e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005


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 (I.R.S. Employer Identification No.)

1231 Greenway Drive, Suite 600
Irving, Texas 75038
(Address of principal executive offices)

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

None
(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of November 2, 2005

Common Stock, $.01 par value		13,816,427 shares

PART I. FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)


	September 30,			June 30,
	2005			2005
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	124,174		$	109,430
Accounts receivable, net		6,194			3,969
Loans receivable, net		24,772			20,787
Prepaid expenses, inventories and other current assets		13,487			13,685

Total Current Assets		168,627			147,871


Noncurrent Assets
Property and equipment, net		38,085			37,657
Covenants not to compete, net		1,564			1,668
Goodwill, net		99,922			98,702
Other assets		6,806			6,723

Total Assets	$	315,004		$	292,621


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Revolving advances	$	53,000		$	43,300
Accounts payable, accrued liabilities and other current liabilities		40,690			36,117
Money orders payable		9,385			4,867

Total Current Liabilities		103,075			84,284


Noncurrent Liabilities
Deferred income tax		4,051			4,302
Deferred revenue		3,112			3,271
Other liabilities		4,362			4,079

Total Liabilities		114,600			95,936


Commitments and Contingencies

Shareholders’ Equity
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $.01 par value, 50,000,000 shares authorized, 13,946,361 and 13,912,045 shares issued and 13,734,961 and 13,700,645 shares outstanding, respectively		137			137
Additional paid-in capital		104,179			103,544
Retained earnings		101,701			98,836
Accumulated comprehensive income (loss)		76			(56	)
Treasury stock, at cost, 211,400 shares		(2,707	)		(2,707	)
Unearned compensation — restricted stock		(2,982	)		(3,069	)

Total Shareholders’ Equity		200,404			196,685

Total Liabilities and Shareholders’ Equity	$	315,004		$	292,621

The accompanying notes are an integral part of these consolidated financial statements.

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED

CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)


	Three Months Ended
	September 30,
	2005			2004
Revenues	$	66,193		$	62,026

Store expenses:
Salaries and benefits		17,235			14,787
Occupancy		9,456			8,182
Provision for loan losses and doubtful accounts		8,159			7,468
Depreciation		2,066			1,687
Hurricane Katrina related expenses		1,655			—
Other		10,335			9,808

Total store expenses		48,906			41,932

Gross margin		17,287			20,094

Region expenses		5,918			5,219
Headquarters expenses		4,830			4,681
Franchise expenses		278			267
Other depreciation and amortization		821			706
Interest expense, net		810			593
Other expenses, net		(67	)		172

Income before income taxes		4,697			8,456
Provision for income taxes		1,832			3,383

Net income	$	2,865		$	5,073


Earnings per share:
Basic	$	0.21		$	0.38
Diluted	$	0.21		$	0.37

Weighted average number of common shares outstanding:
Basic		13,471			13,366
Diluted		13,782			13,848

The accompanying notes are an integral part of these consolidated financial statements.

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


	Three Months Ended
	September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	2,865		$	5,073
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,887			2,393
Provision for loan losses		8,114			7,424
Provision for doubtful accounts		48			44
Expenses related to Hurricane Katrina		1,655			—
Loss on disposal of property and equipment		201			800
Deferred revenue		(540	)		(548	)
Deferred income taxes		(251	)
Stock option expense		117			—
Compensation on restricted stock grants		291			423
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable		(2,273	)		297
Loans receivable		(9,932	)		(6,838	)
Prepaid expenses, inventories and other current assets		208			(447	)
Other assets		(345	)		(2,224	)
Accounts payable, accrued liabilities and other liabilities		963			(2,633	)
Money orders payable		4,518			612

Net cash provided by operating activities		8,526			4,376

Cash flows from investing activities:
Purchases of property and equipment, net		(3,033	)		(2,697	)
Total store acquisition purchase price, net of cash received		(1,308	)		(3,849	)

Net cash used by investing activities		(4,341	)		(6,546	)

Cash flows from financing activities:
Net increase (decrease) in revolving advances		9,700			(17,600	)
Gross borrowings of acquisition notes payable		550			3
Gross repayments of acquisition notes payable		(5	)		—
Tax benefit from stock options		12			—
Proceeds from stock options exercised and restricted stock granted		302			778

Net cash provided (used) by financing activities		10,559			(16,819	)

Net increase (decrease) in cash and cash equivalents		14,744			(18,989	)
Cash and cash equivalents, beginning of period		109,430			123,041

Cash and cash equivalents, end of period	$	124,174		$	104,052


Supplemental disclosures of cash flows information:
Interest paid	$	811		$	732
Income taxes paid		71			253

The accompanying notes are an integral part of these consolidated financial statements.

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed interim consolidated financial statements of Ace Cash Express, Inc. (the “Company” or “ACE” or “we” or “us”) and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and the rules and regulations of the Securities and Exchange Commission. They do not include all information and footnotes required by U.S. GAAP for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim consolidated financial statements should be read in conjunction with our audited financial statements in our Annual Report on Form 10-K for the year ended June 30, 2005 filed with the Securities and Exchange Commission. In the opinion of our management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included.

Certain prior period balances have been reclassified to conform to the current period’s presentation.

Revenue Recognition Policy

All of our store transactions are processed through our point-of-sale system. Approximately 94% of our revenue results from transactions at the point-of-sale with our customers, and approximately 56% of our revenue is effectively recognized when the transaction is completed at the point-of-sale. These transactions include check cashing, bill payment, money transfer, money order sales, and other miscellaneous products and services grouped in “other fees.” The full amount of the check fee is recognized as revenue at the time of the transaction with no allowance for anticipated returned checks. We act in an agency capacity regarding bill payment services, money transfers, and money orders offered and sold at our stores. We record the net amount retained as revenue because the supplier is the primary obligor in the arrangement, the amount we earn per transaction is fixed, and the supplier has the ultimate credit risk.

For short-term or payday loans made by us, for the Republic Bank loans and First Bank of Delaware loans (both defined below) for which we act only as marketing agent and servicer for a fee from the lender, revenue constituting loan fees and interest (whether paid by the customer or the lender) is recognized ratably over the term of each loan.

We recognize contractual revenue guarantees from product or service providers in accordance with the terms of the contracts under which they are paid. We amortize any bonus or incentive payments from product or service providers over the term or duration of the contracts under which they are made. Revenue from guarantees, bonuses and incentives are recorded in their respective revenue product line.

Franchise revenue consists of up-front franchise fees charged for opening the franchised store and on-going royalty fees. Franchise fees, which are the initial fees paid by the franchisees, are recognized when the franchised location has been identified, the lease has been obtained, the training has occurred, the building has been built or leasehold improvements have been completed, the proprietary point-of-sale system has been installed and the store has been opened. Franchise royalty fees, which are the greater of a minimum fee or a percentage of each franchisee’s actual revenues, are recognized and payable monthly.

