as the industry matures and consolidates. We compete with other
check cashing stores, short-term consumer lenders, grocery stores, banks,
savings and loan institutions, other financial services entities and other
retail businesses that also cash checks, offer short-term consumer loans, sell
money orders, provide money transfer services, or other similar financial
services. Some of our competitors that are not check cashing companies have
larger and more established customer bases and substantially greater financial,
marketing and other resources. Our stores have also recently been facing
competition from automated check cashing machines deployed in supermarkets,
convenience stores and other public venues by large financial services
organizations. We cannot assure you that we will be able to compete
successfully. As a result, we could lose market share and our revenues could
decline, thereby affecting our ability to generate sufficient cash flow to
service our indebtedness and fund our operations. Our revenues and net income from check cashing services may be materially
adversely affected if the number of consumer check cashing transactions
decreases or the amount of checks we cash that are uncollected significantly
increases. Historically, over half of our revenues come from our check cashing
business. Any changes in economic factors that materially adversely affect
consumer transactions could reduce the volume of transactions that we process
and have a 44




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material adverse effect on our business, financial condition and results
of operations. Recently, there has been increasing penetration of electronic
banking services into the check cashing and money transfer industry, including
direct deposit of payroll checks and electronic transfer of government
benefits. To the extent that checks are replaced with such electronic
transfers, demand for our check cashing services could decrease. In addition, the risk that we assume upon cashing a check is that the
check will be uncollected because of insufficient funds, stop payment orders,
or fraud. If the amount of checks we cash that are uncollected increases
significantly, our net income will be materially adversely affected. Our money transfer and money order revenues are derived from a key third-party
relationship and a loss of that relationship could adversely affect our
liquidity and profits. We are a party to a money order agreement with Travelers Express under
which we exclusively sell Travelers Express money orders that bear our logo.
Under this agreement, we are obligated to make prompt remittances of money
order proceeds. We are also an agent for the receipt and transmission of wire
transfers of money through the MoneyGram network in accordance with an
agreement with Travelers Express and MoneyGram Payment Systems, Inc., an
affiliate of Travelers Express. We receive significant revenues pursuant to
these agreements. Approximately 7.1% and 7.6% of our total revenues in fiscal
2004 and 2003, respectively, were derived from these agreements. Our
relationship with Travelers Express and its affiliates is therefore significant
to our business. Accordingly, if any disruption in this relationship occurs, it
could materially and adversely affect our liquidity and profits. Any disruption in the availability of our information systems could adversely
affect operations at our stores. Our information systems include a proprietary point-of-sale system in our
stores and a management information system. The personal computer-based
point-of-sale system is fully operational in all company-owned stores, is used
by our self-service machines for cashing checks and accepting third-party bill
payments and is licensed for use by our franchised stores. The management
information system is designed to provide summary and detailed information to
district managers, regional vice presidents and corporate managers at any time
through internet connectivity. Any disruption in the availability of our
information systems could affect our operations and could adversely affect our
business. Part of our business is seasonal, which causes our revenues to fluctuate and
may adversely affect our ability to service our debt. Our business is seasonal to the extent of the impact of cashing tax refund
checks and tax refund anticipation loan checks. The impact of these services is
primarily in the third and fourth quarters of our fiscal year. Also, our
short-term loan business declines slightly in the third fiscal quarter as a
result of customers receipt of tax refund checks and tax refund anticipation
loans. This seasonality requires us to manage our cash flows over the course of
the year. If our revenues were to fall substantially below what we would
normally expect during certain periods, our annual financial results would be
adversely impacted and our ability to service our debt may also be adversely
affected. Because we maintain a significant supply of cash in our stores, we may be
subject to cash shortages due to employee error and theft. Since our business requires us to maintain a significant supply of cash in
each of our stores and (during tax season) each of our self-service machines,
we are subject to the risk of cash shortages resulting from employee errors and
theft. Although we have implemented various procedures and programs to reduce
these risks, maintain insurance coverage for theft and provide security for our
employees and facilities, we cannot assure you that employee error and theft
will not occur. Material occurrences of error and theft could lead to cash
shortages and could adversely affect our results of operations. Risks Related to our Common Stock The price of our common stock may be volatile. In the past three years, stocks listed on the Nasdaq National Market, as
our common stock is, have experienced high levels of volatility and significant
declines in value from their historic highs. The trading price of our common
stock has fluctuated, and may continue to fluctuate, substantially from time to
time. The fluctuations could cause you to lose part or all of your investment
in our shares of common stock. Those factors that could cause fluctuations in
the trading price of our common stock include, but are not limited to, the
following:  
    
    price and volume fluctuations in the overall stock market from time to time,  
    
    significant volatility in the market price and trading volume of financial services companies, 45




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
    
    actual or anticipated changes in our earnings or fluctuations in our
operating results or in the expectations of securities analysts,  
    
    general economic conditions and trends,  
    
    major catastrophic events,  
    
    loss of a significant client or clients,  
    
    sales of large blocks of our stock, or  
    
    departures of key personnel. In the past, following periods of volatility in the market price of a
companys securities, securities class action litigation has often been brought
against that company. Due to the potential volatility of our stock price, we
may therefore be the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert managements attention
and resources from our business. Insiders have substantial control over us and could limit your ability to
influence the outcome of key transactions, including a change of control. As of June 30, 2004, our principal shareholders, directors and executive
officers, and entities affiliated with them, owned approximately 15% of the
outstanding shares of our common stock. As a result, these shareholders, if
acting together, are able to influence or control matters requiring approval by
our shareholders, including the election of directors and the approval of
mergers, acquisitions or other extraordinary transactions. They may also have
interests that differ from yours and may vote in a way with which you disagree
and which may be adverse to your interests. The concentration of ownership may
have the effect of delaying, preventing or deterring a change of control of our
company, could deprive our shareholders of an opportunity to receive a premium
of their common stock as a party of a sale of our company and might ultimately
affect the market price of our common stock. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, particularly including changes in
interest rates that might affect the costs of our financing under our existing
credit agreement. To mitigate the risks of changes in interest rates, we use
derivative financial instruments. We do not use derivative financial
instruments for speculative or trading purposes. To reduce our risk of greater
interest expense because of interest-rate fluctuations, we have entered into
interest-rate swap agreements, which effectively converted a portion of our
floating-rate interest obligations to fixed-rate interest obligations, as
described in Note 3 to Notes to Consolidated Financial Statements. The fair value of our existing interest-rate swaps was ($283,000) as of June
30, 2004. The associated underlying debt has equaled or exceeded the notional
amount for each swap throughout the existence of the swap, and we anticipate
that it will continue to do so. Each existing swap is based on the same index
as, and repriced on a consistent basis with its corresponding underlying debt. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 15(a)(1) for information required for this item. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
Report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that those disclosure controls and procedures are
effective. There were no changes in our internal control over 46




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financial reporting during the year ended June 30, 2004, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. 
 ITEM 9B. OTHER INFORMATION None. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference from
the information provided under the caption Directors and Executive Officers
in our definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for our Annual
Meeting of Shareholders to be held on November 15, 2004 (our 2004 Proxy
Statement). 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference from
the information provided under the captions Executive Compensation and Stock
Performance Chart in our 2004 Proxy Statement. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference from the
information provided under the captions Security Ownership of Certain
Beneficial Owners and Management and Equity Compensation Plan Information in
our 2004 Proxy Statement. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the
information provided under the caption Directors and Executive Officers
Certain Relationships in our 2004 Proxy Statement. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference from the
information provided under the caption Relationships with Independent
Certified Public Accountants in our 2004 Proxy Statement. 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Report: (1) Financial Statements.Report of independent registered public accounting firm
    
    
    53Consolidated balance sheets as of June 30, 2004 and 2003
    
    
    54Consolidated statements of earnings for the years ended June 30, 2004, 2003, and 2002
    
    
    55Consolidated statement of shareholders equity for the years ended June 30, 2004, 2003, and 2002
    
    
    56Consolidated statements of cash flows for the years ended June 30, 2004, 2003, and 2002
    
    
    57Notes to consolidated financial statements
    
    
    58(2) Financial Statement Schedules.Report of independent registered public accounting firm
    
    
    81Schedule II  Valuation and Qualifying Accounts
    
    
    82
 47




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(3) Exhibits. Exhibit Number
    
    Exhibits3.1
    
    Restated Articles of Incorporation of the Company, as amended through
January 31, 1998. (Included as Exhibit 3.6 to the Companys Form 10-Q as
of December 31, 1997 (Commission File Number 0-20774) and incorporated
herein by reference.)3.2
    
    Amended and Restated Bylaws of the Company, as amended through January
31, 1998. (Included as Exhibit 3.7 to the Companys Form 10-Q as of
December 31, 1997 (Commission File Number 0-20774) and incorporated herein
by reference.)3.3
    
    Certificate of Amendment to the Companys Bylaws dated January 3, 2000.
(Included as Exhibit 3.3 to the Companys Form 10-Q as of December 31,
1999 (Commission File Number 0-20774) and incorporated herein by
reference.)4.1
    
    Form of Certificate representing shares of Registrants Common Stock.
(Included as Exhibit 4.1 to the Companys Registration Statement on Form
S-1 (Reg. No. 33-53286) (the Registration Statement) and incorporated
herein by reference.)10.1
    
    Lease Agreement dated October 1, 1987, between the Company and Greenway
Tower Joint Venture, as amended by First Amendment to Lease Agreement
dated April 29, 1988, Second Amendment to Lease Agreement dated August 24,
1988, Third Amendment to Lease Agreement dated December 29, 1988 and
Fourth Amendment to Lease Agreement dated January 29, 1991. (Included as
Exhibit 10.8 to the Registration Statement and incorporated herein by
reference.)10.2
    
    Fifth Amendment to Lease Agreement dated June 13, 1994, between the
Company and Greenway Tower Joint Venture. (Included as Exhibit 10.10 to
the Companys Form 10-K as of June 30, 1994 (Commission File Number
0-20774) and incorporated herein by reference.)10.3
    
    Ace Cash Express, Inc. 401(k) Profit Sharing Plan, adopted July 1, 1994.
(Included as Exhibit 10.13 to the Companys Form 10-K as of June 30, 1994
(Commission File Number 0-20774) and incorporated herein by reference.)#10.4
    
    Ace Cash Express, Inc. Deferred Compensation Plan, adopted July 1, 1994.
(Included as Exhibit 10.14 to the Companys Form 10-K as of June 30, 1994
(Commission File Number 0-20774) and incorporated herein by reference.)#10.5
    
    Ace Cash Express, Inc. Non-Employee Directors Stock Option Plan dated
March 27, 1995. (Included as Exhibit 10.19 to the Companys Form 10-K as
June 30, 1995 (Commission File Number 0-20774) and incorporated herein by
reference.)#10.6
    
    Sixth Amendment to Lease Agreement dated February 1, 1996, between the
Company and Greenway Tower Joint Venture. (Included as Exhibit 10.25 to
the Companys Form 10-Q as of March 31, 1996 (Commission File Number
0-20774) and incorporated herein by reference.)10.7
    
    Amendment No.1 to the Ace Cash Express 401K Profit Sharing Plan effective
January 1, 1998. (Included as Exhibit 10.33 to the Companys Form 10-Q as
of March 31, 1998 (Commission File Number 0-20774) and incorporated herein
by reference.)#10.8
    
    Amendment No. 1 to Ace Cash Express, Inc. Non-Employee Directors
Stock Option Plan. (Included as Exhibit 10.34
to the Companys Form 10-K as of June 30, 1998 (Commission File No.
0-20774) and incorporated herein by
reference.) #10.9
    
    Amendment No. 2 to Ace Cash Express, Inc. Non-Employee Directors
Stock Option Plan. (Included as Exhibit 10.35
to the Companys Form 10-K as of June 30, 1998 (Commission File No.
0-20774) and incorporated herein by
reference.) #10.10
    
    Ace Cash Express, Inc. 1997 Stock Option Plan. (Included as Exhibit A
to the Companys Proxy Statement for the 1997 Annual Meeting of
Shareholders (Commission File No. 0-20774) and incorporated herein by
reference.)#
 48




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##### Table of Contents



Exhibit Number
    
    Exhibits10.11
    
    Amendment No. 1 to Ace Cash Express, Inc. 1997 Stock Option Plan.
(Included as Exhibit 10.37 to the Companys Form 10-K as of June 30, 1998
(Commission File No. 0-20774) and incorporated herein by reference.) #10.12
    
    Money Order Agreement dated as of April 16, 1998, but effective as of
December 16, 1998, between the Company and Travelers Express Company, Inc.
(Confidential treatment for a portion of this document has been granted by
the Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934). (Included as Exhibit 10.39 to the
Companys Form 10-K as of June 30, 1998 (Commission File No. 0-20774) and
incorporated herein by reference.)10.13
    
    Amendment No.3 to Ace Cash Express, Inc. Non-Employee Directors Stock
Option Plan. (Included as Exhibit 10.44 to the Companys Form 10-Q as of
December 31, 1998 (Commission File No. 0-20774) and incorporated herein by
reference.)#10.14
    
    Amendment No. 2 to Ace Cash Express, Inc. 1997 Stock Option Plan.
(Included as Exhibit 10.45 to the Companys
Form 10-Q as of December 31, 1999 (Commission File Number 0-20774) and
incorporated herein by reference.)#10.15
    
    Money Transfer Agreement dated as of June 30, 2000, among the
Company, Travelers Express Company, Inc., and
MoneyGram Payment Systems, Inc. (Confidential treatment for a portion of
this document has been granted by the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.) (Included as Exhibit 10.48 to the
Companys Form 10-K as of June 30, 2000 (Commission File No. 0-20774) and
incorporated herein by reference.)10.16
    
    Amendment No. 3 to Ace Cash Express, Inc. 1997 Stock Option Plan.
(Included as Exhibit 10.50 to the Companys Form 10-Q as of December 31,
2000 (Commission File No. 0-20774) and incorporated herein by reference.)#10.17
    
    Change-in-Control Executive Severance Agreement dated as of May 15,
2001, between the Company and Barry M.
Barron. (Included as Exhibit 10.56 to the Companys Form 10-K as of
June 30, 2001 (Commission File No. 0-20774) and incorporated herein by
reference.)#10.18
    
    Separation Agreement dated as of February 28, 2002, between the Company
and R. Edward McCarty. (Included as
Exhibit 10.1 to the Companys Form 10-Q as of March 31, 2002 (Commission
File No. 0-20774) and incorporated herein by reference.)#10.19
    
    Consulting Agreement dated as of February 28, 2002, between the Company
and R. Edward McCarty. (Included as
Exhibit 10.2 to the Companys Form 10-Q as of March 31, 2002 (Commission
File No. 0-20774) and incorporated herein by reference.)#10.20
    
