10-K 1 d28716e10vk.htm FORM 10-K e10vk
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___to___
Commission File Number 0-20774
ACE CASH EXPRESS, INC.
(Exact name of registrant as specified in its charter)
     
Texas
(State or other jurisdiction of incorporation or organization) 		  75-2142963
(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:
     
Title of each class   Name of each exchange
on which registered
     
None
Securities registered pursuant to Section 12(g) 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.
Yes þ No o
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o
As of December 31, 2004, the aggregate market value of voting stock (based upon the last reported sales price on The Nasdaq Stock Market) held by nonaffiliates of the registrant was $342,041,167.
As of September 7, 2005, the number of shares of the Common Stock outstanding was 13,709,963.
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, 2005
Table of Contents
             
        Page  
        Number  
           
 
            
  Business     3  
  Properties     21  
  Legal Proceedings     21  
  Submission of Matters to a Vote of Security Holders     21  
 
            
           
 
            
  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     21  
  Selected Financial Data     23  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     26  
  Quantitative and Qualitative Disclosures About Market Risk     51  
  Financial Statements and Supplementary Data     51  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     51  
  Controls and Procedures     51  
 
   Management’s Report on Internal Control over Financial Reporting     52  
 
   Report of Independent Registered Public Accounting Firm     53  
 
            
  Other Information     54  
 
            
           
 
            
  Directors and Executive Officers of the Registrant     54  
  Executive Compensation     54  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     54  
  Certain Relationships and Related Transactions     54  
  Principal Accountant Fees and Services     54  
 
            
           
 
            
  Exhibits and Financial Statement Schedules     54  
 
            
SIGNATURES     59  
 
            
INDEX TO EXHIBITS     93  
 Third Amendment to the Marketing & Services Agreement
 Installment Loan Marketing & Servicing Agreement
 Subsidiaries
 Consent of Grant Thornton LLP
 Certification of CEO Pursuant to Section 302
 Certification of CFO Pursuant to Section 302
 Certification of CEO Pursuant to Section 906
 Certification of CFO Pursuant to Section 906

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PART I
ITEM 1. BUSINESS
Overview
     We began operations in 1968, and were incorporated as a Texas corporation in March 1982. We are a leading retailer of financial services, including check cashing, short-term consumer loans and bill payment services. As of June 30, 2005, we had a total network of 1,371 stores in 37 states and the District of Columbia, consisting of 1,142 company-owned stores and 229 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.
     Our reportable segments are strategic business units that differentiate between company-owned and franchised stores. Company-owned store revenue is generated from customer-transaction processing in stores owned by the Company, and franchised store revenue is generated from the franchise fees charged for opening the franchised store and on-going royalty fees received from franchisees. For more information on our segment financial information, please see Note 2 to our Consolidated Financial Statements.
     Website Access to Reports. Through our website at www.acecashexpress.com we provide free access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Forms 3, 4 and 5 filed by reporting persons, and all amendments thereto, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. In addition, the Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.
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.

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     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 over 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, most stores offer customers a range of other services, including bill payments, money orders and money transfers. Most stores also offer photocopying, fax transmission services and postage stamps.
Competitive Strengths
     We offer a menu of retail financial services delivered through our growing network of 1,371 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 2006 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 the number of new customer transactions; and
 
  •   provide more customers with the ACE Prepaid Mastercard®.

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     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;
 
  •   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 1,142 company-owned stores, in large part, as a result of a disciplined acquisition strategy. Of our 1,142 stores, 451 were acquired in 111 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 and Chief Operations Officer, has been with us since 2001 and has extensive experience operating company-owned and franchised restaurant locations. 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 network 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 have identified several key geographic areas or markets for the development of both ACE Cash Express stores as well as ACE Cash Advance stores. These markets were identified following a review of the country’s top standard metropolitan statistical areas and an internal evaluation of each market’s ability to support our store development program.
     Specific trade areas are identified within each geographic market based upon our assessment of the area’s demographics and traffic patterns. Our real estate department then seeks to identify specific site locations within each trade area. The