Returned Checks

We charge other store expenses for losses on returned checks (which include the check fee amount) in the period during which such checks are returned. We credit recoveries on returned checks in the period the recovery is received.

New Store Accounting

Start-up costs for new stores such as training, supplies and travel are expensed as incurred. Costs of acquiring and constructing long-lived assets and their installation costs are capitalized and depreciated over the shorter of the useful life or lease term.

Store Acquisition Accounting

We account for all store acquisitions using the purchase method of accounting. This method requires the allocation of the purchase price to individual tangible assets acquired, intangible assets acquired arising from contractual or legal rights, and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the cost of acquired assets over the net amounts assigned to assets acquired and liabilities assumed is recognized as goodwill. Any costs, including “out-of-pocket” or incremental costs directly related to the acquisition, such as fees paid to outside consultants for accounting, legal, or engineering investigations or for appraisals, are included in the cost of the acquired assets.

Capitalization of Certain Development Costs

Effective July 1, 2005, we began capitalizing certain internal costs directly associated with the site selection, design, and construction of new stores. These costs are recorded as part of leasehold improvements and are depreciated over the shorter of 120 months or the lease term. During the quarter ended September 30, 2005, we capitalized $53,000.

Gain or Loss on Store Closure

We close stores in the normal course of business based on store performance, lease termination or unfavorable lease extension terms. For closed stores, we record a loss in other expense for the write-off of any remaining book value of fixed assets not transferred to other locations and any related closing costs. For stores sold to third parties, a gain or loss is recorded based on the amount received less the write-off of any remaining book value of fixed assets not sold or transferred to other locations and any related closing costs.

Earnings Per Share Disclosures

Earnings per share have been computed based on the weighted average number of common and dilutive shares outstanding for the respective periods. Dilutive shares include employee and non-employee director stock options and restricted stock.

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding excluding unvested restricted stock. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, after adjusting for the dilutive effect of stock options and restricted stock, and unamortized compensation expense. The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share:


	Three Months Ended
	September 30,
	2005		2004
	(in thousands)
Net income	$	2,865	$	5,073

Reconciliation of denominator:
Weighted average number of common shares outstanding — basic		13,471		13,366
Effect of dilutive stock options and restricted stock		311		482

Weighted average number of common and dilutive shares outstanding — diluted		13,782		13,848

The following table presents the options to purchase shares of common stock which were not included in the computation of diluted earnings per share for the three months ended September 30, 2005 and 2004 because the exercise prices of those options were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive:


	Three Months
	Ended
	September 30,
	2005		2004
Options not included in the computation of earnings per share		110,000		33,750

Fair Value of Financial Instruments

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced sale or liquidation. The amounts reported in the consolidated balance sheets for trade receivables, trade payables, notes receivable, revolving advances, money orders payable, and notes payable all approximate fair value.

Stock Incentive Plans

We sponsor one employee stock incentive plan and one non-employee director stock incentive plan, both of which permit the grant of stock options and restricted stock. Restricted stock are shares of our common stock that cannot be transferred by the holder until its restrictions are lifted, usually in accordance with a vesting schedule of three to five years from the date of grant.

Adoption of SFAS 123(R)

Until June 30, 2005, we accounted for our stock incentive plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Therefore, we reflected only restricted stock expense in our reported net income, because all stock options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Effective July 1, 2005, we adopted SFAS No. 123R, “Share Based Payment”, which requires that we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the vesting period. We used the modified-prospective-transition method. Under this transition method, stock-based compensation cost recognized in the quarter ended September 30, 2005 includes: (a) compensation cost for all unvested stock-based awards as of July 1, 2005 that were granted prior to July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all stock-based awards granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).

Outstanding employee options are generally exercisable annually in installments over a three- to four-year period from the date of grant at an exercise price of not less than the fair market value at the grant date. The options expire ten years after the date of grant. Restricted stock are shares of the Company’s common stock and cannot be transferred by the holder until its restrictions are lifted, usually in accordance with a vesting schedule of three- to five-years from the date of grant. Restricted stock is expensed based on the fair market value on the grant date. As of September 30, 2005, 1,217,558 shares were reserved for restricted stock or stock option grants, 815,851 shares had been granted as restricted stock or were subject to outstanding stock option grants and 401,707 shares were available under our employee stock incentive plan.

Outstanding non-employee director options are generally exercisable annually in installments over a three-year period from the date of grant at an exercise price of not less than the fair market value at the grant date. The options

expire five years after the date of grant. Restricted stock cannot be transferred by the holder until its restrictions are lifted, usually in accordance with a vesting schedule of three years from the date of grant. Restricted stock is expensed based on the fair market value on the grant date. The non-employee director stock incentive plan expired on March 26, 2005. As of September 30, 2005, 111,836 shares had been granted as restricted stock or were subject to outstanding stock option grants under our non-employee director stock incentive plan.

As a result of adopting SFAS 123(R) on July 1, 2005, the Company’s income before income taxes for the three months ended September 30, 2005 was $0.1 million lower than if it had continued to account for share-based compensation under APB 25, and cash flow from financing activities were not significantly changed.

Determining Fair Value

Valuation and Amortization Method—The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Expected Volatility—Stock-based payments made prior to July 1, 2005 were accounted for using the intrinsic value method under APB 25. The fair value of stock based payments made subsequent to June 30, 2005 were valued using the Black-Scholes valuation method with a volatility factor based on the Company’s historical stock trading history.

Risk-Free Interest Rate—The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury securities with an equivalent term.

Estimated Forfeitures—When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures.

Fair Value— The weighted average fair value of each employee option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the three months ended September 30, 2005 and 2004:


	Three Months Ended
	September 30,
	2005			2004
Expected volatility		44	%		46	%
Expected life (years)		4.0			4.4
Risk-free interest rate		4.0	%		3.9	%
Expected forfeitures		7.3	%		3.9	%
Expected dividends	None			None

The weighted average fair value of each non-employee director option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during each of the three months ended September 30, 2005 and 2004:


	Three Months Ended
	September 30,
	2005			2004
Expected volatility		44	%		46	%
Expected life (years)		4.7			4.7
Risk-free interest rate		4.0	%		3.9	%
Expected forfeitures	None			None
Expected dividends	None			None

Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in its statement of cash flows. In accordance with guidance in SFAS 123(R), the cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from employee’s exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. During the three months ended September 30, 2005, the Company recorded $12,000 of excess tax benefits as a financing cash inflow.