    Seventh Amendment to Lease Agreement dated December 20, 2000, between
the Company and Greenway Tower
Joint Venture. (Included as Exhibit 10.66 to the Companys Form 10-K as
of June 30, 2002 (Commission File No. 0-20774) and incorporated herein by
reference.)10.21
    
    Eighth Amendment to Lease Agreement dated May 10, 2001, between the
Company and Greenway Tower Joint
Venture. (Included as Exhibit 10.67 to the Companys Form 10-K as of June
30, 2002 (Commission File No. 0-
20774) and incorporated herein by reference.)10.22
    
    Ace Cash Express, Inc. Executive Non-Qualified Excess Plan Adoption
Agreement with the First Amendment to the
Ace Cash Express, Inc. Executive Non-Qualified Excess Plan, dated as of
October 1, 2001. (Included as Exhibit 10.68 to the Companys Form 10-K
as of June 30, 2002 (Commission File No. 0-20774) and incorporated herein
by reference.) #10.23
    
    Stipulation and Consent to the Issuance of a Consent Order between Ace
Cash Express, Inc. and the Office of the
Comptroller of the Currency dated October 25, 2002. (Included as Exhibit
10.1 to the Companys Form 8-K filed on November 5, 2002 (Commission File
No. 0-20774) and incorporated herein by reference.)10.24
    
    Consent Order issued by the Office of the Comptroller of the Currency In
the Matter of Ace Cash Express, Inc.,
Irving, Texas, as Agent and Bank Service Provider for Goleta National
Bank, Goleta, California, dated October 25, 2002. (Included as Exhibit
10.2 to the Companys Form 8-K filed on November 5, 2002 (Commission File
No. 0-20774) and incorporated herein by reference.)10.25
    
    Amendment No. 4 to Ace Cash Express, Inc. 1997 Stock Option Plan.
(Included as Exhibit 10.1 to the Companys
 49




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##### Table of Contents



Exhibit Number
    
    ExhibitsForm 10-Q as of December 31, 2002 (Commission File No. 0-20774) and
incorporated herein by reference.) #10.26
    
    License Agreement dated November 22, 2000, with Addendum No. 1 thereto
dated as of May 31, 2001, by and
between H&R Block Tax Services, Inc. and the Company. (Confidential
treatment for a portion of this document has been granted by the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.) (Included as Exhibit 10.1 to the
Companys Form 8-K filed on January 21, 2003 (Commission File No. 0-20774)
and incorporated herein by reference.)10.27
    
    Loan and Servicing Agreement dated as of December 18, 2002, among Ace
Funding LLC, the Company, Autobahn
Funding Company LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank
Frankfurt am Main, and U.S. Bank National Association, together with the
material Schedules, Exhibits and Annexes thereto. (Confidential treatment
for a portion of this document has been granted by the Securities and
Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.) (Included as Exhibit 10.3 to the Companys Form 8-K filed
on January 21, 2003 (Commission File No. 0-20774) and incorporated herein
by reference.)10.28
    
    Marketing and Servicing Agreement dated as of October 21, 2002, with
First Amendment to Marketing and
Servicing Agreement dated as of January 28, 2003, between Republic Bank &
Trust Company and the Company. (Application for confidential treatment for
a portion of this document has been submitted to the Securities and
Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.) (Included as Exhibit 10.1 to the Companys Form 10-Q as of
March 31, 2003 (Commission File No. 0-20774) and incorporated herein by
reference.)10.29
    
    Restricted Stock Agreement dated January 28, 2003 between the Company and
Barry M. Barron. (Included as
Exhibit 10.2 to the Companys Form 10-Q as of March 31, 2003 (Commission
File No. 0-20774) and incorporated herein by reference.) #10.30
    
    Restricted Stock Agreement dated July 2, 2003 between the Company and Jay
B. Shipowitz. (Included as Exhibit
10.3 to the Companys Form 10-Q as of September 30, 2003 (Commission File
No. 0-20774) and incorporated herein by reference.) #10.31
    
    Restricted Stock Agreement dated July 2, 2003 between the Company and
Barry M. Barron. (Included as Exhibit
10.4 to the Companys Form 10-Q as of September 30, 2003 (Commission File
No. 0-20774) and incorporated herein by reference.) #10.32
    
    Restricted Stock Agreement dated October 30, 2003, between the Company
and William S. McCalmont. (Included
as Exhibit 10.1 to the Companys Form 10-Q as of December 31, 2003
(Commission File No. 0-20774) and incorporated herein by reference.) #10.33
    
    Change-in-Control Executive Severance Agreement executed December 5,
2003, but effective as of August 5, 2003,
between the Company and William S. McCalmont. (Included as Exhibit 10.1
to the Companys Form 10-Q as of December 31, 2003 (Commission File No.
0-20774) and incorporated herein by reference.) #10.34
    
    Amendment Number One to Money Order Agreement dated as of February 18,
1999, between the Company and
Travelers Express Company, Inc. (Included as Exhibit 10.1 to the
Companys Form 8-K filed on November 4, 2003
(Commission File No. 0-20774) and incorporated herein by reference.)10.35
    
    Amendment No. 2 to Money Order Agreement dated as of October 29, 2003,
between the Company and Travelers Express Company, Inc. (Confidential
treatment for a portion of this document has been granted by the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.) (Included as Exhibit 10.2 to the
Companys Form 8-K filed on November 4, 2003 (Commission File No. 0-20774)
and incorporated herein by reference.)10.36
    
    Cash Services Agreement dated as of December 30, 2003, by and between
the Company and Texas Capital Bank, National Association, together with
the material Exhibits and Annexes thereto. (Confidential treatment for a
portion of this document has been granted by the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.) (Included as Exhibit 10.1 to the Companys Form 8-K filed on
January 14, 2004 (Commission File No. 0-20774) and incorporated herein by
reference.)10.37
    
    First Amendment dated as of December 22, 2003, among Ace Funding LLC,
the Company, Autobahn Funding Company LLC, DZ Bank AG Deutsche
Zentral-Genossenschaftsbank Frankfurt am Main, and U.S. Bank National
 50




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##### Table of Contents



Exhibit Number
    
    ExhibitsAssociation, together with the Schedules thereto. (Included as Exhibit
10.2 to the Companys Form 8-K filed on January 14, 2004 (Commission File
No. 0-20774) and incorporated herein by reference.)10.38
    
    First Amended and Restated Credit Agreement dated July 30, 2004, by and
among the Company, Wells Fargo Bank, National Association, as
administrative agent for the lenders, JPMorgan Chase Bank, J.P. Morgan
Securities, Inc., U.S. Bank, National Association, Bank of America, N.A.,
Union Bank of California, N.A., Keybank National Association, and the
lenders named in Schedule 2.01, together with the Exhibits and Schedules
thereto. (Application for confidential treatment for a portion of the
Schedules to this document has been submitted to the Securities and
Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.) (Included as Exhibit 10.1 to the Companys Form 8-K filed
on August 13, 2004 (Commission File No. 0-20774) and incorporated herein
by reference.)10.39
    
    Executive Employment Agreement dated to be effective as of July 1, 2004,
between the Company and Jay B. Shipowitz. (Included as Exhibit 10.1 to
the Companys Form 8-K filed on August 27, 2004 (Commission File No.
0-20774) and incorporated herein by reference.) #10.40
    
    Restricted Stock Agreement dated to be effective as of July 1, 2004,
between the Company and Jay B. Shipowitz. (Included as Exhibit 10.2 to
the Companys Form 8-K filed on August 27, 2004 (Commission File No.
0-20774) and incorporated herein by reference.) #10.41
    
    Change-in-Control Executive Severance Agreement dated to be effective as
of July 1, 2004, between the Company and Jay B. Shipowitz. (Included as
Exhibit 10.3 to the Companys Form 8-K filed on August 27, 2004
(Commission File No. 0-20774) and incorporated herein by reference.) #10.42
    
    Employment Agreement dated to be effective as of July 1, 2004, between
the Company and Donald H. Neustadt. (Included as Exhibit 10.4 to the
Companys Form 8-K filed on August 27, 2004 (Commission File No. 0-20774)
and incorporated herein by reference.) #10.43
    
    General Release and Covenant Not to Sue dated to be effective as of June
30, 2004 between the Company and Donald H. Neustadt. (Included as Exhibit
10.5 to the Companys Form 8-K filed on August 27, 2004 (Commission File
No. 0-20774) and incorporated herein by reference.) #21
    
    Subsidiaries of the Company.*23
    
    Consent of Grant Thornton LLP.*31
    
    Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32
    
    Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith#
    
    Management contract or compensatory plan or arrangement 51




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. ACE CASH EXPRESS, INC.By:
    /s/  WILLIAM S. MCCALMONTWilliam S. McCalmontExecutive Vice President and  
Chief Financial OfficerDate: September 10, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated. Signature
    
    Title/s/ RAYMOND C. HEMMIG
Raymond C. Hemmig
    
    Chairman of the Board, Director/s/ JAY B. SHIPOWITZ
Jay B. Shipowitz
    
    President and Chief Executive Officer
Director/s/ WILLIAM S. MCCALMONT
William S. McCalmont
    
    Executive Vice President and Chief Financial Officer/s/ MICHAEL J. BRISKEY
Michael J. Briskey
    
    Senior Vice President of Finance
Treasurer/s/ WALTER E. EVANS
Walter E. Evans
    
    Senior Vice President and General Counsel
Secretary/s/ ROBERT P. ALLYN
Robert P. Allyn
    
    Director/s/ DONALD H. NEUSTADT
Donald H. Neustadt
    
    Director/s/ MARSHALL B. PAYNE
Marshall B. Payne
    
    Director/s/  MICHAEL S. RAWLINGS
Michael S. Rawlings
    
    Director/s/ EDWARD W. ROSE III
Edward W. Rose III
    
    Director/s/ CHARLES DANIEL YOST
Charles Daniel Yost
    
    Director
 52




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders,
Ace Cash Express, Inc.: We have audited the consolidated balance sheets of Ace Cash Express, Inc. (a
Texas corporation) and Subsidiaries as of June 30, 2004 and 2003, and the
related consolidated statements of earnings, shareholders equity, and cash
flows for each of the three years in the period ended June 30, 2004. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ace Cash Express,
Inc. and Subsidiaries as of June 30, 2004 and 2003, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP Dallas, Texas
August 20, 2004 53




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##### Table of Contents



ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) June 30,
    
    June 30,2004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    123,041
    
    
    $
    108,110Accounts receivable, net
    
    
    5,555
    
    
    
    9,429Loans receivable, net
    
    
    17,047
    
    
    
    13,000Prepaid expenses, inventories, and other current assets
    
    
    10,658
    
    
    
    10,742Total Current Assets
    
    
    156,301
    
    
    
    141,281Noncurrent AssetsProperty and equipment, net
    
    
    30,721
    
    
    
    32,352Covenants not to compete, net
    
    
    1,067
    
    
    
    1,151Goodwill, net
    
    
    81,719
    
    
    
    75,586Other assets
    
    
    3,839
    
    
    
    8,398Total Assets
    
    $
    273,647
    
    
    $
    258,768LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesRevolving advances
    
    $
    60,000
    
    
    $
    83,900Accounts payable, accrued liabilities, and other current liabilities
    
    
    32,678
    
    
    
    40,756Money orders payable
    
    
    4,495
    
    
    
    6,884Term advances
    
    
    
    
    
    
    3,833Notes payable
    
    
    33
    
    
    
    778Total Current Liabilities
    
    
    97,206
    
    
    
    136,151Noncurrent LiabilitiesTerm advances
    
    
    
    
    
    
    34,436Notes payable
    
    
    75
    
    
    
    110Other liabilities
    
    
    9,936
    
    
    
    9,087Total Liabilities
    
    
    107,217
    
    
    
    179,784Commitments and Contingencies
    
    
    
    
    
    
    Shareholders EquityPreferred stock, $1 par value, 1,000,000 shares authorized, none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 20,000,000 shares authorized,
13,518,737 and 10,395,113 shares issued and 13,307,337 and
10,183,713 shares outstanding, respectively
    
    
    133
    
    
    
    102Additional paid-in capital
    
    
    95,941
    
    
    
    24,385Retained earnings
    
    
    75,296
    
    
    
    58,244Accumulated comprehensive loss
    
    
    (170
    )
    
    
    (1,017
    )Treasury stock, at cost, 211,400 shares
    
    
    (2,707
    )
    
    
    (2,707
    )Unearned compensation  restricted stock
    
    
    (2,063
    )
    
    
    (23
    )Total Shareholders Equity
    
    
    166,430
    
    
    
    78,984Total Liabilities and Shareholders Equity
    
    $
    273,647
    
    
    $
    258,768
 The accompanying notes are an integral part of these consolidated financial statements. 54




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##### Table of Contents



ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS  Year Ended June 30,2004
    
    2003
    
    2002Revenues
    
    $
    246,659
    
    
    $
    234,289
    
    
    $
    229,266Store expenses:Salaries and benefits
    
    
    59,593
    
    
    
    58,170
    
    
    
    57,864Occupancy
    
    
    30,563
    
    
    
    29,194
    
    
    
    28,207Provision for loan losses and doubtful accounts
    
    
    24,235
    
    
    
    22,892
    
    
    
    22,064Depreciation
    
    
    7,563
    
    
    
    6,966
    
    
    
    7,180Other
    
    
    40,066
    
    
    
    38,192
    
    
    
    36,512Total store expenses
    
    
    162,020
    
    
    
    155,414
    
    
    
    151,827Gross margin
    
    
    84,639
    
    
    
    78,875
    
    
    
    77,439Region expenses
    
    
    19,251
    
    
    
    17,056
    
    
    
    17,495Headquarters expenses
    
    
    18,681
    
    
    
    17,133
    
    
    
    16,594Franchise expenses
    
    
    1,196
    
    
    
    1,225
    
    
    
    993Other depreciation and amortization
    
    
    3,893
    
    
    
    5,423
    
    
    
    7,570Interest expense, net
    
    
    10,231
    
    
    
    16,004
    
    
    
    14,934Loss on early extinguishment of debt
    
    
    4,858
    
    
    
    270
    
    
    
    Other (income) expenses, net
    
    
    (1,893
    )
    
    
    1,314
    
    
    
    2,827Income from continuing operations before taxes
    
    
    28,422
    
    
    
    20,450
    
    
    
    17,026Provision for income taxes
    
    
    11,370
    
    
    
    8,174
    
    
    
    6,913Income from continuing operations
    
    
    17,052
    
    
    
    12,276
    
    
    
    10,113Discontinued operations:Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    499
    
    
    