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specific site is then presented for approval to our Capital Approval Committee consisting of our President and Chief Executive Officer, Executive Vice President and Chief Operations Officer, and our Executive Vice President and Chief Financial Officer. The Capital Approval Committee bases its decision to approve a specific site and to pursue the development of a store on such factors as the terms of the lease, the visibility of the store, the capital cost of the proposed store and the trade area’s demographics.
     We opened 80 company-owned stores in fiscal 2005 (including 20 ACE Cash Advance stores), compared to 53 stores in fiscal 2004 and 14 stores in fiscal 2003. 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 50 to 60 new ACE Cash Express company-owned stores and 50 to 60 ACE Cash Advance company-owned stores, with a net gain of approximately 70 to 100 company-owned stores after store closures, in fiscal 2006. We are still targeting an aggregate net gain of approximately 300 company-owned stores for the five-year period ending June 30, 2008.
     A decision to close a store is typically based upon store performance or our inability to obtain favorable lease renewal terms. Company-owned stores are evaluated for closure during our quarterly business reviews and at the end of the store’s lease term or any renewals of the lease term. A landlord may also choose not to renew the lease at the end of its term. We closed 32 stores in fiscal 2005, 24 stores in fiscal 2004, and 28 stores in fiscal 2003. This represents 3%, 2%, and 3% of total company-owned stores as of June 30, 2005, 2004 and 2003, respectively.
     Company-owned stores are sold infrequently. Company-owned stores that are sold are typically located in isolated geographic areas that do not fit into our overall strategic geographic development plans. We sold six stores in fiscal 2005, five stores in fiscal 2004, and 23 stores in fiscal 2003.
     Continue Franchise Store Development. 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.
     Our franchise department seeks to locate franchised stores in geographic markets that are not designated for company-owned development. The franchise department targets specific trade areas within each geographic market and identifies potential franchisees within these trade areas. These potential franchisees are then contacted to determine their level of interest in developing an ACE Cash Express store. Potential franchisees interested in developing stores also contact the franchise department directly.
     We opened 48 franchised stores in fiscal 2005, compared to 32 franchised stores in fiscal 2004 and 26 stores in fiscal 2003. As of June 30, 2005, we had 229 franchised stores and we believe our targeted markets will provide additional ACE franchise stores across the United States. Currently, we have franchise agreements for the development of over 100 new franchise stores.
     A franchise agreement may be terminated if the franchisee does not comply with the franchise agreement. Subject to the terms of the franchise agreement, a franchisee may also elect to voluntarily close a store or leave the ACE system based upon a variety of factors specific to the individual franchisee. In either case, we consider these closed stores, whether or not the store actually closes or is re-branded. In fiscal 2005, one franchised store was closed, compared to 15 franchised stores in fiscal 2004 and eight franchised stores in fiscal 2003.
     Pursue Opportunistic Acquisitions. A key element of our network growth strategy is to acquire existing check-cashing stores and to re-brand them as ACE Cash Express stores. Since 1991, we have acquired over 500 check-cashing stores. We have not acquired any monoline payday loan stores but may do so in the future.
     Our evaluation of an acquisition candidate is based upon that store’s existing revenue and cash flow, our ability to introduce additional services enhancing revenue growth, our assessment of the store’s geographic market and its consistency with our strategic development plans and our expectation that we can introduce our proprietary information systems and Operational Goals to the store generating operating efficiencies.
     A decision to acquire a store is reached following an assessment of the factors noted above and a financial review of our anticipated return on investment. Acquisitions requiring an investment of greater than $1 million are approved by our board of directors.