The following table illustrates the stock options granted during the three months ended September 30, 2005, and stock option expense reported in net income and recognized in accordance with SFAS No. 123R for stock options vesting during the period presented for both the employee stock incentive plan and the non-employee director stock incentive plan for the three months ended September 30, 2005:


	Three Months
	Ended
	September 30,
	2005
Number of shares of stock options granted:
Employee stock incentive plan		2,500
Non-employee stock incentive plan		—

		2,500


Total stock-based compensation expense determined under fair value based methods for all stock option awards:
Employee stock incentive plan	$	107,004
Non-employee director stock incentive plan		10,090

	$	117,094

Pro-forma Disclosures

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123R to stock-based employee compensation for the prior period presented:


	Three Months
	Ended
	September 30,
	2004
	(in thousands,
	except per share
	amounts)
Net income, as reported	$	5,073

Deduct: Total stock-based employee compensation expense determined under fair value based methods for all stock option awards, net of related tax effects		(579	)

Deduct: Total stock-based non-employee director compensation expense determined under fair value based methods for all stock option awards, net of related tax effects		(24	)


Pro forma net income	$	4,470


	Three Months
	Ended
	September 30,
	2004
	(in thousands,
	except per share
	amounts)
Earnings per share:
Basic — as reported	$	0.38
Basic — pro forma	$	0.33

Diluted — as reported	$	0.37
Diluted — pro forma	$	0.32

Restricted Stock Grants

The following table presents restricted stock granted and forfeited under both the employee stock incentive plan and the non-employee director stock incentive plan, and the stock-based compensation cost reflected in our reported net income for the three months ended September 30, 2005 and 2004:


	Three Months Ended
	September 30,
	2005			2004
Number of shares of restricted stock granted:
Employee stock incentive plan		8,500			56,000
Non-employee stock incentive plan		—			—

		8,500			56,000


Number of shares of restricted stock forfeited:
Employee stock incentive plan		(625	)		(488	)
Non-employee stock incentive plan		—			—

		(625	)		(488	)


Stock-based compensation expense for restricted stock grants:
Employee stock incentive plan	$	248,451		$	409,326
Non-employee director stock incentive plan		42,333			13,964

	$	290,784		$	423,290

Summary of Stock Option and Restricted Stock Activity

The Company issues new shares of common stock upon exercise of stock options. The following is a summary of option activity for our stock incentive plans:


				Outstanding
				Stock			Restricted			Available
	Reserved			Options			Stock			for Grant
Employee Stock Incentive Plan:
Shares at June 30, 2005		1,285,984			627,570			247,080			411,334
Granted		—			2,500			8,500			(11,000	)
Exercised		(25,816	)		(25,816	)		—			—
Restrictions lapsed		(42,610	)		—			(42,910	)		—
Canceled		—			(748	)		(625	)		1,373

Shares at September 30, 2005		1,217,558			602,506			212,045			401,707


Non-Employee Stock Incentive Plan:
Shares at June 30, 2005		111,836			93,751			18,085			—
Granted		—			—			—			—
Exercised		—			—			—			—
Restrictions lapsed		—			—			—			—
Canceled		—			—			—			—

Shares at September 30, 2005		111,836			93,751			18,085			—

2. OPERATING SEGMENTS

Our reportable segments are strategic business units that differentiate between company-owned and franchised stores. Company-owned store revenue is generated from store customer-transaction processing, and franchised store revenue is generated from the franchise fees charged for opening the store and on-going royalty fees. Segment information for the three months ended September 30, 2005 and 2004 was as follows:


		Company-
		owned			Franchised			Other			Total
	(in thousands)
Three months ended September 30, 2005:
Revenue		$	65,424		$	769		$	—		$	66,193

Gross margin			16,518			769			—			17,287
Region, headquarters, franchise expenses			(10,748	)		(278	)		—			(11,026	)
Other depreciation and amortization			(816	)		(5	)		—			(821	)
Interest income (expense), net			—			—			(810	)		(810	)
Other expenses, net			67			—						67

Income (loss) before taxes		$	5,021		$	486		$	(810	)	$	4,697


Three months ended September 30, 2004:
Revenue		$	61,279		$	747		$	—		$	62,026

Gross margin			19,347			747			—			20,094
Region, headquarters, franchise expenses			(9,900	)		(267	)		—			(10,167	)
Other depreciation and amortization			(703	)		(3	)		—			(706	)
Interest income (expense), net			—			—			(593	)		(593	)
Other expenses, net			(172	)		—						(172	)

Income (loss) before taxes		$	8,572		$	477		$	(593	)	$	8,456

Segment information as of September 30, 2005 and 2004 was as follows:


	Company-owned		Franchised		Total
	(in thousands, except for number of stores)
As of September 30, 2005:
Total assets	$	313,405	$	1,599	$	315,004
Number of stores		1,163		226		1,389

As of September 30, 2004:
Total assets	$	261,122	$	1,208	$	262,330
Number of stores		1,055		202		1,257

3. DERIVATIVE INSTRUMENTS — SWAP AGREEMENTS

Our objective in managing our exposure to fluctuations in interest rates is to decrease the volatility of earnings and cash flows associated with changes in the applicable rates. To achieve this objective, we have entered into interest-rate swap agreements. The interest-rate swaps are derivative instruments related to forecasted transactions and are considered to hedge future cash flows. The effective portion of any gains or losses are included in accumulated comprehensive income (loss) and other current and noncurrent liabilities until earnings are affected by the variability of cash flows. Any ineffective portion is recognized currently into earnings. If it becomes probable that a forecasted transaction will no longer occur, the interest-rate swap will continue to be carried on the balance sheet at fair value, and gains or losses that were deferred in accumulated comprehensive income (loss) will be recognized immediately into earnings. If the interest-rate swaps are terminated prior to their expiration dates, any cumulative gains and losses will be deferred and recognized into earnings over the remaining life of the underlying exposure. If the

hedged liabilities are to be sold or extinguished, we will recognize the gain or loss on the designated financial instruments currently into earnings.

We use the cumulative approach to assess effectiveness of the cash flow hedges. The measurement of hedge ineffectiveness is based on the cumulative dollar offset method. Under this method, we compare the changes in the floating rate component of the cash flow hedge to the floating rate cash flows of the revolving loan facility. Changes in the fair value of the effective cash flow hedges are recorded in accumulated comprehensive income (loss). The effective portion that has been deferred in accumulated comprehensive income (loss) will be reclassified to earnings when the hedged items impact earnings.

The associated underlying hedged liability has equaled or exceeded the notional amount for each of our interest-rate swaps throughout the existence of the interest-rate swaps, and we anticipate that it will continue to do so with respect to the swaps in effect as of September 30, 2005. The interest-rate swaps are based on the same index as their respective underlying debt. The interest-rate swaps to date have been highly effective in achieving offsetting cash flows attributable to the fluctuations in the cash flows of the hedged risk, and no amount has been required to be reclassified from accumulated comprehensive income (loss) into earnings for hedge ineffectiveness or due to excluding a portion of the value from measuring effectiveness during the three months ended September 30, 2005 or 2004.