    Net income
    
    $
    17,052
    
    
    $
    12,775
    
    
    $
    10,113Basic earnings per share:Continuing operations
    
    $
    1.55
    
    
    $
    1.20
    
    
    $
    1.00Discontinued operations
    
    
    
    
    
    
    0.05
    
    
    
    Total
    
    $
    1.55
    
    
    $
    1.25
    
    
    $
    1.00Diluted earnings per share:Continuing operations
    
    $
    1.49
    
    
    $
    1.20
    
    
    $
    1.00Discontinued operations
    
    
    
    
    
    
    0.05
    
    
    
    Total
    
    $
    1.49
    
    
    $
    1.25
    
    
    $
    1.00Weighted average number of common shares outstanding:Basic
    
    
    11,009
    
    
    
    10,181
    
    
    
    10,118Diluted
    
    
    11,477
    
    
    
    10,206
    
    
    
    10,141
 The accompanying notes are an integral part of these consolidated financial statements. 55




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##### Table of Contents



ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY  UnearnedCommon Stock
    
    Additional
    
    
    
    
    
    Accumulated
    
    Treasury Stock
    
    Compensation
    
    TotalPaid-In
    
    Retained
    
    Comprehensive
    
    
    
    - Restricted
    
    Shareholders'Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    Shares
    
    Amount
    
    Stock
    
    EquityBalance as of July 1, 2001
    
    
    10,047,120
    
    
    $
    100
    
    
    $
    23,288
    
    
    $
    35,356
    
    
    ($
    1,311
    )
    
    
    211,400
    
    
    ($
    2,707
    )
    
    $
    
    
    
    $
    54,726Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,113Change in fair value of interest-rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,346Stock options exercised and related tax benefit
    
    
    133,468
    
    
    
    2
    
    
    
    1,065
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,067Balance as of June 30, 2002
    
    
    10,180,588
    
    
    
    102
    
    
    
    24,353
    
    
    
    45,469
    
    
    
    (1,078
    )
    
    
    211,400
    
    
    
    (2,707
    )
    
    
    
    
    
    
    66,139Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,775Change in fair value of interest-rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,836Stock options exercised and related tax benefit
    
    
    625
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Restricted stock
    
    
    2,500
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    2Balance as of June 30, 2003
    
    
    10,183,713
    
    
    
    102
    
    
    
    24,385
    
    
    
    58,244
    
    
    
    (1,017
    )
    
    
    211,400
    
    
    
    (2,707
    )
    
    
    (23
    )
    
    
    78,984Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,052
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,052Change in fair value of interest-rate swaps,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    847
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    847Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,899Stock options exercised and related tax benefit
    
    
    504,827
    
    
    
    5
    
    
    
    7,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,689Restricted stock
    
    
    207,175
    
    
    
    2
    
    
    
    2,602
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,040
    )
    
    
    564Stock offering
    
    
    2,411,622
    
    
    
    24
    
    
    
    61,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,294Balance as of June 30, 2004
    
    
    13,307,337
    
    
    $
    133
    
    
    $
    95,941
    
    
    $
    75,296
    
    
    ($
    170
    )
    
    
    211,400
    
    
    ($
    2,707
    )
    
    ($
    2,063
    )
    
    $
    166,430
 The accompanying notes are an integral part of this consolidated financial statement. 56




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ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  Year Ended June 30,2004
    
    2003
    
    2002Cash flows from operating activities:Net income
    
    $
    17,052
    
    
    $
    12,775
    
    
    $
    10,113Less: Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    499
    
    
    
    Income from continuing operations
    
    
    17,052
    
    
    
    12,276
    
    
    
    10,113Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    11,456
    
    
    
    12,389
    
    
    
    14,750Provision for loan losses
    
    
    24,280
    
    
    
    22,772
    
    
    
    22,064Provision for doubtful accounts
    
    
    (21
    )
    
    
    120
    
    
    
    Restructuring charge
    
    
    
    
    
    
    
    
    
    
    (163
    )Loss on disposal of property and equipment
    
    
    781
    
    
    
    634
    
    
    
    688Loss on investment in ePacific
    
    
    
    
    
    
    703
    
    
    
    Deferred income taxes
    
    
    (305
    )
    
    
    5,818
    
    
    
    1,443Deferred revenue
    
    
    (2,009
    )
    
    
    (2,217
    )
    
    
    (2,182
    )Compensation on restricted stock grants
    
    
    562
    
    
    
    2
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    3,919
    
    
    
    (757
    )
    
    
    (5,374
    )Loans receivable
    
    
    (20,961
    )
    
    
    (15,483
    )
    
    
    (24,894
    )Prepaid expenses, inventories and other current assets
    
    
    1,104
    
    
    
    (3,917
    )
    
    
    138Other assets
    
    
    2,258
    
    
    
    (10,888
    )
    
    
    (4,453
    )Accounts payable, accrued liabilities, and other liabilities
    
    
    (12,479
    )
    
    
    13,279
    
    
    
    6,260Net cash provided by operating activities
    
    
    25,637
    
    
    
    34,731
    
    
    
    18,390Cash flows from investing activities:Purchases of property and equipment, net
    
    
    (7,950
    )
    
    
    (4,771
    )
    
    
    (7,127
    )Intangible assets acquired
    
    
    (6,403
    )
    
    
    (673
    )
    
    
    (1,177
    )Net cash used by investing activities
    
    
    (14,353
    )
    
    
    (5,444
    )
    
    
    (8,304
    )Cash flows from financing activities:Net decrease in money orders payable
    
    
    (2,389
    )
    
    
    (6,533
    )
    
    
    (3,511
    )Net repayments of revolving advances
    
    
    (23,900
    )
    
    
    (13,600
    )
    
    
    (12,300
    )Net repayments of term advances
    
    
    (38,269
    )
    
    
    (10,081
    )
    
    
    (4,650
    )Net borrowings (repayments) of notes payable
    
    
    (780
    )
    
    
    (576
    )
    
    
    386Payments of senior secured notes payable
    
    
    
    
    
    
    (8,000
    )
    
    
    (4,000
    )Proceeds from stock options exercised
    
    
    7,689
    
    
    
    7
    
    
    
    1,067Proceeds from restricted stock
    
    
    2
    
    
    
    
    
    
    
    Proceeds from stock offering
    
    
    61,294
    
    
    
    
    
    
    
    Net cash provided (used) by financing activities
    
    
    3,647
    
    
    
    (38,783
    )
    
    
    (23,008

    )Cash provided (used) by continuing operations
    
    
    14,931
    
    
    
    (9,496
    )
    
    
    (12,922
    )Cash provided by sale of discontinued operations
    
    
    
    
    
    
    1,342
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    14,931
    
    
    
    (8,154
    )
    
    
    (12,922
    )Cash and cash equivalents, beginning of year
    
    
    108,110
    
    
    
    116,264
    
    
    
    129,186Cash and cash equivalents, end of year
    
    $
    123,041
    
    
    $
    108,110
    
    
    $
    116,264Supplemental disclosures of cash flows information:Interest paid
    
    $
    9,943
    
    
    $
    15,391
    
    
    $
    12,292Income taxes paid
    
    $
    7,403
    
    
    $
    5,309
    
    
    $
    3,871
 The accompanying notes are an integral part of these consolidated financial statements. 57




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ACE CASH EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations Ace Cash Express, Inc. (the Company or ACE or we or us) was
incorporated under the laws of the state of Texas in March 1982. We operate in
one line of business with two segments (company-owned and franchised
operations) and provide retail financial services, such as check-cashing;
small, short-term consumer loans; third-party bill-payments; money orders; wire
transfers; and other transactional services to customers for a fee. On June
30, 2004, we owned and operated 1,026 stores and had 204 franchised stores, for
a total network of 1,230 stores in 36 states and the District of Columbia. Principles of Consolidation The consolidated financial statements include the accounts of ACE and our
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Use of Estimates The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In applying the accounting principles, we must
often make individual estimates and assumptions regarding expected outcomes or
uncertainties. As might be expected, the actual results or outcomes are
generally different than the estimated or assumed amounts. These differences
are usually minor and are included in our consolidated financial statements as
soon as they are known. Estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates. Actual results related to the estimates and assumptions made in preparing our
consolidated financial statements will emerge over periods of time, such as
estimates and assumptions underlying the determination of allowance for loan
losses and self-insurance liabilities. These estimates and assumptions are
monitored and periodically adjusted as circumstances warrant. For instance, our
liability for self-insurance related to workers compensation, general
liability and medical liability may be adjusted based on higher or lower actual
loss experience. Although there is greater risk with respect to the accuracy of
these estimates and assumptions because of the period over which actual results
may emerge, such risk is mitigated by the ability to make changes to these
estimates and assumptions over the same period. We periodically review the carrying value of goodwill and other intangible
assets when events and circumstances warrant such a review. One of the methods
used for this review is performed using estimates of future cash flows. If the
carrying value of goodwill or other intangible assets is considered impaired,
an impairment charge is recorded for the amount by which the carrying value of
the goodwill or intangible assets exceeds its fair value. We believe that the
estimates of future cash flows and fair value are reasonable. Changes in
estimates of such cash flows and fair value, however, could affect the
evaluation. Based on an assessment of our accounting policies and the underlying judgments
and uncertainties affecting the application of those policies, we believe that
our consolidated financial statements provide a meaningful and fair perspective
of us. We do not suggest that other risk factors, such as those discussed
elsewhere or incorporated by reference in this prospectus as well as changes in
growth objectives, could not adversely impact our consolidated financial
position, results of operations and cash flows in future periods. Revenue Recognition Policy All of our store transactions are processed through our point-of-sale system.
Approximately 97% of our revenue results from transactions at the point-of-sale
with our customers, and approximately 66% of our revenue is effectively
recognized when the transaction is completed at the point-of-sale. These
transactions include check cashing, bill payment, money transfer, money order
sales, and other miscellaneous products and services grouped in other fees.
We act in an agency capacity regarding some of the products and services
offered and sold at our stores, and therefore record as revenue the amounts
received from customers less amounts remitted to the provider. 58




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We recognize contractual revenue guarantees from product or service providers
in accordance with the terms of the contracts under which they are paid. We
amortize any bonus or incentive payments from product or service providers over
the term or duration of the contracts under which they are made. For short-term or payday loans made by us, for the Republic Loans (as defined
below) for which we act only as marketing agent and servicer for a fee from the
lender, and, during the fiscal year ended June 30, 2003, for our participation
interests in Goleta Loans (as defined below), revenue constituting loan fees
and interest (whether paid by the customer or the lender) is recognized ratably
over the term of each loan, which is generally 14 days. Franchise revenue consists of up-front franchise fees charged for opening the
franchised store and on-going royalty fees. Franchise fees, which are the
initial fees paid by the franchisees, are recognized when the franchised
location has been identified, the lease has been obtained, the training has
occurred, the building has been built or leasehold improvements have been
completed, the proprietary point-of-sale system has been installed and the
store has been opened. Franchise royalty fees, which are the greater of a
minimum fee or a percentage of each franchisees actual revenues, are
recognized and payable monthly. The components of revenue are as follows: Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Check cashing
    
    $
    129,194
    
    
    $
    125,703
    
    
    $
    118,907Short-term consumer loans
    
    
    77,029
    
    
    
    70,806
    
    
    
    74,197Bill payments
    
    
    16,960
    
    
    
    13,507
    
    
    
    10,156Money transfers
    
    
    11,136
    
    
    
    10,898
    
    
    
    10,998Money orders
    
    
    6,330
    
    
    
    6,960
    
    
    
    7,554Franchising
    
    
    2,774
    
    
    
    2,346
    
    
    
    2,199Other services
    
    
    3,236
    
    
    
    4,069
    
    
    
    5,255Total revenue
    
    $
    246,659
    
    
    $
    234,289
    
    
    $
    229,266
 Cash and Cash Equivalents We consider all highly-liquid investment securities purchased with an original
maturity of three months or less from the date of purchase to be cash
equivalents. Accounts Receivable, Net Accounts receivable, net, on the consolidated balance sheets as of June 30,
2004 and 2003 were $5.6 million and $9.4 million, respectively, and include the
receivable for fees payable by Republic Bank, the receivable for incentive
payments under the agreement with MoneyGram Payment Systems, Inc., and other
miscellaneous receivables net of an allowance for doubtful accounts of $0.8
million and $0.7 million as of June 30, 2004 and 2003, respectively. Accounts
receivable, net, as of June 30, 2003 also included the receivable for the
insurance settlement related to the Goleta Loan-related lawsuits of $4.7
million. Investments During fiscal 2000, we invested $1 million in ePacific Incorporated
(ePacific) and purchased approximately 14% of their Series A Convertible
Preferred Stock. ePacific was a private company in the business of providing
customized debit-card payment systems and electronic funds transfer processing
services. This investment, which was carried at cost, was included in other
non-current assets on the consolidated balance sheets. On June 2, 2003, the board of directors of ePacific elected to dissolve the
corporation and liquidate its assets. As a result, we received a cash
distribution of $297,000 and recorded a loss on the investment of $703,000. Loans Receivable, Net Until December 31, 2002, we were a party to a Master Loan Agency Agreement and
ancillary agreements (the Goleta Agreement with Goleta National Bank
(Goleta), a national bank located in Goleta, California. Under the Goleta
Agreement, short-term loans made by Goleta (Goleta Loans) were offered at
most of our owned stores. A Goleta Loan could be up to $500 and had to be
repaid or renewed in 14 days. Under the Goleta Agreement, we purchased from
Goleta a participation representing 90% of each Goleta Loan made on a previous
day. Goleta determined the interest rate (and other 59