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     We believe that our extensive experience with acquisitions allows us to efficiently integrate acquired stores into our network. In fiscal 2005, we acquired 74 stores compared to 34 stores in fiscal 2004 and two stores in fiscal 2003.
     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 entered into a written agreement with NetSpend Corporation, a prepaid payments company, whereby we offer prepaid debit cards in our stores. The MasterCard® prepaid debit card offered through NetSpend allows our customers to “load” cash onto these cards and use them wherever MasterCard debit cards are accepted. Pursuant to our agreement, we receive from the customer a portion of the purchase price of the cards and a convenience fee for loads on the cards. In addition, we receive from NetSpend an additional portion of the purchase price of the card and commissions based on the aggregate amount loaded or direct deposited on the cards, the number of purchases or ATM withdrawal transactions made with the cards and account maintenance and subscription fees paid by the customer. Our agreement with NetSpend expires on March 31, 2007, and will automatically renew for one year periods thereafter absent 365 days’ prior notice by either of the parties. Either party may terminate the agreement at an earlier date if the non-terminating party (i) fails to pay to the terminating party amounts when due, (ii) fails to timely cure a default under the agreement or (iii) is bankrupt or insolvent. During fiscal 2005, we and our franchisees sold approximately 187,000 cards and loaded a total face value of more than $575 million. Revenues generated under this NetSpend agreement during fiscal 2005, 2004, and 2003 were $7.3 million, $4.6 million, and $2.7 million, respectively, which represents 2.7%, 1.9%, and 1.2% of our net revenues for such periods, and are included in Bill Pay revenue. We believe that our distribution network, with 1,371 network stores in 37 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 during fiscal 2005 as compared to fiscal 2004.
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 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;
 
  •   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.

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     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 from these services for the indicated fiscal years:
                         
    Fiscal Year Ended June 30,  
    2005     2004     2003  
    (in thousands)  
Check cashing
   $ 131,619     $ 129,194     $ 125,703  
Short-term consumer loans
     91,793       77,029       70,806  
Bill payments
     20,266       16,961       13,507  
Money transfers
     11,868       11,136       10,898  
Money orders
     6,875       6,330       6,960  
Franchising
     3,180       2,774       2,346  
Other fees
     3,048       3,235       4,069  
 
                  
Total revenue
   $ 268,649     $ 246,659     $ 234,289  
 
                  
     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, and this fee is deducted from the cash returned to the customer. 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 2005, our company-owned stores cashed approximately 13.3 million checks with an aggregate face amount of approximately $5.3 billion. The face amount of the average check was $396 and our average fee per check was $9.98, or 2.5%, of the average check.
     The full amount of the check fee is recognized as revenue at the time of the transaction with no allowance for anticipated returned checks. If a check cashed by us is returned for any reason, we record the face amount of the check (which includes the check fee) as a loss in the period in which it is returned in other store expenses. 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. The percent of check fee revenue attributable to returned checks was 0.11%, 0.15%, and 0.14% for the fiscal years ended June 30, 2005, 2004 and 2003, 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, for a term of 14 days and in some cases 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 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

