UNITED STATES

FORM 10-K

OR

Commission File Number 0-20774

ACE CASH EXPRESS, INC.

(Registrant’s telephone number, including area code) (972) 550-5000

Securities registered pursuant to Section 12(b) of the Act:

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.

ACE CASH EXPRESS, INC.
FORM 10-K
For the Year Ended June 30, 2004

Table of Contents

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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.

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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:

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moving customers in and out of the store more quickly due to faster connectivity to our centralized risk management system;

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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.

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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:

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approximately 50% Caucasian; 25% Hispanic; 20% African American; 5% Other;

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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:

     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

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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.

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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.

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     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:

     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.

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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:

     The following table illustrates the development of company-owned stores since June 30, 2000:

     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.

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     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:

     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.

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     The following table illustrates the development of franchised stores since June 30, 2000:

     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.

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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

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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.

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     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

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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

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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.

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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 Purdie lawsuit, 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.

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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 Purdie and 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.

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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

     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:

     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.

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ITEM 6. SELECTED FINANCIAL DATA

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SELECTED FINANCIAL DATA (continued)

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SELECTED FINANCIAL DATA (continued)

(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.

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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

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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