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terms) of the Goleta Loans. Interest equal to $17 per $100 of Goleta Loan was
charged by Goleta for each 14-day period. As of January 1, 2003, we no longer
offered Goleta Loans at any of our stores. Since January 1, 2003, all of the short-term loan products or similar services,
also known as payday loans, offered at our stores have consisted of either (1)
short-term loans or deferred-deposit services made or entered into by us,
(sometimes called ACE Loans in these Notes), or (2) deferred-deposit loans or
services (Republic Loans) made or entered into by Republic Bank & Trust
Company, a Kentucky state-chartered bank (Republic Bank). As of June 30,
2004, we were offering our ACE Loans in 561 of our owned stores, and Republic
Bank was offering Republic Loans in 359 of our owned stores in Texas,
Pennsylvania, and Arkansas. All of these loans and services, regardless of
type, are made in accordance with state regulations; therefore, the terms of
the loans and services vary from state to state. In general, ACE Loans consist of providing a customer cash in exchange for the
customers check or an Automated Clearinghouse (ACH) authorization to debit
the customers bank account, along with an agreement to defer the presentment
or deposit of that check or the initiation of that ACH debit on the customers
account, as the case may be, until the deferred presentment date. The amount
of the customers check or ACH authorization is the amount of the cash provided
to the customer plus a fee to us. The term of the deferral of the check
presentment or ACH debit is typically two to four weeks. During the year ended
June 30, 2004, the average amount of cash provided to a customer in such a
transaction was $269, and the average fee to us was $39.40. As of June 30,
2004 and 2003, the gross receivable for our ACE Loans was approximately $27.7
million and $20.2 million, respectively. The Republic Loans are offered and made at our owned stores in accordance with
a Marketing and Servicing Agreement dated as of October 21, 2002, as amended
(the Republic Bank Agreement), which is scheduled to continue until January
1, 2006. The terms of the Republic Loans are generally similar to those of our
ACE Loans, though Republic Bank has sole discretion regarding the terms of the
Republic Loans. As of June 30, 2004, Republic Bank authorized loans up to $425
with a term of 14 days, and the interest charged by Republic Bank was $17.64
per $100 of loan value. Under the Republic Bank Agreement, Republic Bank pays us an agency fee for our
services in marketing or processing the Republic Loans at the stores and in
collecting outstanding Republic Loans. We do not acquire or own any
participation interest in any of the Republic Loans, but our fees are subject
to reduction by the losses from uncollected Republic Loans. The maximum
potential future payments that we could be obligated to make under the Republic
Bank Agreement are the total outstanding Republic Loans recorded on Republic
Banks financial statements, which were $9.4 million as of June 30, 2004 and
$10.4 million as of June 30, 2003. Loan fees and interest include our interest and fees received from our
participation interests in Goleta Loans, our fees and interest received from
customers of our ACE Loans, and our agency fees received from Republic Bank
related to Republic Loans. Loan fees and interest revenues are recognized
ratably over the term of each loan, regardless of the type of revenue or loan. We have established a loan loss allowance regarding our economic interests in
our ACE Loans and (until June 30, 2003) in the Goleta Loans. Our policy for
determining the loan loss allowance is based on historical loan loss experience
generally, as well as the results of our managements review and analysis of
the payment and collection of the loans within the last fiscal quarter. Our
policy is to charge off interests in all of our ACE Loans and Goleta Loans that
are 180 days or more past due. Charge-offs are applied as a reduction to the
allowance for loan losses and any recoveries of previously charged off loans
are applied as an increase to the allowance for loan losses. We establish a
payable to Republic Bank to reflect our obligation to, in effect, bear all
Republic Loan losses; that payable estimates such losses from such loans that
are 180 days or more past due. Our policy in establishing the payable
regarding Republic Loan losses is substantially the same as our policy
regarding the loan loss allowance for the other types of loans. Loans receivable, net, on the consolidated balance sheets as June 30, 2004 and
2003 were $17.0 million and $13.0 million, respectively, which includes
receivables for our short-term consumer loans (but not regarding any Republic
Loans, because we do not own any interest in those loans). The loan loss
allowance of $10.6 million and $8.7 million as of June 30, 2004 and 2003,
respectively, represented 38.3% and 40.2% of the gross loans receivable as of
that date. Net loan charge-offs for the years ended June 30, 2004 and 2003,
were $15.0 million and $22.8 million, respectively. 60




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Inventories Inventories consist of postage stamps, bus passes, and other inventory.
Postage stamps are stated at purchase price and accounted for using the
specific identification method. Other inventories are stated at cost and
utilize the first-in, first-out method. June 30,2004
    
    2003(in thousands)Postage stamp inventory
    
    $
    444
    
    
    $
    444Bus pass inventory
    
    
    178
    
    
    
    121Other inventory
    
    
    156
    
    
    
    103$
    778
    
    
    $
    668
 Property and Equipment Depreciation of property and equipment is based on the lesser of the estimated
useful lives of the respective assets or the lease terms. The useful lives of
property and equipment by class are as follows: store equipment and furniture
and fixtures, five to ten years; leasehold improvements, ten years; signs,
eight years; and other property and equipment, five to ten years. Depreciation
is calculated on a straight-line basis. Software Development Costs We expense costs incurred in the preliminary project stages, and thereafter
capitalize costs incurred in the developing or obtaining, of internal use
software, including external direct costs of materials and services, as well as
payroll and payroll-related costs. We capitalized $0.6 million for software
development costs for each of the years ended June 30, 2004 and 2003. The net
book value of capitalized software development costs was $1.8 million and $2.7
million at June 30, 2004 and 2003, respectively. Accounting for Impairment of Long-lived Assets We evaluate all long-lived assets, including intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. Impairment is recognized when the carrying amounts of
such assets cannot be recovered by the undiscounted net cash flows they will
generate. Intangible Assets Goodwill represents the excess of purchase price over identified net assets
acquired on company-owned stores. We review goodwill annually for possible
impairment. During the years ended June 30, 2004, 2003, and 2002, we completed
our annual reviews and determined that the fair value of the company-owned
stores reporting unit exceeded the carrying value, and as a result no
impairment loss has been recorded. Covenants not to compete are amortized over
the applicable period of the contract, generally ranging from two to five
years. Deferred Borrowing Costs Deferred borrowing costs are amortized over the term of the corresponding
financing arrangement. Amortization expenses related to deferred borrowing
costs for the years ended June 30, 2004, 2003, and 2002 were $2.3 million, $3.8
million, and $5.8 million, respectively. The deferred borrowing cost balances
at June 30, 2004 and 2003 were $3.9 million and $10.5 million, net of
accumulated amortization of $2.7 million and $1.4 million, respectively.
Deferred borrowing costs are reflected in other current and other non-current
assets in the accompanying consolidated balance sheets. In connection with our
stock offering in April 2003, we repaid our term advances and wrote-off
deferred borrowing costs of $4.1 million, which was recorded as a loss on early
extinguishment of debt. Store Expenses The direct costs incurred in operating the stores and our self-service machines
(SSMs) have been classified as store expenses and are deducted from total
revenue to determine contribution attributable to the stores. Store expenses
include salary and benefit expense of store employees, rent and other occupancy
costs, depreciation of store property, bank charges, armored and security
costs, loan losses, net returned checks, cash shortages, and other costs
incurred by the stores and for the SSMs (whether or not located in a store). 61




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Returned Checks We charge operations for losses on returned checks in the period such checks
are returned. We credit recoveries on returned checks in the period the
recovery is received. Advertising Costs Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expenses were $2.9 million, $1.2 million, and $0.9
million in the years ended June 30, 2004, 2003 and 2002, respectively. Derivative Instruments and Hedging Activities Our objective in managing our exposure to fluctuations in interest rates is to
decrease the volatility of earnings and cash flows associated with changes in
the applicable rates. To achieve this objective, we have entered into
interest-rate swap agreements. The interest-rate swaps are derivative
instruments related to forecasted transactions and are considered to hedge
future cash flows. The effective portion of any gains or losses are included in
accumulated comprehensive income (loss) until earnings are affected by the
variability of cash flows. Any ineffective portion is recognized currently
into earnings. The cash flows of the interest-rate swaps are expected to be
highly effective in achieving offsetting cash flows attributable to
fluctuations in the cash flows of the floating-rate revolving loan facility and
floating-rate term loan notes. If it becomes probable that a forecasted
transaction will no longer occur, the interest-rate swap will continue to be
carried on the balance sheet at fair value, and gains or losses that were
deferred in accumulated comprehensive income (loss) will be recognized
immediately into earnings. If the interest-rate swaps are terminated prior to
their expiration dates, any cumulative gains and losses will be deferred and
recognized into earnings over the remaining life of the underlying exposure.
If the hedged liabilities are to be sold or extinguished, we will recognize the
gain or loss on the designated financial instruments currently into earnings. We use the cumulative approach to assess effectiveness of the cash flow hedges.
The measurement of hedge ineffectiveness is based on the cumulative dollar
offset method. Under this method, we compare the changes in the floating rate
component of the cash flow hedge to the floating rate cash flows of the
revolving loan facility and the term loan notes. Changes in the fair value of
the effective cash flow hedges are recorded in accumulated comprehensive income
(loss). The effective portion that has been deferred in accumulated
comprehensive income (loss) will be reclassified to earnings when the hedged
items impact earnings. The associated underlying hedged liability has equaled or exceeded the notional
amount for each of our interest-rate swaps throughout the existence of the
interest-rate swaps, and we anticipate that it will continue to do so with
respect to the swaps in effect as of June 30, 2004. The interest-rate swaps
are based on the same index as their respective underlying debt. The
interest-rate swaps to date have been highly effective in achieving offsetting
cash flows attributable to the fluctuations in the cash flows of the hedged
risk, and no amount has been required to be reclassified from accumulated
comprehensive income (loss) into earnings for hedge ineffectiveness or due to
excluding a portion of the value from measuring effectiveness during the years
ended June 30, 2004, 2003 or 2002. The last of the original four interest rate swaps (corresponding to
indebtedness under our bank credit agreement effective before March 31, 2003)
expired as of January 1, 2003. We entered into two new interest-rate swaps
during the fourth quarter of fiscal 2003, corresponding to our
revolving-advance indebtedness under our bank credit agreement effective March
31, 2003 and our term notes under our note purchase agreement effective March
31, 2003. The interest-rate swap corresponding to the term notes was
terminated when we repaid those notes in the fourth quarter of fiscal 2004. The interest-rate swaps resulted in an increase of interest expense of $0.4
million, $1.9 million and $3.2 million for the years ended June 30, 2004, 2003
and 2002, respectively. The average notional amounts and the related effective
swap interest rates for the years ended June 30, 2004 and 2003 are as follows: June 30, 2004
    
    June 30, 2003Effective
    
    
    
    
    
    EffectiveAverage
    
    Swap
    
    Average
    
    SwapNotional
    
    Interest
    
    Notional
    
    InterestCorresponding Debt
    
    Amount
    
    Rate
    
    Amount
    
    Rate(in millions)Revolving advance
    
    $
    58
    
    
    
    4.715
    %
    
    $
    60
    
    
    
    4.32
    %Term loan notes (expired)
    
    $
    
    
    
    
    
    %
    
    $
    20
    
    
    
    14.47
    %
 62




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##### Table of Contents



The fair value of the interest-rate swaps increased by $847,000 and $61,000,
net of tax, during the years ended June 30, 2004 and 2003, respectively, which
have been recorded in accumulated other comprehensive loss. The estimated net
amount of existing losses expected to be reclassified into earnings during the
next fiscal year is $105,000. Accumulated comprehensive loss balances related to the interest-rate swaps are
as follows (in thousands): Change in Accumulated OtherAccumulated Other Comprehensive
    
    Comprehensive Income (Loss) for the YearIncome (Loss), Net of Tax, as of June 30,
    
    Ended June 30,Corresponding Debt
    
    2004
    
    2003
    
    2002
    
    2004
    
    2003Revolving advance (expired)
    
    $
    
    
    
    $
    
    
    
    $
    (1,078
    )
    
    $
    
    
    
    $
    1,078Revolving advance
    
    
    (170
    )
    
    
    (925
    )
    
    
    
    
    
    
    755
    
    
    
    (925
    )Term loan notes
    
    
    
    
    
    
    (92
    )
    
    
    
    
    
    
    92
    
    
    
    (92
    )$
    (170
    )
    
    
    ($1,017
    )
    
    

    ($1,078
    )
    
    $
    847
    
    
    $
    61
 The accumulated comprehensive loss as of June 30, 2004 and 2003 is net of a tax
benefit of $113,000 and $678,000, respectively. A summary of comprehensive income for the years ended June 30, 2004, 2003, and
2002 is presented below: Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Net income
    
    $
    17,052
    
    
    $
    12,775
    
    
    $
    10,113Other comprehensive income:Unrealized gain on hedging instruments
before tax expense
    
    
    1,412
    
    
    
    102
    
    
    
    388Tax expense
    
    
    (565
    )
    
    
    (41
    )
    
    
    (155
    )Unrealized gain on hedging instruments net
of the tax expense
    
    
    847
    
    
    
    61
    
    
    
    233Comprehensive income
    
    $
    17,899
    
    
    $
    12,836
    
    
    $
    10,346
 Franchise Accounting Franchise fees are included in revenue. Franchise fees generally include
initial fees (initial fees) and future optional, exclusive store fees
(optional fees) as well as continuing franchise fees (royalty fees). Initial fees are recognized when we have provided substantially all of our
initial services in accordance with the franchise agreements. Generally, this
occurs when the franchise location has been identified, the lease has been
obtained, training has occurred, the building has been built or leasehold
improvements have been completed, the proprietary point-of-sale system has been
installed and the store has been opened. Optional fees for providing exclusive
arrangements until the franchisee opens the store are recognized either when
the option expires or when the commitments pursuant to the option are
completed. Franchise royalty fees, which are the greater of a minimum fee or
a percentage of each franchisees actual revenues, are recognized and payable
monthly. The following table presents the components of franchise fees recognized in
revenues for the years ended June 30, 2004, 2003, and 2002: June 30,2004
    
    2003
    
    2002(in thousands)Initial fees and option to purchase
fees
    
    $
    567
    
    
    $
    265
    
    
    $
    320Royalty fees
    
    
    2,205
    
    
    
    2,074
    
    
    
    1,872Other
    
    
    2
    
    
    
    7
    
    
    
    7Total franchise revenue
    
    $
    2,774
    
    
    $
    2,346
    
    
    $
    2,199
 Cash payments received under franchise agreements prior to the completion of
the earnings process are deferred until the initial and optional fees are
recognized in accordance with the preceding paragraph. As of June 30, 2004 and
2003, approximately $440,000 and $268,000, respectively, of deferred franchise
fees are recorded in other current and other non-current liabilities in the
accompanying consolidated balance sheets. 63




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##### Table of Contents



Income Taxes We provide deferred taxes for temporary differences between the tax and
financial reporting bases of assets and liabilities at the rate expected to be
in effect when the taxes become payable. Earnings Per Share Earnings per share have been computed based on the weighted average number of
common and dilutive shares outstanding for the respective periods. Dilutive
shares include employee and non-employee director stock options. Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share are
computed by dividing net income by the weighted average number of common shares
outstanding, after adjusting for the dilutive effect of stock options.
Restricted stock that has been granted and not forfeited to or repurchased by
us is included in common shares outstanding for both calculations. The
following table presents the reconciliation of the numerator and denominator
used in the calculation of basic and diluted earnings per share: Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Income from continuing operations
    
    $
    17,052
    
    
    $
    12,276
    
    
    $
    10,113Gain on sale of discontinued operations, net of tax
    
    
    
    
    
    
    499
    
    
    
    Net income
    
    $
    17,052
    
    
    $
    12,775
    
    
    $
    10,113Reconciliation of denominator:Weighted average number of common shares
outstanding  basic
    