Our interest-rate swap agreement with JP Morgan Chase Bank associated with our revolving advance facility under our bank credit agreement with a notional amount of $35 million is effective until September 29, 2006. The fixed rate effective on September 30, 2005, prior to adding the applicable margin, was 3.925%.

During the three months ended September 30, 2005, we purchased an additional swap instrument from Wells Fargo Bank associated with our revolving advance facility under our bank credit agreement with a notional amount of $30 million, which will be effective from September 29, 2006 until September 28, 2007. The fixed rate effective for the term of the agreement, prior to adding the applicable margin, will be 4.46%.

The interest-rate swaps resulted in an increase of interest expense as follows:


	Three Months Ended
	September 30,
	2005		2004
	(in thousands)
Increase in interest expense	$	38	$	137

The average notional amounts and the related average effective swap interest rates for the three months ended September 30, 2005 and 2004, along with the rates effective on September 30, 2005 and 2004 are as follows:

September 30, 2005

September 30, 2004

Average

Ending

Average

Ending

Effective

Average

Swap

Average

Swap

Corresponding

Notional

Interest

Notional

Interest

Debt

Amount

Rate

Amount

Rate

(in millions)

Revolving advance

6.175

5.576

5.215

The fair value of the interest-rate swap increased by $132,000 and decreased by $122,000, net of tax, during the three months ended September 30, 2005 and 2004, respectively. These changes have been recorded in accumulated comprehensive income (loss). The estimated net amount expected to reduce interest expense during the next twelve months is $96,000.

Accumulated comprehensive income (loss) balances related to the interest-rate swaps are as follows (in thousands):

Change in

Accumulated

Comprehensive

Income (Loss)

Corresponding

Accumulated Comprehensive Income (Loss),

for the Three Months

Debt

Net of Tax, as of

Ended September 30,

September 30,

June 30,

September 30,

June 30,

2005

2004

2005

2004

Revolving advance

($56

)

($292

)

($170

)

132

($122

)

A summary of comprehensive income (loss) for the three months ended September 30, 2005 and 2004 is presented below:


	Three Months Ended
	September 30,
	2005			2004
	(in thousands)
Net income	$	2,865		$	5,073
Other comprehensive income (loss):
Unrealized gain (loss) on hedging instruments before tax expense		218			(203	)
Tax (expense) benefit		(86	)		81

Unrealized gain (loss) on hedging instruments net of tax (expense) benefit		132			(122	)

Comprehensive income	$	2,997		$	4,951

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Acquisitions

The following table provides information concerning the acquisitions made during the three months ended September 30, 2005:


	For the Three Months Ended September 30,
	2005		2004
	(in thousands, except number of stores
	and number of transactions)
Number of stores acquired		2		23
Number of transactions		1		4
Amounts allocated to:
Goodwill	$	1,220	$	3,280
Covenants not to compete		20		230
Customer lists		36		—

Total intangibles costs		1,276		3,510
Property and equipment		32		339
Other assets		—		559

Total purchase price	$	1,308	$	4,408

Amortizable Intangible Assets

Covenants not to compete are as follows:


	September		June 30,
	30, 2005		2005
	(in thousands)
Covenants not to compete, at cost	$	2,681	$	2,678
Less — accumulated amortization		1,117		1,010

	$	1,564	$	1,668

Each of the covenants not to compete is amortized over the applicable period of the contract. The weighted-average amortization period is 4.0 years.

Amortization expense related to the covenants not to compete for the three months ended September 30, 2005 was $124,000. Total estimated remaining amortization expense for the five succeeding fiscal years assuming current balances and no new acquisitions are as follows:

Estimated Remaining Amortization Expense for Covenants Not to Compete


For the Nine
Months Ending
June 30,	For the Year Ending June 30,
2006	2007	2008	2009	2010	2011
	(in thousands)
$339	$401	$363	$284	$152	$25

Customer lists acquired are as follows:


	September 30,		June 30,
	2005		2005
	(in thousands)
Customer lists, at cost	$	731	$	695
Less — accumulated amortization		254		196

	$	477	$	499

Customer lists are amortized based on anticipated turnover and are amortized over the appropriate period. The weighted-average amortization period is 4.9 years.

Amortization expense related to the customer lists for the three months ended September 30, 2005 was $58,000. Total estimated remaining amortization expense for the five succeeding fiscal years assuming current balances and no new acquisitions are as follows:

Estimated Remaining Amortization Expense for Customer Lists


For the Nine
Months Ending
June 30,	For the Year Ending June 30,
2006	2007	2008	2009	2010	2011
	(in thousands)
$156	$153	$102	$49	$12	$5

Intangible Assets Not Subject to Amortization

Changes in the carrying value of goodwill for the three months ended September 30, 2005 are as follows:


	Three Months
	Ended
	September 30, 2005
	(in thousands)
Balance, beginning of the period	$	98,702
Goodwill from acquisitions		1,220

Balance, end of the period	$	99,922

There were no impairment losses for the three months ended September 30, 2005 or 2004.

5. SHORT-TERM LOANS

The short-term loan products offered at our stores consist of either (1) short-term loans made or entered into by us, (“ACE loans”), (2) deferred-deposit loans made or entered into by Republic Bank (“Republic Bank loans”), or (3) multi-installment loans (20-week loans) made or entered into by First Bank of Delaware (“First Bank of Delaware loans”). As of September 30, 2005, we were offering ACE loans in 627 of our company-owned stores, and Republic Bank and First Bank of Delaware were offering Republic Bank loans and First Bank of Delaware loans in 428 of our company-owned stores in Texas, Pennsylvania, and Arkansas. All loans and services, regardless of type, are made in accordance with state regulations; therefore, the terms of the loans and services vary from state to state.

Loan fees and interest include our fees and interest received from customers of our ACE loans, and our agency fees received from Republic Bank and First Bank of Delaware related to their loans. Loan fees and interest revenues are recognized ratably over the term of each loan, regardless of the type of revenue or loan.

We have established a loan loss allowance regarding our economic interests in our ACE loans. Our policy for determining the loan loss allowance is generally based on historical loan loss experience, as well as the results of management’s review and analysis of the payment and collection of the loans within the last fiscal quarter. Our policy is to charge off all of our ACE loans which are 180 days or more past due. Charge-offs are applied as a reduction to the allowance for loan losses and any recoveries of previously charged off loans are applied as an increase to the allowance for loan losses.

Republic Bank and First Bank of Delaware approve and own the loans they make, therefore, we do not record the Republic Bank or First Bank of Delaware loans as loans receivable on our books. However, under our agreement with each bank, we are obligated to reimburse the bank an amount equal to the net amount of loans charged off by the bank. Therefore, we establish a liability for our anticipated losses on their loans. This liability estimates such losses from such loans that are 180 days or more past due. Our policy in establishing the liability regarding Republic Bank and First Bank of Delaware loan losses is substantially the same as our policy regarding the loan loss allowance for our ACE loans. The liability for loan losses payable to Republic Bank as of September 30, 2005 and 2004 was $3.9 million and $4.5 million, respectively. Net loan charge-offs of Republic Bank loans for the three months ended September 30, 2005 and 2004, were $1.7 million and $1.5 million, respectively. The liability for loan losses payable to First Bank of Delaware as of September 30, 2005 was $0.6 million, and since we began marketing and servicing First Bank of Delaware loans only on August 1, 2005, no charge-offs have been recorded.