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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, 2005, we were offering short-term consumer loans in 621 of our owned stores and Republic Bank was offering short-term consumer loans in 427 of our company-owned stores in Texas, Pennsylvania and Arkansas. As of June 30, 2005, we did not offer short-term consumer loans in 92 of our company-owned stores in Georgia, Maryland and North Carolina due to an unfavorable regulatory environment in those states. During the fiscal year ended June 30, 2005, we made approximately 1.6 million short-term consumer loans and Republic Bank made approximately 578,000 short-term consumer loans through our stores. The average advance provided to a customer in our short-term consumer loan transactions was $277 and the average finance charge paid to us was $41.17. The average advance provided to a customer by Republic Bank loan made through our stores was $319 and the average finance charge was $56.30. As of June 30, 2005, the gross receivable for short-term consumer loans made by us was approximately $31.8 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 $10.7 million as of June 30, 2005.
     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, 2005, our provision for loan losses, including our accrual for anticipated payments to Republic Bank for losses on their loans, as a percentage of matured loan volume (which represents all loans which became due and payable during the reporting period) for our loans and for Republic Bank loans combined was 4.4%, compared to 4.7% for fiscal 2004. At the end of each fiscal quarter, we analyze the loan loss provision, our loan loss allowance and the accrued liability to Republic Bank, that has been computed to determine if our estimates of the allowance and liability are adequate based on our understanding of past loan loss experience, current economic conditions, volume and growth of the loan portfolios, timing of maturity, as well as collections experience.
     On March 1, 2005, the Federal Deposit Insurance Corporation, or FDIC, issued revised Guidelines for Payday Lending which provide guidance to banks that engage in payday lending, and include a requirement that such banks develop procedures to ensure that a payday loan is not provided to any customer with payday loans outstanding from any lender for more than three months in the previous 12 months. The revised FDIC guidelines became effective on July 1, 2005, and affect the loans offered at our stores by Republic Bank. In fiscal 2006, we have introduced two new loan products to our Texas customers and one new loan product to our customers in Arkansas and Pennsylvania that provide alternatives to the loan product offered by Republic Bank. These new loan products will provide consumers who exceed the maximum allowable payday loans under the revised FDIC guidelines access to the credit they require.
     In our stores in Texas, Arkansas and Pennsylvania, commencing August 1, 2005, we began offering a 20-week, 10-payment installment loan product made by the First Bank of Delaware to customers that have reached the limits outlined by the FDIC guidelines. In our stores in Texas, commencing on July 1, 2005, we began offering customers who do not qualify for either the Republic Bank loan or the First Bank of Delaware loan a 32-day, single-installment loan permitted under Texas law.
     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, we remit the amount owed to the third party on the next business day under an agreement with that payee and either receive a service fee from the payee or collect a fee from the consumer. The agreements generally have a three-to-five year term, but oftentimes renew automatically unless written notice is provided by either party. 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. These agreements vary in term and fee structure based on estimated quantity and volume of future customer payments. In fiscal 2005, our company-owned stores processed approximately 7.9 million bill payment transactions through agreements with 139 service providers for revenue of $13.0 million. In fiscal 2004, our company-owned stores processed approximately 7.8 million bill payment transactions through agreements with 102 service providers for revenue of $12.4 million.
     Our stores also offer NetSpend’s ACE MasterCard debit card, which allows customers to “load” cash onto a MasterCard

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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 2005, our company-owned stores sold approximately 172,000 prepaid debit cards and loaded more than $527 million onto these cards, compared to fiscal 2004, when we sold approximately 133,000 cards and loaded more than $245 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 75,000 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 7.6 million money orders during fiscal 2005. 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.
     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 229 company-franchised stores in operation as of June 30, 2005, compared to 204 as of June 30, 2004, 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. We acquired 22, 13 and two franchised stores during the years ended June 30, 2005, 2004 and 2003, respectively.
     In order to qualify potential franchisees, we primarily evaluate their financing viability, familiarity with the industry and prior business experience. The franchisee is responsible for the capital cost of opening the store, including leasehold improvements, signage, computer equipment and security systems, operating costs and working capital. We have no obligation to finance any costs related to start-up or operations for the franchisees. Franchises are financed by the franchisee with their own financing sources.
     Other services. In many company-owned stores, we offer a variety of other retail financial services to our customers, such as photocopying, fax transmission services, postage stamps and various prepaid services, including long-distance telephone cards.
     We lease self-service machines, which utilize our internally developed point-of-sale system and are able to cash checks, sell prepaid long-distance telephone cards, sell money orders and process third-party bill payments. As of June 30, 2005, we had seven machines in company-owned locations and we had 44 bill payment self-service machines located at a third-party service provider’s locations. We placed 130 self-service machines in H&R Block retail locations for use during the 2005 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.
     Our tax business self-service machines are leased over various terms, typically 3 to 5 years, but our corresponding annual lease expense is recognized during the tax season. After tax season, the machines remain in H&R Block offices, but are unused until the next tax season. Lease expense for self-service machines used during tax season for the fiscal years ended June 30, 2005, 2004 and 2003 was $0.7 million, $1.3 million, and $1.6 million, respectively.
New Store Economics
     The capital cost of opening a new ACE Cash Express store varies depending on the size and type of store, but is typically in the range of $65,000 to $85,000, before the Moneygram incentive. This capital cost includes leasehold improvements, signage, computer equipment and security systems. MoneyGram pays us an incentive for each new ACE Cash Express company-owned location opened, which is accounted for as deferred revenue that is recognized over the remaining life of our contract with MoneyGram. For more information, see “Relationships with the Money Order and MoneyGram Suppliers” below. During fiscal 2005, we opened 60 ACE Cash Express 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 $30,000 per store.