    
    11,009
    
    
    
    10,181
    
    
    
    10,118Effect of dilutive stock options
    
    
    468
    
    
    
    25
    
    
    
    23Weighted average number of common and
dilutive shares outstanding  diluted
    
    
    11,477
    
    
    
    10,206
    
    
    
    10,141
 For fiscal years ended June 30, 2004, 2003, and 2002, options to purchase
11,250, 1,179,121, and 1,275,818 shares of common stock, respectively, were not
included in the computation of diluted earnings per share because the exercise
prices of those options were greater than the average market price of the
common stock and, therefore, the effect would be anti-dilutive. Fair Value of Financial Instruments The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced sale or liquidation. The amounts reported in the
consolidated balance sheets for trade receivables, trade payables, notes
receivable, revolving advances, money order payable, and notes payable all
approximate fair value. Reclassifications Certain prior year amounts have been reclassified to conform with the current
year presentation. Stock Incentive Plans At June 30, 2004, we sponsored one employee stock incentive plan and one
non-employee director stock incentive plan, both of which permit the grant of
stock options and restricted stock. We account for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. 64




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The following table presents restricted stock granted and forfeited under both
the employee stock incentive plan and the non-employee director stock incentive
plan, along with the corresponding stock-based compensation cost reflected in
our reported net income for the years ended June 30, 2004 and 2003: Year Ended June 30,2004
    
    2003Number of shares of restricted stock granted:- Employee stock incentive plan
    
    
    199,075
    
    
    
    2,500- Non-employee stock incentive plan
    
    
    8,750
    
    
    
    207,825
    
    
    
    2,500Number of shares of restricted stock forfeited:- Employee stock incentive plan
    
    
    (650
    )
    
    
    - Non-employee stock incentive plan
    
    
    
    
    
    
    (650
    )
    
    
    Stock-based compensation expense for restricted stock grants:- Employee stock incentive plan
    
    $
    530,000
    
    
    $
    2,000- Non-employee director stock incentive plan
    
    
    33,000
    
    
    
    $
    563,000
    
    
    $
    2,000
 No other stock-based employee compensation is reflected in our reported net
income, because all stock options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation. Year Ended June 30,2004
    
    2003
    
    2002(in thousands, except per share amounts)Net income, as reported
    
    $
    17,052
    
    
    $
    12,775
    
    
    $
    10,113Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of

related tax effects
    
    
    (855
    )
    
    
    (1,158
    )
    
    
    (1,306
    )Deduct: Total stock-based non-employee director compensation
expense determined under fair value based methods for all
awards,
net of related tax effects
    
    
    (40
    )
    
    
    (65
    )
    
    
    (78
    )Pro forma net income
    
    $
    16,157
    
    
    $
    11,552
    
    
    $
    8,729Earnings per share:Basic as reported
    
    $
    1.55
    
    
    $
    1.25
    
    
    $
    1.00Basic  pro forma
    
    $
    1.47
    
    
    $
    1.13
    
    
    $
    0.86Diluted  as reported
    
    $
    1.49
    
    
    $
    1.25
    
    
    $
    1.00Diluted  pro forma
    
    $
    1.41
    
    
    $
    1.13
    
    
    $
    0.86
 The weighted average fair value of each employee option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal 2004, 2003,
and 2002, respectively: expected volatility of 46%, 46%, and 49%, expected
lives of 4.5, 6.2, and 6.7 years; risk-free interest rates of 3.9%, 3.3%, and
4.6% and no expected dividends. The weighted average fair value of each non-employee director option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in fiscal 2004,
2003, and 2002, respectively: expected volatility of 46%, 46%, and 49%;
expected lives of 4.7, 5.0, and 5.0 years; risk-free interest rates of 3.9%,
3.3%, and 4.6%; and no expected dividends. 2. OPERATING SEGMENTS Our reportable segments are strategic business units that differentiate between
company-owned and franchised stores. Company-owned store revenue is generated
from store customer-transaction processing, and franchised store revenue is 65




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generated from the franchise fees charged for opening the store and on-going
royalty fees. The accounting policies of the segments are those described in
the summary of significant accounting policies above. Segment information for the years ended June 30, 2004, 2003, and 2002 was as
follows: Company-owned
    
    Franchised
    
    Other
    
    Total(in thousands, except for number of stores)Year ended June 30, 2004:Revenue
    
    $
    243,885
    
    
    $
    2,774
    
    
    $
    
    
    
    $
    246,659Gross margin
    
    
    81,865
    
    
    
    2,774
    
    
    
    
    
    
    
    84,639Region, headquarters, franchise expenses
    
    
    (37,932
    )
    
    
    (1,196
    )
    
    
    
    
    
    
    (39,128
    )Other depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (3,893
    )
    
    
    (3,893
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (10,231
    )
    
    
    (10,231
    )Other expenses
    
    
    
    
    
    
    
    
    
    
    (2,965
    )
    
    
    (2,965
    )Income (loss) before taxes
    
    $
    43,933
    
    
    $
    1,578
    
    
    ($
    17,089
    )
    
    $
    28,422Total assets
    
    $
    272,567
    
    
    $
    1,080
    
    
    $
    
    
    
    $
    273,647Number of stores at June 30, 2004
    
    
    1,026
    
    
    
    204
    
    
    
    
    
    
    
    1,230Year ended June 30, 2003:Revenue
    
    $
    231,943
    
    
    $
    2,346
    
    
    $
    
    
    
    $
    234,289Gross margin
    
    
    76,529
    
    
    
    2,346
    
    
    
    
    
    
    
    78,875Region, headquarters, franchise expenses
    
    
    (34,189
    )
    
    
    (1,225
    )
    
    
    
    
    
    
    (35,414
    )Other depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (5,423
    )
    
    
    (5,423
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (16,004
    )
    
    
    (16,004
    )Other expenses
    
    
    
    
    
    
    
    
    
    
    (1,584
    )
    
    
    (1,584
    )Income (loss) before taxes
    
    $
    42,340
    
    
    $
    1,121
    
    
    ($
    23,011
    )
    
    $
    20,450Total assets
    
    $
    258,203
    
    
    $
    565
    
    
    $
    
    
    
    $
    258,768Number of stores at June 30, 2003
    
    
    968
    
    
    
    200
    
    
    
    
    
    
    
    1,168Year ended June 30, 2002:Revenue
    
    $
    227,067
    
    
    $
    2,199
    
    
    $
    
    
    
    $
    229,266Gross margin
    
    
    75,240
    
    
    
    2,199
    
    
    
    
    
    
    
    77,439Region, headquarters, franchise expenses
    
    
    (34,089
    )
    
    
    (993
    )
    
    
    
    
    
    
    (35,082
    )Other depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (7,570
    )
    
    
    (7,570
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (14,934
    )
    
    
    (14,934
    )Other expenses
    
    
    
    
    
    
    
    
    
    
    (2,827
    )
    
    
    (2,827
    )Income (loss) before taxes
    
    $
    41,151
    
    
    $
    1,206
    
    
    $
    (25,331
    )
    
    $
    17,026
 3. FINANCING ARRANGEMENTS AND MONEYGRAM AGREEMENT Payment of Senior Secured Notes On March 31, 2003, immediately before executing our bank credit agreement and
our note purchase agreement (described below), we prepaid the remaining $4
million principal installment of our 9.03% Senior Secured Notes due November
15, 2003 that were issued to Principal Life Insurance Company in November 1996.
The total $4.3 million that we paid to discharge those notes included accrued
and unpaid interest and a prepayment premium of $270,000 under the terms of the
agreement with Principal Life Insurance Company. For the years ended June 30,
2003 and 2002, there was $0.5 million and $0.9 million of interest expense,
respectively, incurred on those notes. Fiscal 2004 Credit Facilities During the year ended June 30, 2004, we were party to:  
    
    a credit agreement with a syndicate of banks led by Wells Fargo Bank
Texas, National Association, as administrative agent for itself and
other lenders, that provided for revolving credit facilities of up to
$175 million; and  
    
    a note purchase agreement with American Capital Financial Services,
Inc., as agent for its affiliate American Capital 66




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##### Table of Contents



Strategies, Ltd., in the amount of $40 million of our senior subordinated
secured promissory notes. These agreements were entered into and became effective on March 31, 2003 and
were amended on June 30, 2003 and October 31, 2003. The credit agreement provided for the following two revolving line-of-credit
facilities that were to expire on March 31, 2006:  
    
    a $120 million primary revolving credit facility available throughout
the three-year term; and  
    
    a $55 million seasonal revolving credit facility available to us
during each calendar-year-end holiday and tax season (i.e., December 1
through March 15) during the three-year term. The revolving line-of-credit facilities included, subject to certain
conditions, a letter-of-credit facility from Wells Fargo Bank of up to $5
million. Borrowings under the credit agreement bore interest at a variable annual
rate equal to, at our discretion, either:  
    
    The sum of (a) the greatest of (i) the prime rate publicly announced
by Wells Fargo Bank, (ii) one percent, plus the rate of interest on the
secondary market for three-month certificates of deposit reported by the
Board of Governors of the Federal Reserve System, multiplied by a
fraction, the numerator of which is one and the denominator of which is
one minus the maximum reserve percentages required by the Board of
Governors to which Wells Fargo Bank is subject for new negotiable
nonpersonal time deposits in dollars of over $100,000 with maturities of
approximately three months plus the annual assessment rate that is
payable by a member of the Bank Insurance Fund classified as well
capitalized, and (iii) the federal funds rate plus 0.5%; plus (b) a
margin that varied from 1.5% to 2.75% per annum based on our
debt-to-EBITDA ratio. (For this ratio, EBITDA is our earnings before
interest, taxes, depreciation and amortization.) This interest rate
adjusted on a daily basis.  
    
    The sum of (a) the London Interbank Offered Rate, or LIBOR, for one-,
two-, three- or six-month maturities (at our discretion), multiplied by
a fraction, the numerator of which is one and the denominator of which
is one minus the maximum reserve percentages required by the Board of
Governors to which Wells Fargo Bank is subject for Eurocurrency funding,
plus (b) a margin that varied from 3.0% to 4.25% per annum based on our
debt-to-EBITDA ratio. This interest rate adjusted, at our discretion, at
one-, two-, three-, or six-month intervals, in accordance with the
corresponding LIBOR.  
    
    The sum of (a) LIBOR for one-month maturities, plus (b) a margin that
varied from 3.0% to 4.25% per annum based on our debt-to-EBITDA ratio.
This interest rate adjusts on a daily basis. We selected the third alternative described above as the annual interest rate
for our borrowings under the credit agreement, and as of June 30, 2004, that
interest rate was 4.375% (calculated using LIBOR plus 3.0%). The note purchase agreement was a private placement of $40 million of our
debt securities. Under the note purchase agreement, we issued four separate $10
million senior subordinated secured notes to American Capital Strategies, Ltd.:
a Series A Note, a Series B Note, a Series C Note and a Series D Note. The
notes varied by interest rates, maturity and payment schedule. The annual interest rates on the outstanding principal amount of the Notes
were:  
    
    Series A Note: LIBOR plus 8%.  
    
    Series B Note: LIBOR plus 10%.  
    
    Series C Note: LIBOR plus 13%.  
    
    Series D Note: LIBOR plus 13.25%. Interest on all of the notes was payable monthly. The unpaid principal amounts of the notes were payable, with accrued and
unpaid interest, as follows:  
    
    Series A Note: eleven quarterly installments of $833,333, payable at
the end of each calendar quarter, beginning June 30, 2003; and all
remaining amounts at maturity on March 31, 2006. 67




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##### Table of Contents




    
    Series B Note: twelve quarterly installments of $125,000, payable at
the end of each calendar quarter, beginning June 30, 2003; seven
quarterly installments of $1,062,500, payable at the end of each
calendar quarter, beginning June 30, 2006; and all remaining amounts at
maturity on March 31, 2008.  
    
    Series C Note: at maturity on March 31, 2009.  
    
    Series D Note: at maturity on March 31, 2010. We were subject to various restrictive covenants in the credit agreement and in
the note purchase agreement that were substantially similar. The covenants
included restrictions on the incurrence of indebtedness from other sources,
advances to or investments in other persons or entities, amounts payable to
settle litigation, the payment of dividends to shareholders and on the
repurchase of shares and the requirement that various financial ratios be
maintained. Certain of the covenants in the credit agreement and in the note
purchase agreement required us to limit our capital expenditures during each
fiscal year to specified amounts and to limit any acquisition of assets or
capital stock of an entity in the retail financial services business. In the fourth quarter of fiscal 2004, we used the net proceeds from our sale of
shares of our common stock in a public offering to repay all of the remaining
amounts due under the term notes issued to American Capital Strategies, Ltd
(see Note 18 below). With that repayment, we also paid a cash prepayment fee
of approximately $700,000. We also incurred a non-cash charge of approximately
$4.1 million related to the write-off of deferred financing fees associated
with those notes. As of June 30, 2004, we had borrowed $60.0 million under our revolving
line-of-credit facility under the credit agreement. The average amount borrowed on our revolving line-of-credit facility was $81.0
million and $96.3 million for the years ended June 30, 2004 and 2003,
respectively. The prime rate effective on June 30, 2004 was 4.25% and LIBOR
effective on that date was 1.375%. As of June 30, 2003, we had borrowed $83.9 million under our revolving
line-of-credit facility under the credit agreement, and there was indebtedness
of $38.3 million outstanding under the term notes to American Capital
Strategies, Ltd. The Prime Rate effective on June 30, 2003 was 4.0%, and LIBOR
effective on that date was 1.125% As described in Note 19 below, on July 30, 2004, we amended and restated the
bank credit agreement and the revolving facilities under that agreement. Swap Agreements To reduce our risk of greater interest expense because of interest-rate
fluctuations, we enter into interest-rate swap agreements from time to time,
which effectively convert a portion of our floating-rate interest obligations
to fixed-rate interest obligations. On April 23, 2003, we entered into an interest-rate swap agreement with JP
Morgan Chase Bank, regarding a notional amount of $60 million, associated with
the revolving advance facility under our bank credit agreement, to be effective
until March 31, 2006. On May 31, 2004, the notional amount was reduced from
$60 million to $30 million and will increase to $45 million on January 1, 2005.
The fixed rate effective on June 30, 2004, prior to adding the applicable
margin, was 1.715%. On June 2, 2003, we entered into an interest-rate swap agreement with National
City Bank regarding a notional amount of $20 million, corresponding to our term
notes, to be effective until March 31, 2006. In May 2004, we paid the notes in
full and terminated the swap agreement. There was no material gain or loss
recorded as a result of the swap termination. The fair value of the interest-rate swaps is ($0.3) million and ($1.7) million
as of June 30, 2004 and 2003, respectively, and is included in other noncurrent
liabilities. 68