Loans receivable, net, on the consolidated balance sheets as September 30, 2005 and June 30, 2005 were $24.8 million and $20.8 million, respectively, which includes receivables for our ACE loans (but excluding any Republic Bank loans or First Bank of Delaware loans, because we do not own any interest in those loans). The loan loss allowance of $13.2 million and $11.0 million as of September 30, 2005 and June 30, 2005, respectively, represented

34.8% and 34.6% of the gross loans receivable as of that date. Net loan charge-offs for the three months ended September 30, 2005 and 2004, were $3.7 million for each period.

ACE Loans

In general, ACE loans consist of providing a customer cash in exchange for the customer’s check or an Automated Clearinghouse (“ACH”) authorization to debit the customer’s bank account, along with an agreement to defer the presentment or deposit of that check or the initiation of that ACH debit on the customer’s account, as the case may be, until the deferred presentment date. The amount of the customer’s check or ACH authorization is the amount of the cash provided to the customer plus a fee to us. The term of the deferral of the check presentment or ACH debit is typically two to four weeks. During the quarter ended September 30, 2005, the average amount of cash provided to a customer in such a transaction was $296, and the average fee to us was $42.27. As of September 30, 2005 and June 30, 2005, the gross receivable for our ACE loans was approximately $38.0 million and $31.8 million, respectively.

Bank Loans

The Republic Bank loans are offered and made at our owned stores in accordance with a Marketing and Servicing Agreement dated as of October 21, 2002, as amended (the “Republic Bank Agreement”). The term of our agreement with Republic Bank expires January 1, 2008, but either party may terminate this agreement at an earlier date if (i) the non-terminating party fails to timely cure a material default under, or an inaccurate representation or warranty in, the agreement, (ii) either party’s performance under the agreement is rendered illegal or materially adversely affected as a result of changes in law, (iii) the terminating party is notified by any governing regulatory agency that such party’s performance of its obligations under the agreement may be unlawful, unsafe or unsound or may jeopardize such party’s standing or rating with such agency, or (iv) the non-terminating party is bankrupt or is in receivership. In addition, provided we are not in default under the agreement, we may terminate this agreement at an earlier date if Republic Bank ceases to fund the short-term consumer loans we market, or if applicable law is amended or changed in a manner that has an adverse effect on our ability to continue servicing these Republic Bank Loans. Finally, we may exclude from the agreement all of our stores in a particular state if we determine that we can profitably engage in that state in short-term consumer loan transactions independent of Republic Bank or any other bank subject to similar restrictions on making such short-term loans; except that the stores in Arkansas or in Pennsylvania may not be excluded before January 1, 2006, and the stores in Texas may not be excluded before April 1, 2006.

The First Bank of Delaware loans are offered at our owned stores in accordance with a Marketing and Servicing Agreement dated July 21, 2005 (the “First Bank of Delaware Agreement”). The term of our agreement with First Bank of Delaware expires July 21, 2008, and will automatically renew for an additional 12 months unless either party elects to terminate it as of July 21, 2008 by providing at least 90 days’ notice to the other party before that date. The agreement may be terminated before its scheduled expiration: (i) automatically if either party seeks protection under any federal or state bankruptcy, insolvency, receivership, or similar law; (ii) automatically if First Bank of Delaware is placed into conservatorship or receivership with the FDIC or other authority; (iii) automatically if an involuntary bankruptcy or insolvency petition is filed against us and not dismissed within 30 days of that filing or a receiver or any regulatory authority takes control of us; (iv) by either party if the other party commits a material breach of, or other specified default under, the agreement and fails to cure such breach or default within 30 days of notice; (v) by First Bank of Delaware, upon 90 days notice, if First Bank of Delaware becomes aware of any adverse legal, regulatory, or other developments that could have a material adverse impact on First Bank of Delaware, the profitability of its activities under the agreement, or its litigation or risk exposure; (vi) by us, upon 90 days notice, if First Bank of Delaware changes its loan-related policies in a manner that is reasonably likely to have, or if we become aware of any adverse legal, regulatory, or other developments that could have, a material adverse impact on us, the profitability of our activities under the agreement, or our litigation or risk exposure; or (vii) by us, upon 90 days notice, if we determine that we can profitably engage in installment-loan or deferred-deposit transactions in Texas independent of First Bank of Delaware, except that upon any termination for this reason on or before December 31, 2006, we must pay First Bank of Delaware a termination fee of $100,000.

The terms of the Republic Bank loans are generally similar to those of our ACE loans, though Republic Bank has sole discretion regarding the terms of the Republic Bank loans. As of September 30, 2005, Republic Bank authorized loans up to $425 with a term of 14 days, and the interest charged by Republic Bank was $17.64 per $100

of loan value. The loans offered by First Bank of Delaware Republic Bank loans are short-term consumer loans payable by the borrower in multiple installments over a maximum 20-week period. First Bank of Delaware has sole discretion regarding the terms of these loans. As of September 30, 2005, First Bank of Delaware authorized loans up to $425 with a term of 20 weeks, and the annual interest rate charged by First Bank of Delaware was 389%.

Under both bank agreements, we provide various services in connection with our marketing and servicing of the banks’ short-term consumer loans in exchange for agency fees equal to a portion of the interest charged by the banks based on loan volume. These services include advertising, application processing and collecting payments from the bank customers. We do not acquire or own any participation interest in any of the bank loans, but our agency fees are subject to reduction by the losses from uncollected bank loans. The maximum potential future payments that we could be obligated to make under the Republic Bank Agreement are the total outstanding Republic Bank loans recorded on their financial statements, which were $5.6 million as of September 30, 2005 and $10.7 million as of June 30, 2005. The maximum potential future payments that we could be obligated to make under the First Bank of Delaware Agreement are the total outstanding First Bank of Delaware loans recorded on their financial statements, which were $4.1 million as of September 30, 2005.

6. HURRICANE KATRINA

During the quarter, we recorded a pre-tax charge of $1.7 million related to losses from Hurricane Katrina. This charge included an addition to the loan loss provision and the write-off of fixed assets. At this time, 14 of our 22 company-owned stores in the greater New Orleans market remain closed.

7. ACQUISITION AGREEMENT

On September 21, 2005, we entered into an Asset Purchase Agreement with Popular Cash Express, Inc. (“PCE”), Popular Cash Express – California, Inc. (“PCEC”) and with Popular North America, Inc. (“PNA”). Pursuant to the agreement, we will purchase substantially all of PCE’s and PCEC’s assets relating to their check-cashing and related business operations which includes 111 check-cashing stores.