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     The capital cost of a mature ACE Cash Advance store is typically in the range of $35,000 to $45,000, and includes leasehold improvements, signage, computer equipment and security systems. A new ACE Cash Advance store requires working capital of $70,000 to $100,000. During fiscal 2005, we opened 20 ACE Cash Advance stores.
     The following tables show the average annual store revenues and the average gross margin for ACE Cash Express company-owned stores (excluding acquired stores) which were opened in the year indicated and were open as of June 30, 2005:
                                                 
    Number of     Average Store Revenues  
    Stores Open at     Year Ended June 30,  
Year Opened:   June 30, 2005     2005     2004     2003     2002     2001  
            (in thousands)  
1996 and earlier
     273     $ 282.2     $ 284.2     $ 270.4     $ 272.5     $ 241.0  
1997
     33       285.1       270.7       248.1       242.2       209.1  
1998
     45       255.0       252.8       243.5       228.8       191.8  
1999
     60       232.7       216.3       206.0       199.2       164.4  
2000
     59       217.0       210.1       191.9       180.4       127.1  
2001
     41       236.7       215.1       187.9       143.0       34.3  
2002
     35       210.6       183.6       128.9       35.6       —  
2003
     12       207.7       160.3       36.2       —       —  
2004
     42       122.8       28.7       —       —       —  
2005
     60       39.9       —       —       —       —  
 
                                              
 
     660                                          
ACE Cash Advance stores (1)
     31                                          
Acquired stores (1)
     451                                          
 
                                              
 
     1,142                                          
 
                                              
                                                 
    Number of     Average Store Gross Margin  
    Stores Open at     Year Ended June 30,  
Year Opened:   June 30, 2005     2005     2004     2003     2002     2001  
                    (in thousands)                  
1996 and earlier
     273     $ 119.3     $ 117.8     $ 110.7     $ 116.0     $ 80.4  
1997
     33       117.5       98.0       89.1       88.8       56.0  
1998
     45       89.8       78.9       84.0       81.4       44.9  
1999
     60       79.2       61.1       59.5       55.0       16.5  
2000
     59       66.6       54.8       48.3       46.3       (6.7 )
2001
     41       71.2       51.5       39.4       8.6       (21.3 )
2002
     35       63.7       37.7       (1.4 )     (26.4 )     —  
2003
     12       58.2       16.3       (18.3 )     —       —  
2004
     42       (14.3 )     (31.7 )     —       —       —  
2005
     60       (29.3 )     —       —       —       —  
 
                                              
 
     660                                          
ACE Cash Advance stores (1)
     31                                          
Acquired stores (1)
     451                                          
 
                                              
 
     1,142                                          
 
                                              
 
(1)   ACE Cash Advance and acquired store count are provided on this newly constructed ACE Cash Express store economics table to delineate mix between ACE Cash Express newly constructed , ACE Cash Advance and acquired stores in our company-owned store network. A similar table for ACE Cash Advance and acquired stores would not provide a useful performance trend because we have just recently begun opening ACE Cash Advance stores, and acquired store performance varies significantly depending on the number of years that the store has been open prior to acquisition
     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 2005, 2004 and 2003, we closed 32, 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, 2005:
(MAP)
     The following table illustrates the development of company-owned stores since June 30, 2001:
<
                                         
    Company-Owned Stores  
    As of June 30,  
Market Area   2005     2004     2003     2002     2001  
Texas
     368       340       328       329       326  
California
     92       87       85       88       90  
Colorado
     78       66       53       56       53  
Arizona
     73       72       75       72       75  
Florida
     65       63       68       91       91  
Pennsylvania
     43       16       16       16       9  
Georgia
     39       44       46       50       50  
Ohio
     38       27       25       24       18  
Tennessee
     38       39       18       18       19  
Maryland
     36       38       39       39       40  
Virginia
     34       32       29       29       29  
Louisiana
     33       35       27       27       25  
Indiana
     30       28       26       25       25  
Washington
     23       14       13       13       13  
Oklahoma
     20       20       21       23       23  
Arkansas
     18       8       8       8       8  
North Carolina
     16       18       16       16       16