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##### Table of Contents



The following table provides summarized data related to the revolving advances
(Revolving Advances) and outstanding indebtedness under the Notes and the
term advances (collectively, Term Advances) under our credit agreements
effective as of June 30, 2004 and 2003: As of and for the Years Ended June 30,Revolving Advances
    
    Term Advances2004
    
    2003
    
    2004
    
    2003(dollars in thousands, except interest rates)Ending balance
    
    $
    60,000
    
    
    $
    83,900
    
    
    $
    
    
    
    $
    38,269Average balance
    
    $
    81,028
    
    
    $
    96,345
    
    
    $
    31,489
    
    
    $
    43,531Interest expense
    
    $
    3,799
    
    
    $
    5,612
    
    
    $
    3,955
    
    
    $
    5,403Swap expense
    
    
    365
    
    
    
    1,901
    
    
    
    40
    
    
    
    Total interest expense
    
    $
    4,164
    
    
    $
    7,512
    
    
    $
    3,995
    
    
    $
    5,403Accrued interest expense
    
    $
    121
    
    
    $
    9
    
    
    $
    
    
    
    $
    412Weighted average interest rate:Excluding swap expense
    
    
    4.81
    %
    
    
    5.82
    %
    
    
    12.92
    %
    
    
    12.41
    %Including swap expense
    
    
    5.30
    %
    
    
    7.80
    %
    
    
    12.79
    %
    
    
    12.41
    %Unused advance commitment fees
    
    $
    241
    
    
    $
    185
    
    
    $
    
    
    
    $
    
 The following table provides the information regarding the individual swap
agreements: Interest Rate
Appliesto:
    
    FixedInterestNotional
    
    Swap Agreement Term
    
    To Specific Term
    
    RateBank
    
    Debt
    
    Amount
    
    
    
    
    
    BeforeName
    
    Type
    
    (in millions)
    
    Beginning
    
    Ending
    
    From
    
    To
    
    MarginJP
Morgan Chase Bank
    
    Revolving Advances
    
    $
    60
    
    
    
    4/23/2003
    
    
    
    3/31/2006(Swap
    
    
    
    4/23/2003
    
    
    
    6/30/2003
    
    
    
    1.320
    %$
    60
    
    
    
    
    
    
    
    terminated
    
    
    
    7/1/2003
    
    
    
    5/30/2004
    
    
    
    1.715
    %$
    30
    
    
    
    
    

    
    
    May 26, 2004)
    
    
    
    5/31/2004
    
    
    
    6/30/2004
    
    
    
    1.715
    %$
    30
    
    
    
    
    
    
    
    
    
    
    
    7/1/2004
    
    
    
    12/31/2004
    
    
    
    2.965
    %$
    45
    
    
    
    
    
    
    
    
    
    
    
    1/1/2005
    
    
    
    6/30/2005
    
    
    
    2.965
    %$
    45
    
    
    
    
    
    
    
    
    
    
    
    7/1/2005
    
    
    
    3/31/2006
    
    
    
    3.925
    %National City Bank
    
    TermAdvance
    
    $
    20
    
    
    
    6/2/2003
    
    
    
    3/31/2006
    
    
    
    6/2/2003
    
    
    
    6/30/2003
    
    
    
    1.34
    %$
    20
    
    
    
    
    
    
    
    
    
    
    
    7/1/2003
    
    
    
    3/31/2004
    
    
    
    1.34
    %$
    20
    
    
    
    
    
    
    
    
    
    
    
    4/1/2004
    
    
    
    5/26/2004
    
    
    
    1.34
    %
 Self-Service Machine Funding Arrangements We placed 219 of our self-service check cashing machines in certain retail
offices of H&R Block Tax Services, Inc. (H&R Block) during the 2004 tax
season. In accordance with an existing multi-year license agreement between us
and H&R Block, the self-service machines are made available to cash only tax
refund anticipation loan checks of H&R Block customers. For the 2004 tax season, we had the right to obtain a maximum of $330
million of cash or currency for the self-service machines placed in the H&R
Block retail offices through two arrangements. One of the arrangements,
originally entered into on January 7, 2003 and amended on December 22, 2003,
was with Ace Funding LLC, our wholly owned subsidiary, as borrower, DZ Bank AG
Deutsche Zentral-Genossenschaftsbank Frankfurt am Main, a German bank, as
arranger and liquidity agent, and Autobahn Funding Company LLC, as lender. The
other arrangement, which was entered into on December 30, 2003, was with Texas
Capital Bank, National Association, a national bank that is a subsidiary of
Texas Capital Bancshares, Inc. In accordance with the first amendment to the existing agreement among us,
Ace Funding, DZ Bank and Autobahn Funding, up to a $190 million revolving
line-of-credit facility was made available to Ace Funding to provide the cash
or 69




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##### Table of Contents



currency to certain of the self-service machines in H&R Block retail
offices during the 2004 tax season. For financial reporting purposes, Ace
Funding is our consolidated subsidiary and all borrowings by Ace Funding under
this arrangement, all amounts paid by Ace Funding under this arrangement and
all check cashing fees received by us from the self-service machines subject to
this arrangement will be reflected in our consolidated financial statements. Under the cash services agreement with Texas Capital Bank for the 2004 tax
season, we had available up to $140 million in cash or currency for certain of
the self-service machines in H&R Block retail offices. For the use of Texas
Capital Banks cash, as well as corresponding transportation and custodial
services provided by the bank, we agreed to pay fees to the bank that vary
depending on the volume of checks cashed in the self-service machines and our
use of corresponding services. The cash in the self-service machines, as well
as the cashed checks deposited in the self-service machines in exchange for
that cash, are not our assets but assets of Texas Capital Bank. Under the cash
services agreement, our access to the cash or currency was subject to any need
of the bank for that property for its own business or purposes. We agreed to
maintain, during the term of this agreement (i.e., the 2004 tax season), a
deposit account at Texas Capital Bank of at least $1 million, pledged as
assurance of our performance of our obligations under the cash services
agreement. We are entitled to all of the check cashing fees earned from the
self-service machines subject to this arrangement upon the expiration of this
agreement, subject to and after the payment to the bank of all amounts to which
it is entitled. This agreement expired on March 31, 2004. Notes Payable As of June 30, 2004, there is only one acquisition-related note payable
outstanding, dated November 8, 2001, in the original principal amount of
$200,000. This note is payable in annual installments of $40,000 (including
imputed interest at an interest rate of 8%) until maturity in October 2006. A settlement agreement was entered into regarding the note payable balance of
$856,000 as of June 30, 2003, which was the escrowed portion of the total
purchase price for a 107-store acquisition in November 2000, and from which we
had not authorized the monthly release of $23,778 since June 2001 due to a
pending lawsuit regarding 11 of the acquired locations. As a result, in May
2004, we authorized payment of the $856,000 note payable, which had been held
in escrow and we received a settlement payment of $434,000, which was recorded
in other (income) expenses, net. Notes payable were approximately $0.1 million and $0.9 million as of June 30,
2004 and 2003, respectively. For the years ended June 30, 2004, 2003, and
2002, there was $11,000, $60,000, and $100,000, respectively, included in
interest expense related to the acquisition notes payable. Debt Maturity Schedule Scheduled maturities of debt for the years following June 30, 2004, which
includes acquisition notes payable, are as follows (in thousands): Year Ending June 30:2005
    
    $
    332006
    
    
    362007
    
    
    39Remaining years
    
    
    $
    108
 MoneyGram Agreement We are an agent for the receipt and transmission of wire transfers of money
through the MoneyGram network. In June 2000, we signed a Money Transfer
Agreement with Travelers Express and MoneyGram Payment Systems, Inc. (MPS),
an affiliate of Travelers Express, that became effective on January 1, 2001
(the MoneyGram Agreement). The MoneyGram Agreement provides for a revenue
guarantee on acquired stores for the conversion of wire transfer services to
MoneyGram from another supplier. The amount of the guarantee is equivalent to
the annual aggregate wire transfer revenue for the acquired stores derived from
another supplier. The amount of guarantee revenue, which represents the
difference between the guarantee and our actual wire transfer service revenue
from the acquired stores, under the MoneyGram Agreement and a similar preceding
agreement with MPS for the fiscal years ended June 30, 2004, 2003, and 2002,
was approximately $3.7 million, $3.7 million, and $3.9 million, respectively.
Accounts receivable from MPS related to these guarantees as of June 30, 2004
and 2003 was $0.6 million and $0.8 million, respectively. We agreed to offer and sell only MoneyGram wire transfer services during the
term of the MoneyGram Agreement ending December 31, 2007. We earn commissions
for each transmission and receipt of money through the MoneyGram network 70




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##### Table of Contents



effected at a Company location; those commissions equal varying percentages of
the fees charged by MPS to consumers for the MoneyGram services. Under the MoneyGram Agreement, we are receiving a total of approximately $12.5
million in bonuses, payable in equal monthly installments (without interest)
over the seven-year term. The amount of those monthly installments will be
subject to reduction if we close or sell a significant number of those
locations at which MoneyGram services are offered at the beginning of the
MoneyGram Agreement. In addition, we will be entitled to receive certain
incentive bonuses regarding new MoneyGram service locations that it opens or
acquires during the term of the MoneyGram Agreement. During the fiscal years ended June 30, 2004, 2003, and 2002, $2.6 million, $2.5
million, and $2.5 million, respectively, of revenue was recognized related to
bonuses and incentive bonuses under the MoneyGram Agreement and a similar
preceding agreement with MPS. The total deferred revenue related to these
bonuses and incentive bonuses as of June 30, 2004 and 2003, was $3.3 million
and $3.7 million, respectively and are included in other current and
non-current liabilities in the accompanying consolidated balance sheets. 4. OTHER EXPENSES Other store expenses consisted of the following: Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Returns and
cash shorts
    
    $
    9,350
    
    
    $
    9,896
    
    
    $
    10,390Armored and security
    
    
    7,954
    
    
    
    7,782
    
    
    
    7,708Information
services
    
    
    5,860
    
    
    
    3,831
    
    
    
    1,953Bank charges
    
    
    5,093
    
    
    
    5,314
    
    
    
    5,207Store supplies
    
    
    4,219
    
    
    
    4,063
    
    
    
    3,995Telecommunications
    
    
    2,211
    
    
    
    3,027
    
    
    
    3,845Advertising
and marketing
    
    
    2,072
    
    
    
    564
    
    
    
    159Miscellaneous
    
    
    3,307
    
    
    
    3,715
    
    
    
    3,255$
    40,066
    
    
    $
    38,192
    
    
    $
    36,512
 Other (income) expenses, net, consisted of the following: Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Gain on sale of warrants issued by Netspend
    
    $
    (1,049
    )
    
    $
    
    
    
    $
    Settlements (1)
    
    
    (138
    )
    
    
    5,750
    
    
    
    1,984Insurance recovery resulting from claims related to the
Goleta loan-related lawsuits
    
    
    
    
    
    
    (4,700
    )
    
    
    Gain on sale of stores to franchisees
    
    
    (649
    )
    
    
    (888
    )
    
    
    Store lease buyout (2)
    
    
    (450
    )
    
    
    
    
    
    
    Store closing expense
    
    
    410
    
    
    
    534
    
    
    
    1,029Gain on sale of land in North Carolina
    
    
    (95
    )
    
    
    
    
    
    
    Loss on liquidation of ePacific investment
    
    
    
    
    
    
    703
    
    
    
    Restructure provision
    
    
    
    
    
    
    
    
    
    
    (163
    )Other
    
    
    78
    
    
    
    (85
    )
    
    
    (23
    )($1,893
    )
    
    $
    1,314
    
    
    $
    2,827
  (1)
    
    Fiscal 2004 consists of $106,000 for additional administrative
costs related to the settlement of substantially all claims in the
Goleta loan-related lawsuits, $190,000 for a state regulatory
settlement and the recovery of $434,000 resulting from the settlement
of the Silverman lawsuit. Fiscal 2003 consists of a $5 million
charge for settlement and release of substantially all claims in the
Goleta loan-related lawsuits and payments of $500,000 and $250,000 to
resolve state and federal regulatory matters, respectively.  (2)
    
    We received payment to terminate a store lease in Arizona to
allow another retailer to occupy the location. 71




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5. PREPAID EXPENSES, INVENTORIES, AND OTHER CURRENT ASSETS Prepaid expenses, inventories, and other current assets consisted of the
following: June 30,2004
    
    2003(in thousands)Deferred tax asset
    
    $
    6,903
    
    
    $
    5,493Deferred finance costs
    
    
    1,920
    
    
    
    2,993Prepaid income taxes
    
    
    
    
    
    
    1,143Inventories
    
    
    778
    
    
    
    668Other prepaid invoices
    
    
    1,057
    
    
    
    445$
    10,658
    
    
    $
    10,742
 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: June 30,2004
    
    2003(in thousands)Property and equipment, at cost:Store equipment, furniture, and fixtures
    
    $
    46,702
    
    
    $
    43,251Leasehold improvements
    
    
    26,912
    
    
    
    24,648Signs
    
    
    7,931
    
    
    
    8,102Other property and equipment
    
    
    1,375
    
    
    
    1,50782,920
    
    
    
    77,508Less  accumulated depreciation
    
    
    (52,199
    )
    
    
    (45,156
    )$
    30,721
    
    
    $
    32,352
 Depreciation expense was $8.8 million, $8.2 million, and $8.3 million in fiscal
2004, 2003, and 2002, respectively. 7. GOODWILL AND OTHER INTANGIBLE ASSETS We have two reporting units: (1) company-owned stores and (2) franchised
stores. The franchised stores reporting unit has no intangible assets. We
obtained an independent third-party appraisal of the fair value of the
company-owned stores reporting unit as of July 1, 2001, which indicated that
the fair value of the company-owned stores reporting unit exceeded the carrying
value, and as a result, no impairment loss was recorded. Subsequent annual
impairment tests have also indicated that no impairment exists. Acquisitions The following table provides information concerning the acquisitions made
during the years ended June 30, 2004, 2003, and 2002: Year Ended June 30,2004
    
    2003
    
    2002(in thousands, except number of storesand number of transactions)Number of stores acquired
    
    
    34
    
    
    
    2
    
    
    
    8Number of transactions
    
    
    4
    
    
    
    2
    
    
    
    4Total purchase price
    
    $
    7,937
    
    
    $
    736
    
    
    $
    1,412Amounts allocated to:Goodwill
    
    $
    6,133
    
    
    $
    658
    
    
    $
    1,094Covenants not to compete
    
    
    270
    
    
    
    10
    
    
    
    65Property and equipment
    
    
    511
    
    
    
    50
    
    
    
    135Other assets
    
    
    1,023
    
    
    