The purchase agreement provides that we will pay to PCE and PCEC up to $36 million for the assets, of which up to $19.4 million will be evidenced by a series of convertible promissory subordinated notes, with the remaining balance to be paid in cash. The notes will be payable on a quarterly basis and will bear interest at 3.625% per annum, and will mature on December 31, 2025 unless earlier converted by the holder, redeemed at our option or required to be repurchased at the option of the holder upon a change of control of the Company. The notes will be convertible into shares of our common stock at a conversion price of $26.77.

On October 31, 2005, we consummated the acquisition of 16 stores in Arizona and 9 stores in Texas. On November 7, 2005 we consummated the acquisition of 11 stores in Florida. We intend to stage additional closings during the second quarter of fiscal 2006 as the conditions to closing each acquired store are satisfied.

PCE and PCEC have agreed to not compete against us within a limited radius from the stores being acquired until September 21, 2010, and have also agreed to not solicit or hire any of our employees until September 21, 2006.

The closings of the transaction are subject to the satisfaction of various customary conditions, including the consent of the sellers’ existing landlords, receipt of all requisite licenses and permits from various governmental authorities, and the consent of our bank group. The agreement includes customary representations and warranties from PCE and PCEC regarding the assets being purchased by us.

8. PENDING LAWSUITS AND SETTLEMENTS

On June 1, 2005, Perseveranda Goins, Marie Aficial and Antonia Torres filed in the Superior Court of the State of California for the County of San Diego, a putative class action seeking damages and injunctive relief against us and Your Financial Resource, Inc., one of our franchisees, alleging, among other things, that we and our franchisee violated various California state law requirements with respect to the making of short-term consumer loans to the plaintiffs by, among other things, failing to make proper disclosures to the plaintiffs and assessing plaintiffs’

insufficient funds fees in excess of the statutory cap. On July 1, 2005, the defendants removed the lawsuit to the United States District Court for the Southern District of California.

On June 13, 2005, Rebecca Webb and Pamela List, both of whom are our former employees, filed in the United States District Court for the Eastern District of Texas, Marshall Division, a putative class action against us under the Fair Labor Standards Act seeking to recover overtime wages allegedly due to “center managers” and “managers-in-training” who regularly worked in excess of 45 hours per week.

Because these lawsuits purport to be class actions, the amount of damages for which we might be responsible is uncertain. In addition, any such amount depends upon proof of the allegations and on the number of persons who constitute the class of plaintiffs (if permitted by the court). We intend to vigorously defend ourselves against these lawsuits.

We are also involved from time to time in various other legal proceedings incidental to the conduct of our business. We believe that none of these legal proceedings, or any other threatened legal proceedings, will result in any material impact on our financial condition, results of operations and cash flows.

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
SUPPLEMENTAL STATISTICAL DATA
(unaudited)


	Three Months Ended
	September 30,						Year Ended June 30,
	2005			2004			2005			2004			2003
Company Operating and Statistical Data:
Company-owned stores in operation:
Beginning of period		1,142			1,026			1,026			968			1,003
Acquired		2			23			74			34			2
Opened		29			15			80			53			14
Sold		(1	)		—			(6	)		(5	)		(23	)
Closed		(9	)		(9	)		(32	)		(24	)		(28	)

End of period		1,163			1,055			1,142			1,026			968
Franchised stores in operation:
Beginning of period		229			204			204			200			184
Opened		6			9			48			32			26
Acquired by ACE		(2	)		(11	)		(22	)		(13	)		(2	)
Closed/Sold		(7	)		—			(1	)		(15	)		(8	)

End of period		226			202			229			204			200

Total store network		1,389			1,257			1,371			1,230			1,168


Percentage increase (decrease) in comparable store revenues from prior period: ⁽¹⁾
Total revenue		2.2	%		7.9	%		3.1	%		5.0	%		1.9	%
Check fees including tax check fees		(0.2	%)		(1.7	%)		(3.8	%)		4.1	%		5.4	%
Loan fees and interest		3.3	%		20.7	%		12.7	%		7.8	%		(4.4	%)

Cash Flow Data: (in thousands)
Purchases of property and equipment, net	$	3,033		$	2,697		$	18,951		$	7,439		$	4,721
Store acquisition costs:
Property and equipment		32			339			958			511			50
Intangible assets		1,276			3,510			18,429			6,403			670

Check Cashing Data:
Face amount of checks cashed (in millions)	$	1,230		$	1,147		$	5,277		$	5,103		$	5,040
Face amount of average check	$	372		$	358		$	396		$	388		$	383
Average fee per check	$	8.95		$	8.78		$	9.98		$	9.91		$	9.65
Fees as a percentage of average check		2.41	%		2.45	%		2.52	%		2.55	%		2.52	%
Number of checks cashed (in thousands)		3,310			3,204			13,325			13,151			13,148

Check Collections Data: (in thousands except percentages)
Face amount of returned checks	$	9,002		$	5,952		$	26,914		$	21,705		$	24,087
Collections		7,101			4,041			20,951			13,947			16,935

Net write-offs	$	1,901		$	1,911		$	5,963		$	7,758		$	7,152


Collections as a percentage of returned checks		78.9	%		67.9	%		77.8	%		64.3	%		70.3	%
Net write-offs as a percentage of revenues		2.9	%		3.1	%		2.2	%		3.1	%		3.1	%
Net write-offs as a percentage of the face amount of checks cashed		0.15	%		0.17	%		0.11	%		0.15	%		0.14	%

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
SUPPLEMENTAL STATISTICAL DATA, continued
(unaudited)
(in thousands, except averages and percents)


	Three Months Ended
	September 30,						Year Ended June 30,
	2005			2004			2005			2004			2003
Combined Short-Term Consumer Loans Operating Data:
Volume — new loans and refinances	$	181,520		$	159,673		$	640,356		$	527,723		$	484,026
Average advance	$	300		$	283		$	290		$	278		$	274
Average finance charge	$	44.24		$	44.83		$	45.87		$	43.71		$	44.55
Number of loan transactions — new loans and refinances		563			554			2,139			1,909			1,798
Matured loan volume	$	172,927		$	154,565		$	613,380		$	516,741		$	488,940
Loan fees and interest	$	25,209		$	23,223		$	91,793		$	77,029		$	70,806
Loan loss provision	$	8,114		$	7,424		$	26,941		$	24,280		$	22,293
Gross margin on loans		67.8	%		68.0	%		70.7	%		68.5	%		68.5	%
Loan loss provision as a percent of matured loan volume		4.7	%		4.8	%		4.4	%		4.7	%		4.6	%