    16
    
    
    
    118
 72




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##### Table of Contents



Amortizable Intangible Assets Covenants not to compete are as follows: June 30,2004
    
    2003(in thousands)Covenants not to compete, at cost
    
    $
    2,304
    
    
    $
    2,281Less  accumulated amortization
    
    
    (1,237
    )
    
    
    (1,130
    )$
    1,067
    
    
    $
    1,151
 Covenants not to compete are amortized over the applicable period of the
contract. The weighted-average amortization period is 4.9 years. Total intangible amortization expense for fiscal 2004, 2003, and 2002 was $0.4
million, $0.4 million, and $0.5 million, respectively. Amortization expense related to the covenants not to compete for the year ended
June 30, 2004 and estimated for the five succeeding fiscal years are as
follows: Amortization Expense for Covenants Not to CompeteFor the YearEnded June 30,
    
    Actual
    
    Estimated(in thousands)2004
    
    
    $
    3542005
    
    
    
    
    
    
    $
    3172006
    
    
    
    
    
    
    
    1992007
    
    
    
    
    
    
    
    1492008
    
    
    
    
    
    
    
    1452009
    
    
    
    
    
    
    
    136
 Intangible Assets Not Subject to Amortization Changes in the carrying value of goodwill for the years ended June 30, 2004 and
2003 are as follows: Year Ended June 30,2004
    
    2003(in thousands)Balance, beginning of the year
    
    $
    75,586
    
    
    $
    75,015Goodwill from acquisitions
    
    
    6,133
    
    
    
    663Goodwill written off related to sale of stores in Florida
    
    
    
    
    
    
    (92
    )Balance, end of the year
    
    $
    81,719
    
    
    $
    75,586
 There were no impairment losses for the years ended June 30, 2004, 2003 and
2002. 73




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##### Table of Contents



8. ACCOUNTS PAYABLE, ACCRUED LIABILITIES, AND OTHER LIABILITIES Accounts payable, accrued liabilities and other current liabilities consisted
of the following: June 30,2004
    
    2003(in thousands)Accrued salaries and benefits
    
    $
    9,782
    
    
    $
    7,675Accounts payable  trade
    
    
    8,911
    
    
    
    10,857Money transfer payable

    
    
    2,132
    
    
    
    4,223Deferred revenue
    
    
    1,900
    
    
    
    1,322Income taxes payable
    
    
    1,621
    
    
    
    106Payable to Republic Bank
    
    
    1,584
    
    
    
    6,773Accrued self-service machine write-off
    
    
    1,400
    
    
    
    Interest-rate swap
    
    
    
    
    
    
    398Deferred gain on sale of stores
    
    
    159
    
    
    
    Interest payable
    
    
    138
    
    
    
    423Accrued litigation
    
    
    104
    
    
    
    5,139Restructuring accrual
    
    
    28
    
    
    
    203Other
    
    
    4,919
    
    
    
    3,637$
    32,678
    
    
    $
    40,756
 Other non-current liabilities consisted of the following: June 30,2004
    
    2003(in thousands)Deferred tax liabilities
    
    $
    5,684
    
    
    $
    4,563Deferred revenue
    
    
    3,969
    
    
    
    3,227Interest-rate swap
    
    
    283
    
    
    
    1,297$
    9,936
    
    
    $
    9,087
 9. MONEY ORDER AGREEMENT In April 1998, we signed a money order agreement with Travelers Express
Company, Inc. (Travelers Express), effective December 17, 1998. Under this
agreement, we exclusively sell Travelers Express money orders that bear the ACE
logo. On October 29, 2003, we entered into an amendment to the money order
agreement that extended the term until December 31, 2007. A total of $5 million of bonuses, in addition to earned commissions or fees,
was paid to us over the five-year term of the original agreement. Those
payments were deferred and amortized on a straight-line basis over that term
beginning January 1999. Under the amendment, a signing bonus of approximately
$2 million was paid, and an annual incentive bonus is payable to us on January
1 of each of the four calendar years of the extended term. The first
installment of the annual incentive bonus of $350,000 was received in January,
2004. If the amended money order agreement is terminated under certain circumstances
before the expiration of its extended term, we will be obligated to repay a
portion of the amendment bonus amounts received from Travelers Express. Our
payments and other obligations to Travelers Express under the agreement are
secured by a subordinated lien on our assets. The deferred revenue balances as
of June 30, 2004 and 2003 are $1.8 million and $0.4 million, respectively, and
are included in other current and non-current liabilities in the accompanying
consolidated balance sheets. Revenue of $0.9 million, $1.0 million, and $1.0
million were recognized for the years ended June 30, 2004, 2003 and 2002,
respectively. 10. NETSPEND AGREEMENT In January 2004, in conjunction with an agreement with NetSpend Corporation to
distribute stored-value or debit cards at our stores, we received a warrant to
purchase 1,167,264 shares of the common stock of NetSpend Corporation. In May
2004, we exercised that warrant and sold the acquired shares for a net gain of
approximately $1.0 million. 74




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##### Table of Contents



11. SHAREHOLDERS EQUITY Preferred Stock Under our Articles of Incorporation, our Board of Directors has the power to
authorize the issuance of one or more classes or series of preferred stock and
to fix the designations, powers, preferences and relative, participating,
optional or other rights, if any, and the qualifications, limitations, or
restrictions thereof, if any. At June 30, 2004, 2003 and 2002, one million
shares of preferred stock were authorized with a par value of $1.00, none of
which were issued and outstanding. Stock Incentive Plans Employee Stock Incentive Plan.We sponsor the 1997 Stock Incentive Plan, which
permits the grant of stock options and restricted stock to eligible employees.
The 1987 Stock Option Plan expired during fiscal 1998, though options granted
thereunder continued to be effective, in accordance with their terms, through
November 2002. A total of 2,115,000 shares of our common stock may be issued
upon exercise of options or as restricted stock under the 1997 Stock Incentive
Plan. As of June 30, 2004, there were 1,605,887 shares of Common Stock
reserved for grants of options or restricted stock under the 1997 Stock
Incentive Plan. Options and restricted stock are granted at the sole discretion
of the Board of Directors or its Compensation Committee to selected ACE
employees. Outstanding options are generally exercisable annually in
installments over a three- to four-year period from the date of grant at an
exercise price of not less than the fair market value at the grant date. The
options expire at ten years after date of grant. Restricted stock generally
vests over a three- to five-year period from the date of grant. Exercise
prices for employee options outstanding as of June 30, 2004, ranged from $8.06
to $27.90 (fair market value on dates of grant). The following table provides
certain information with respect to stock options outstanding and exercisable
at June 30, 2004, under the 1997 Stock Incentive Plan: Outstanding
    
    ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-average
    
    average
    
    Stock
    
    averageStock options
    
    exercise
    
    remaining
    
    options
    
    exerciseRange of exercise prices
    
    outstanding
    
    price
    
    contractual life
    
    exercisable
    
    priceUnder $10.00
    
    
    349,197
    
    
    $
    9.31
    
    
    
    7.3
    
    
    
    105,709
    
    
    $
    9.31$10.01  $15.00
    
    
    438,129
    
    
    
    12.78
    
    
    
    6.6
    
    
    
    246,440
    
    
    
    12.78$15.01  $20.00
    
    
    108,750
    
    
    
    17.02
    
    
    
    5.6
    
    
    
    106,250
    
    
    
    16.97$20.01  $30.00
    
    
    11,250
    
    
    
    27.9
    
    
    
    9.8
    
    
    
    
    
    
    
    907,326
    
    
    $
    12.14
    
    
    
    6.8
    
    
    
    458,399
    
    
    $
    12.95
 The weighted average fair value of options granted during the years ended June
30, 2004, 2003, and 2002, calculated using the Black-Scholes option pricing
model, was approximately $6.56 per share, $4.67 per share, and $5.28 per share,
respectively. The number of shares of common stock exercisable under stock
options as of June 30, 2003, and 2002 were 698,180 and 533,455 at a weighted
average exercise price of $12.64 and $12.96, respectively. The following table summarizes stock option and restricted stock activity under
the 1987 Stock Option Plan and the 1997 Stock Incentive Plan: Outstanding
    
    
    
    
    
    WeightedAverageStock
    
    Restricted
    
    Available
    
    Stock OptionReserved
    
    Options
    
    Stock
    
    for Grant
    
    PriceShares at July 1, 2001
    
    
    1,828,453
    
    
    
    1,221,441
    
    
    
    
    
    
    
    607,012
    
    
    $
    12.05Granted
    
    
    
    
    
    
    340,002
    
    
    
    
    
    
    
    (340,002
    )
    
    
    9.58Exercised
    
    
    (95,218
    )
    
    
    (95,218
    )
    
    
    
    
    
    
    
    
    
    
    7.39Canceled
    
    
    (45,645
    )
    
    
    (179,362
    )
    
    
    
    
    
    
    133,717
    
    
    
    10.77Shares at June 30, 2002
    
    
    1,687,590
    
    
    
    1,286,863
    
    
    
    
    
    
    
    400,727
    
    
    
    11.93Granted
    
    
    
    
    
    
    272,100
    
    
    
    2,500
    
    
    
    (274,600
    )
    
    
    9.53Exercised
    
    
    (625
    )
    
    
    (625
    )
    
    
    
    
    
    
    
    
    
    
    8.58Canceled
    
    
    (11,250
    )
    
    
    (228,122
    )
    
    
    
    
    
    
    216,872
    
    
    
    11.26Shares at June 30, 2003
    
    
    1,675,715
    
    
    
    1,330,216
    
    
    
    2,500
    
    
    
    342,999
    
    
    
    11.55Increase in shares
reserved
    
    
    400,000
    
    
    
    
    
    
    
    
    
    
    
    400,000Granted
    
    
    
    
    
    
    138,750
    
    
    
    199,075
    
    
    
    (337,825
    )
    
    
    15.27Exercised
    
    
    (469,828
    )
    
    
    (469,828
    )
    
    
    
    
    
    
    
    
    
    
    11.58Canceled
    
    
    
    
    
    
    (91,812
    )
    
    
    (650
    )
    
    
    92,462
    
    
    
    11.23Shares at June 30, 2004
    
    
    1,605,887
    
    
    
    907,326
    
    
    
    200,925
    
    
    
    497,636
    
    
    $
    12.14
 75




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Non-employee Directors Stock Incentive Plan.We also sponsor the Non-employee
Directors Stock Incentive Plan, which permits the grant of stock options and
restricted stock to our outside directors as part of their compensation. A
total of 260,000 shares of our common stock may be issued upon exercise of
options or as restricted stock under the Non-employee Directors stock Incentive
Plan. Outstanding options are generally exercisable annually in installments
over a three-year period from the date of grant at an exercise price of not
less than the fair market value at the grant date. The options expire five
years after date of grant. Restricted stock generally vests over a three-year
period from the date of grant. Exercise prices for non-employee director options outstanding as of June 30,
2004, ranged from $8.01 to $16.38 (fair market value on dates of grant). The
following table provides certain information with respect to stock options
outstanding and exercisable at June 30, 2004 under the Non-employee Directors
Stock Incentive Plan: Outstanding
    
    ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-average
    
    average
    
    Stock
    
    averageStock options
    
    exercise
    
    remaining
    
    options
    
    exerciseRange of exercise prices
    
    outstanding
    
    price
    
    contractual life
    
    exercisable
    
    priceUnder $10.00
    
    
    45,001
    
    
    $
    8.53
    
    
    
    2.9
    
    
    
    19,996
    
    
    $
    8.73$10.01  $15.00
    
    
    31,250
    
    
    
    11.36
    
    
    
    1.4
    
    
    
    31,250
    
    
    
    11.36$15.01  $20.00
    
    
    10,000
    
    
    
    16.38
    
    
    
    0.4
    
    
    
    10,000
    
    
    
    16.3886,251
    
    
    $
    10.47
    
    
    
    2.1
    
    
    
    61,246
    
    
    $
    11.32
 No stock options were granted during the year ended June 30, 2004. The
weighted average fair value of options granted during the years ended June 30,
2003, and 2002, calculated using the Black-Scholes option pricing model, was
approximately $3.56 per share and $4.37 per share, respectively. The number
of shares of common stock exercisable under stock options as of June 30, 2003,
and 2002 were 76,245 and 79,912 at a weighted average exercise price of $12.94
and $13.08, respectively. The following table summarizes stock option and restricted stock activity under
the Non-employee Directors Stock Incentive Plan: Outstanding
    
    
    
    
    
    WeightedAverageStock
    
    Restricted
    
    Available
    
    Stock OptionReserved
    
    Options
    
    Stock
    
    for Grant
    
    PriceShares at July 1, 2001
    
    
    228,500
    
    
    
    141,500
    
    
    
    
    
    
    
    87,000
    
    
    $
    11.23Granted
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    (25,000
    )
    
    
    9.09Exercised
    
    
    (38,250
    )
    
    
    (38,250
    )
    
    
    
    
    
    
    
    
    
    
    6.58Shares at June 30, 2002
    
    
    190,250
    
    
    
    128,250
    
    
    
    
    
    
    
    62,000
    
    
    
    12.20Granted
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    (25,000
    )
    
    
    8.01Canceled
    
    
    
    
    
    
    (27,000
    )
    
    
    
    
    
    
    27,000
    
    
    
    12.42Shares at June 30, 2003
    
    
    190,250
    
    
    
    126,250
    
    
    
    
    
    
    
    64,000
    
    
    
    11.33Granted
    
    
    
    
    
    
    
    
    
    
    8,750
    
    
    
    (8,750
    )Exercised
    
    
    (34,999
    )
    
    
    (34,999
    )
    
    
    
    
    
    
    
    
    
    
    13.18Canceled
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    5,000
    
    
    
    13.25Shares at June 30, 2004
    
    
    155,251
    
    
    
    86,251
    
    
    
    8,750
    
    
    
    60,250
    
    
    $
    11.32
 Stock Repurchase Program In fiscal 2000, the our board of directors authorized the repurchase from time
to time of up to approximately $5 million of our common stock in the open
market or in negotiated transactions. During fiscal 2000 and 2001, we
repurchased 211,400 shares at an average price of $12.81 per share. During
fiscal 2002, 2003, and 2004, no shares were repurchased. This stock repurchase
program will remain in effect, however, until discontinued by our board of
directors. 76




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12. INCOME TAXES The provision for income taxes consists of the following: Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Current -Federal income tax
    
    $
    9,617
    
    
    $
    2,332
    
    
    $
    4,709State income tax
    
    
    2,058
    
    
    
    357
    
    
    
    76111,675
    
    
    
    2,689
    
    
    
    5,470Deferred -Federal income tax
    
    
    (234
    )
    
    
    5,091
    
    
    