Loans Processed for Republic Bank: ⁽²⁾
Volume — new loans and refinances	$	28,763		$	48,454		$	184,646		$	159,692		$	63,897
Average advance	$	309		$	314		$	319		$	296		$	302
Average finance charge	$	54.52		$	55.37		$	56.30		$	52.11		$	53.35
Number of loan transactions — new loans and refinances		93			154			578			541			211
Matured loan volume	$	31,563		$	47,299		$	181,153		$	157,018		$	56,040
Loan fees and interest	$	4,534		$	7,263		$	27,880		$	24,036		$	9,037
Provision for loan losses payable to Republic Bank	$	1,557		$	2,337		$	8,686		$	7,390		$	2,932

Loans Processed for First Bank of Delaware: ⁽³⁾
Volume — new loans and refinances ⁽⁴⁾	$	7,270			—			—			—			—
Average advance	$	340			—			—			—			—
Average finance charge ⁽⁵⁾	$	33.79			—			—			—			—
Number of loan transactions — new loans and refinances ⁽⁶⁾		21			—			—			—			—
Matured loan volume ⁽⁷⁾	$	11,742			—			—			—			—
Loan fees and interest	$	1,901			—			—			—			—
Provision for loan losses payable to First Bank of Delaware	$	609			—			—			—			—

ACE Loans:
Volume — new loans and refinances	$	145,487		$	111,219		$	455,710		$	368,031		$	420,129
Average advance	$	296		$	269		$	277		$	269		$	268
Average finance charge	$	42.27		$	39.89		$	41.17		$	39.40		$	42.71
Number of loan transactions — new loans and refinances		449			400			1,561			1,368			1,587
Matured loan volume	$	129,622		$	107,266		$	432,227		$	359,723		$	432,900
Loan fees and interest	$	18,774		$	15,960		$	63,913		$	52,993		$	61,769
Loan loss provision	$	5,947		$	5,087		$	18,255		$	16,890		$	19,361

ACE Loans Balance Sheet Data:
Gross loans receivable	$	37,993		$	30,819		$	31,790		$	27,663		$	21,734
Less: Allowance for losses		13,221			12,021			11,003			10,616			8,734

Loans receivable, net of allowance	$	24,772		$	18,798		$	20,787		$	17,047		$	13,000


Allowance for losses on loans receivable:
Beginning of period	$	11,003		$	10,616		$	10,616		$	8,734		$	12,213
Provision for loan losses		5,947			5,087			18,255			16,890			19,361
Charge-offs		(3,729	)		(3,833	)		(18,996	)		(15,295	)		(23,729	)
Recoveries		—			151			1,128	⁽⁸⁾		287			889

End of period	$	13,221		$	12,021		$	11,003		$	10,616		$	8,734


Allowance as a percent of gross loans receivable		34.8	%		39.0	%		34.6	%		38.3	%		40.2	%

ITEM 2. 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 loan and bill payment services. As of September 30, 2005, we had a total network of 1,389 stores in 37 states and the District of Columbia, consisting of 1,163 company-owned stores and 226 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. We focus on serving 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 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, short-term 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 (“ACE Loans”), we receive interest on the loans. For the bank loans offered by Republic Bank (“Republic Bank loans”) and First Bank of Delaware (“First Bank of Delaware loans”), we receive origination and servicing fees from such 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.

Regulatory Developments

The Federal Deposit Insurance Corporation, or FDIC, issued guidelines governing permissible arrangements between a state-chartered bank and a marketer and servicer of its payday loans in July 2003, and issued revised guidelines in March 2005. The guidelines apply to our marketing and servicing agreements with Republic Bank and First Bank of Delaware regarding the offering of each such bank’s 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 payday 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 payday lending.

could offer, or we could secure an agreement with another financial institution not subject to such limitations to offer, similar or alternate services. We cannot assure you that we would be successful in offering similar or alternate services or finding such a replacement financial institution, in the latter case especially because arrangements like ours with Republic Bank and First Bank of Delaware are coming under increasing political and regulatory scrutiny. Lawsuits filed against banks offering these short-term consumer loans, such as one filed by the New York State Attorney General’s office in September 2003 against a Delaware state-chartered bank and the companies servicing its short-term consumer loans through a structure that is in some respects similar to our agreements with Republic Bank and First Bank of Delaware, may hinder our ability to partner with a replacement bank or to establish relationships with new banks in other states as part of our growth strategy. Any alternate or similar services or agreement with a replacement bank or new bank may also not be on terms as favorable to us as our current agreements with Republic Bank and First Bank of Delaware.

Critical Accounting Policies and Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions to determine the reported amounts of our assets, liabilities, revenues and expenses. We base these estimates and assumptions upon the best information available to us at the time the estimates or assumptions are made. The most significant estimates made by our management, which we consider critical, include our allowance for loan losses and accrued liability for loan losses payable to Republic Bank and First Bank of Delaware, valuation of goodwill, income taxes, and valuation of self-insured liabilities, because these estimates and assumptions could change materially as conditions both within and beyond our control change. Accordingly, our actual results could differ materially from our estimates. The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary in determining the value of related assets or liabilities.

Allowance for Loan Losses and Accrued Liability for Loan Losses Payable to Republic Bank and First Bank of Delaware. We establish an allowance for loan losses based on our estimates of the amount of uncollectible loans in our loan portfolio. We also establish a liability for loan losses payable to Republic Bank and First Bank of Delaware based on our estimates of the amount of uncollectible loans in each bank’s loan portfolio. The loan loss allowance and liability to Republic Bank and First Bank of Delaware are considered critical because they are material, subjective, and involve estimates. We determine the required allowance and liability using information such as recent loan loss experience and economic trends and conditions. While the estimates can be affected by operations experience and regulatory changes, historically, our allowance and liability levels have remained consistent as a percentage of their respective loan portfolios.

We regularly review our loss exposure to determine appropriate loss reserve amounts, as well as to determine strategies that could minimize our future exposure. While we believe our current allowance and liability are adequate, we could be negatively affected if we experience a higher than historical level of losses in the short-term, which would require us to increase our provision for loan losses and accrual for loan losses payable to Republic Bank and First Bank of Delaware.

Goodwill. From time to time, we acquire individual stores or a group of stores. When we enter into these acquisitions, we value the underlying tangible and intangible assets and record the excess of the purchase price over the net assets acquired as goodwill. We review the carrying value of goodwill annually or when events and circumstances warrant such a review. We review the carrying value of goodwill using a discounted cash flow model of the expected net cash flows of the business. The most significant variables used in the model include expected revenues, incremental costs and working capital requirements. We regularly compare actual results to expected performance, but in the event we experience significant declines in revenue levels or significant increases in operating costs, the value of goodwill could be impaired, and we might be required to write-down the recorded value of goodwill.