    1,174State income tax
    
    
    (71
    )
    
    
    727
    
    
    
    269(305
    )
    
    
    5,818
    
    
    
    1,443$
    11,370
    
    
    $
    8,507
    
    
    $
    6,913
 The net deferred tax asset consists of the following: June 30,2004
    
    2003(in thousands)Gross assets
    
    $
    9,382
    
    
    $
    8,611Gross liabilities
    
    
    (8,163
    )
    
    
    (7,681
    )Net deferred tax asset
    
    $
    1,219
    
    
    $
    930
 The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows: June 30,2004
    
    2003(in thousands)Loan loss provision
    
    $
    4,246
    
    
    $
    3,538Accrued liabilities and other
    
    
    1,191
    
    
    
    1,193Deferred revenue
    
    
    2,219
    
    
    
    1,785Depreciation and amortization
    
    
    (6,550
    )
    
    
    (6,264
    )Interest-rate swap
    
    
    113
    
    
    
    678$
    1,219
    
    
    $
    930
 The provisions for taxes on income as reported differ from the tax provision
computed by applying the statutory federal income tax rate of 35% in each of
2004, 2003 and 2002, as follows: Year Ended June 30,2004
    
    2003
    
    2002(in thousands)Federal income tax provision on income at
statutory rate
    
    $
    9,948
    
    
    $
    7,449
    
    
    $
    5,959State taxes, net of federal benefit
    
    
    1,421
    
    
    
    959
    
    
    
    928Other
    
    
    1
    
    
    
    99
    
    
    
    26Income tax provision
    
    $
    11,370
    
    
    $
    8,507
    
    
    $
    6,913
 77




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13. COMMITMENTS AND CONTINGENCIES Lease Commitments We lease our facilities and certain equipment under non-cancelable operating
leases. Most of our facility leases contain options that allow us to renew
leases for periods that generally range from three to nine years. At June 30,
2004, future minimum rental payments under existing leases were as follows (in
thousands): Year Ending June 30:2005
    
    $
    17,7672006
    
    
    12,5062007
    
    
    7,6442008
    
    
    3,2742009
    
    
    1,457Remaining years
    
    
    234$
    42,882
 Lease expense was approximately $19.8 million, $19.1 million, and $19.2
million, for the years ended June 30, 2004, 2003, and 2002, respectively. 14. EMPLOYEE BENEFITS PLANS We maintain a 401(k) savings plan (the Benefit Plan) on behalf of our
employees. Employees may contribute up to 20% of their annual compensation to
the Benefit Plan, subject to statutory maximums. The Benefit Plan provides a
matching of 25% of employee contributions made to the Benefit Plan. Matching
contributions for the Benefit Plan were approximately $280,000, $239,000, and
$229,000, for the years ended June 30, 2004, 2003, and 2002, respectively. Effective July 1, 2001, we established an executive non-qualified deferred
compensation plan (the Executive Benefit Plan). Our executives may
contribute up to 50% of their annual compensation and 100% of their bonus to
the Executive Benefit Plan. The Executive Benefit Plan provides a match of 25%
of employee contributions up to the current 401(k) savings plan deferral limit.
Matching contributions for the Executive Benefit Plan were approximately
$23,000, $37,000 and $24,000 for the years ended June 30, 2004, 2003 and 2002,
respectively. 15. RELATED PARTY TRANSACTIONS In fiscal 2000, we purchased approximately 14% of the shares of Series A
Convertible Preferred Stock of ePacific, Incorporated (ePacific) for $1
million. ePacific was a private company in the business of providing
customized debit-card payment systems and electronic funds transfer processing
services. ePacific, formerly a controlled subsidiary of Goleta, provided the
debit-card system and processing services to Goleta to enable it to make the
Goleta Loans described above in Note 1, Summary of Significant Accounting
Policies  Loans Receivable, Net. For the fiscal year ended June 30, 2003 and
2002, we purchased 47,000 and 150,000 debit-cards for a total of $0.1 million
and $0.5 million, respectively. In conjunction with the transition from the
Goleta Loans and to state-regulated loan products, ePacific provided its loan
processing service directly to us. We paid ePacific a total of $300,000 during
fiscal 2003 for loan processing. Under a stockholders agreement with ePacific and its other stockholders, we
had the right to designate one person to serve as a director of ePacific. Jay
B. Shipowitz, our President and Chief Executive Officer, served as a director
of ePacific until August 22, 2003. Primarily as a result of the termination of the relationship between ACE and
Goleta, on June 2, 2003, ePacifics board of directors decided to dissolve the
corporation and distribute the remaining assets. In fiscal 2003, we received a
cash distribution of $297,000 and, therefore, recorded a loss on investment of
$703,000. 78




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16. DISCONTINUED OPERATIONS During the quarter ended December 31, 2002, we sold 19 underperforming stores
in Florida for a pre-tax gain of $0.8 million and an after-tax gain of $0.5
million. The gain on the sale of the 19 stores was classified as discontinued
operations, and included the write-off of $0.8 million of fixed assets and $0.1
million of goodwill related to the 19 stores. The operating results of the 19
stores had no material impact on current or historical net income or cash flow
for or during the first six months of fiscal 2003. Operating results for the
19 stores for the years ended June 30, 2003 and 2002 are shown below. Year Ended June 30,2003
    
    2002(in thousands, except per shareamounts)Revenue
    
    $
    966
    
    
    $
    2,537Gross margin (loss)
    
    
    (37
    )
    
    
    103After-tax income (loss)
    
    
    (22
    )
    
    
    62Diluted earnings (loss) per share
    
    
    0.00
    
    
    
    0.01
 17. PENDING LAWSUITS AND SETTLEMENTS We have been a defendant in a number of lawsuits regarding our former
arrangements with Goleta regarding the Goleta Loans that were offered at most
of our owned stores until December 31, 2002. On May 12, 2003, however, we
entered into a settlement agreement to settle and terminate the nationwide
class-action Goleta Loan-related lawsuit, Purdie v. Ace Cash Express, Inc. et
al., that was pending in the United States District Court in Dallas, Texas, and
on December 15, 2003, the federal court entered a final judgment and order
granting final approval of the settlement agreement. Because of the broad
nature of the class described in the settlement agreement approved by the
court, we believe that the settlement not only disposes of those claims brought
against us in the Purdielawsuit, but also disposes of those claims brought in
the other Goleta Loan-related lawsuits, as well as any future claims brought on
the same grounds. In the settlement agreement, we agreed, among other things, to pay:  
    
    at least $2.5 million as refunds to former borrowers who have
repaid all of their Goleta Loans and who timely submit claims for
refunds or, if the refunds and certain other amounts paid by us total
less than $2.5 million, the amount of the shortfall to certain
consumer-advocacy organizations;  
    
    up to $2.1 million as attorneys fees to the plaintiffs counsel in
the Purdieand other Goleta Loan-related lawsuits being settled and
terminated; and  
    
    notice and other administrative costs in connection with the settlement. The refund payable by us to each eligible former borrower who filed a refund
claim was approximately five percent of the interest or finance charges paid by
that borrower, but not less than $7.50 or more than $45.00. Based on estimates of anticipated claims by eligible borrowers and of
administrative and other costs related to the settlement, we recorded a $5.0
million charge for our settlement payment obligations in our financial
statements in the third quarter of fiscal 2003. During the quarter ended
September 30, 2003, we expensed an additional $0.1 million for administrative
costs related to the settlement. In the fourth quarter of the fiscal year ended
June 30, 2003, we recovered $4.7 million from liability insurance coverage for
claims related to various Goleta Loan-related lawsuits. In March 2004, we mailed to the former Goleta Loan borrowers, and remitted to
the consumer-advocacy organizations and plaintiffs counsel, the amounts
required by the settlement agreement. A legal settlement was reached regarding our note payable balance of $856,000
as of June 30, 2003, which was the escrowed portion of the total purchase price
for a 107-store acquisition in November 2000, and from which we had not
authorized the monthly release of $23,778 since June 2001 due to the pending
lawsuit regarding 11 of the acquired locations. . As a result, in May 2004,
we authorized payment of the $856,000 note payable, which had been held in
escrow and we received a settlement payment of $434,000, which was recorded in
other (income) expenses, net. 79




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18. COMMON STOCK OFFERING On April 26, 2004, we completed a registered public offering of 2,041,622
shares of our common stock at an offering price of $27.00 per share. We used
the net proceeds from our sale of shares in the offering, totaling
approximately $51.9 million, to repay in full the outstanding amount
(approximately $30.4 million of principal and interest) of our senior
subordinated secured promissory notes issued to American Capital Strategies,
Ltd. With that repayment, we also paid a cash prepayment fee of approximately
$700,000. There was no income or expense resulting from the termination of the
interest-rate swap agreement associated with the notes. We also incurred
non-cash charges in the fourth quarter of fiscal 2004 of approximately $4.1
million related to the write-off of deferred financing fees associated with the
notes. After repayment of the notes, we used the remaining estimated net
proceeds to pay down our revolving credit facilities pending use for general
corporate purposes, including potential acquisitions, capital expenditures and
working capital. On April 29, 2004, upon the underwriters exercise of their over-allotment
option, we sold an additional 370,000 shares of our common stock at $27.00 per
share. We used the net proceeds from the sale of these additional shares,
approximately $9.5 million, also to pay down our revolving credit facility
pending use for general corporate purposes, including potential acquisitions,
capital expenditures and working capital. 19. SUBSEQUENT EVENTS  AMENDED CREDIT AGREEMENT On July 30, 2004, we amended and restated our bank credit agreement that was
originally effective March 31, 2003 and extended the maturity of our revolving
credit facilities through June 30, 2008. (Our prior credit agreement was
scheduled to expire, and the indebtedness was scheduled to mature, on March 31,
2006). The new credit agreement provides us with two increased revolving
line-of-credit facilities:  
    
    a $140 million primary revolving credit facility that is available
throughout the four-year term (increased from $120 million under our
prior credit agreement); and  
    
    a $60 million seasonal revolving credit facility that is available
to ACE during each calendar-year-end holiday and tax season (i.e.,
December 15 through March 15) during the four-year term (increased from
$45 million under our prior credit agreement). The revolving line-of-credit facilities include, subject to certain conditions,
a letter-of-credit facility from Wells Fargo Bank of up to $10 million
(increased from $5 million under our prior credit agreement). The variable rate formulas that we may select for the interest rate charged on
borrowings under the new credit agreement will (assuming the same borrowing
base) result in a decrease in the interest rate charged under our prior credit
agreement. 20. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for the fiscal years ended June 30, 2004,
2003, and 2002, are as follows: UnauditedThree Months Ended
    
    Year EndedSept 30
    
    Dec 31
    
    Mar 31
    
    June 30
    
    June 30(in thousands, except per share amounts)2004:Revenues
    
    $
    55,701
    
    
    $
    59,186
    
    
    $
    73,674
    
    
    $
    58,098
    
    
    $
    246,659Net income
    
    
    3,007
    
    
    
    3,718
    
    
    
    8,174
    
    
    
    2,153
    
    
    
    17,052Diluted earnings per share
    
    
    .28
    
    
    
    .34
    
    
    
    .72
    
    
    
    .16
    
    
    
    1.492003:Revenues
    
    $
    56,061
    
    
    $
    57,295
    
    
    $
    67,167
    
    
    $
    53,765
    
    
    $
    234,289Income from continuing operations
    
    
    2,406
    
    
    
    1,910
    
    
    
    2,616
    
    
    
    5,344
    
    
    
    12,276Diluted earnings per share from
continuing operations
    
    
    .24
    
    
    
    .19
    
    
    
    .26
    
    
    
    .52
    
    
    
    1.20Net income
    
    
    2,406
    
    
    
    2,409
    
    
    
    2,616
    
    
    
    5,344
    
    
    
    12,775Diluted earnings per share
    
    
    .24
    
    
    
    .24
    
    
    
    .26
    
    
    
    .52
    
    
    
    1.252002:Revenues
    
    $
    51,910
    
    
    $
    54,662
    
    
    $
    68,091
    
    
    $
    54,603
    
    
    $
    229,266Net income
    
    
    1,989
    
    
    
    1,995
    
    
    
    4,170
    
    
    
    1,959
    
    
    
    10,113Diluted earnings per share
    
    
    .20
    
    
    
    .20
    
    
    
    .41
    
    
    
    .19
    
    
    
    1.00
 80




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REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM ON SCHEDULE To the Board of Directors and Shareholders,
Ace Cash Express, Inc.: In connection with our audit of the consolidated financial statements of Ace
Cash Express, Inc. and Subsidiaries referred to in our report dated August 20,
2004, which is included in Part IV of this Form 10-K, we have also audited
Schedule II for the years ended June 30, 2004, 2003 and 2002. In our opinion,
this schedule presents fairly, in all material respects, the information
required to be set forth therein. /s/ GRANT THORNTON LLP Dallas, Texas,
August 20, 2004 81




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ACE CASH EXPRESS, INC. AND SUBSIDIARIES(a) Schedule II  Valuation and Qualifying Accounts
(in millions) AdditionsCharged
    
    
    
    
    
    
    
    
    
    BalanceBalance at
    
    to costs
    
    Charged
    
    
    
    
    
    atbeginning
    
    and
    
    to other
    
    
    
    
    
    end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    periodJune 30, 2004:Loan loss allowance
    
    $
    8.7
    
    
    $
    16.9
    
    
    $
    
    
    
    $
    (15.0
    )
    
    $
    10.6Loan loss liability to Republic Bank
    
    $
    2.0
    
    
    $
    7.4
    
    
    $
    
    
    
    $
    (8.7
    )
    
    $
    0.7Restructure reserve
    
    $
    0.2
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.2
    )
    
    $
    0.0June 30, 2003:Loan loss allowance
    
    $
    12.2
    
    
    $
    19.3
    
    
    $
    
    
    
    $
    (22.8
    )
    
    $
    8.7Loan loss liability to Republic Bank
    
    $
    
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    2.0Restructure reserve
    
    $
    0.4
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.2
    )
    
    $
    0.2June 30, 2002:Loan loss allowance
    
    $
    13.4
    
    
    $
    21.9
    
    
    $
    
    
    
    $
    (23.1
    )
    
    $
    12.2Loan loss liability to Republic Bank
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Restructure reserve
    
    $
    1.2
    
    
    $
    (0.2
    )
    
    $
    
    
    
    $
    (0.6
    )
    
    $
    0.4
   (a)
    
    This schedule should be read in conjunction with the Companys audited
consolidated financial statements and related notes thereto. 82




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INDEX TO EXHIBITS Exhibit Number
    
    Exhibit21
    
    Subsidiaries of the Company.23
    
    Consent of Grant Thornton LLP.31
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 83