Income Taxes. We establish our deferred tax assets and liabilities based on our profits or losses in each jurisdiction in which we operate. We periodically assess the likelihood of realizing our deferred tax assets and would record a valuation allowance based on the amount of deferred tax assets that we believe is more likely than not to be realized. We base our judgment of the recoverability of our deferred tax asset primarily on historical earnings, our

estimate of current and expected future earnings, prudent and feasible tax planning strategies, and current and future ownership changes. A significant adverse change in any one or several of these factors would materially affect our assessment of the likelihood of recoverability of our deferred tax assets and would impact the amount of tax expense we record. Historically, we have fully recovered our deferred tax assets as estimated.

Self-insurance liabilities. We are self-insured for workers’ compensation, general liability and medical liability claims not otherwise covered by third-party insurance policies. The established self-insured reserves are determined by a review of actuarial assessments and historical loss experience, and may be adjusted based on higher or lower actual loss experience. In the event that we experience higher than expected losses, we may be required to increase the levels of our self-insured liabilities and/or record a charge to cover uninsured losses. Historically, our calculated reserves for self-insured liabilities have been adequate.

Summary of Quarterly Results

The first quarter of fiscal 2006 was impacted by the implementation of the revised FDIC Guidelines for payday lending effective July 1, 2005 and Hurricane Katrina.

Overall demand for short-term consumer loans remains strong across our entire system. As a result of the revised FDIC Guidelines for payday lending, we introduced our new First Bank of Delaware 20-week installment loan product in Arkansas, Pennsylvania and Texas on August 1^st. Though this product has been well-received, it has lower income potential compared to the Republic Bank loan product, and therefore impacted our results this quarter. Same store sales for loan fees in states impacted by the revised FDIC Guidelines were down approximately 13.6%, however, same store sales for loan fees in states not impacted by the revised FDIC Guidelines increased approximately 11.3%. In addition, incremental marketing and training costs of were incurred during the quarter to accomplish the timely introduction of the new First Bank of Delaware installment loan product.

Regarding Hurricane Katrina, we operated 20 stores in markets affected by the hurricane and had another two stores under construction. As of November 4, 2005, eight of the stores have re-opened and we are continuing to evaluate our options for re-opening each of the remaining stores. During the quarter we recorded a pre-tax charge of $1.7 million related to additional loan loss provision and the write-off of fixed assets. In addition, as a result of lost revenue from the stores closed following the hurricane, the gross margin impact was approximately $250,000.

Our fiscal 2006 first quarter total revenue was approximately $4.2 million, or 7%, higher than our fiscal 2005 first quarter total revenue. This increase resulted primarily from an approximate $2.0 million, or 9% increase in loan related revenue, an approximate $1.5 million, or 5% increase in check cashing fees, and an approximate $0.6 million, or 12%, increase in bill payment (including debit card) revenue. Our fiscal 2006 first quarter net income was approximately $2.9 million, with diluted earnings per share of $0.21, compared to our fiscal 2005 first quarter net income of approximately $5.1 million, with diluted earnings per share of $0.37.

Results of Operations

Revenue Analysis


	Three Months Ended September 30,
	2005		2004		Increase (Decrease)						2005			2004
	(in thousands)							(percent)			(percentage of revenue)
Check cashing	$	29,612	$	28,117	$	1,495			5.3	%		44.7	%		45.3	%
Short-term consumer loans		25,209		23,223		1,986			8.6			38.1			37.4
Bill payments		5,296		4,709		587			12.5			8.0			7.6
Money transfers		2,967		2,825		142			5.0			4.5			4.6
Money orders		1,599		1,731		(132	)		(7.6	)		2.4			2.8
Franchising		769		747		22			2.9			1.2			1.2
Other services		741		674		67			9.9			1.1			1.1

Total revenue	$	66,193	$	62,026	$	4,167			6.7	%		100.0	%		100.0	%

Average revenue per store (excluding franchise revenues)	$	56.8	$	58.9		($2.1	)		(3.6	%)

Most of the growth in total revenue in the first quarter of fiscal 2006 from the first quarter of fiscal 2005 resulted from increases in check cashing fees, short-term consumer loan fees and interest, and bill payment services. Comparable store revenue increased by $1.2 million, or 2.2%.

Check cashing fees in the first quarter of fiscal 2006 increased from the first quarter of fiscal 2005 as a result of the increase of 108 stores in our company-owned store network from the prior year, and a 3.9% increase in the face amount of the average check cashed.

Loan fees and interest for the first quarter of fiscal 2006 increased by $2.0 million, or 9%, from the first quarter of fiscal 2005 due to an increase in comparable store loan fees of 3.3% and the increased number of store locations offering loan services. As of September 30, 2005, we offered loan services in 1,055 of our company-owned stores, compared to 954 of our company-owned stores as of September 30, 2004. The revised FDIC guidelines became effective July 1, 2005, and therefore, impacted our ability to provide payday loans to our customers. Effective August 1, 2005, we began marketing and servicing a longer-term (20-week) loan product offered by the First Bank of Delaware. Loan fees and interest as a percent of our total loan revenue from our ACE loan products represent 75%, from Republic Bank loans represent 18%, and from First Bank of Delaware loans represent 7% for the first quarter of fiscal 2006.

The increase in bill payment fees in fiscal 2005 was a result of growth in revenues from our services related to prepaid debit cards. Money transfer services increased as a result of the increase in the number of stores in the ACE network. Money orders decreased due to increases in electronic bill payments and debit card payments.

Bill payment (including debit card) revenue for the first quarter of fiscal 2006 increased from the first quarter of fiscal 2005 primarily because of the growth in revenues from our prepaid debit card services. We sold 42,000 prepaid debit cards during the first quarter of fiscal 2006, and our customers loaded $181 million on these cards during the first quarter of fiscal 2006, compared to $97 million during the same period last year, which reflects the increased acceptance and usage of these cards by our customers.

Store Expense Analysis


	Three Months Ended September 30,
	2005		2004		Increase (Decrease)						2005			2004
	(in thousands)							(percent)			(percentage of revenue)
Salaries and benefits	$	17,235	$	14,787	$	2,448			16.6	%		26.0	%		23.8	%
Occupancy		9,456		8,182		1,274			15.6			14.3			13.2
Provision for loan losses and doubtful accounts		8,159		7,468		691			9.3			12.3			12.0
Depreciation		2,066		1,687		379			22.5			3.1			2.7
Hurricane Katrina related expenses		1,655		—		1,655		NA				2.5			—
Other:
Armored and security		2,149		1,943		206			10.6			3.3			3.1
Returns and cash shortages		2,305		2,401		(96	)		(4.0	)		3.5			3.9
Information services		877		865		12			1.4			1.3			1.4
Bank charges		1,404		1,271		133			10.5			2.1			2.0
Store supplies		870		1,233		(363	)		(29.4	)		1.3			2.0
Telecommunications		419		603		(184	)		(30.5	)		0.6			1.0
Advertising and marketing		1,290		678		612			90.3			2.0			1.1
Miscellaneous		1,021		814		207			25.4			1.5			1.3

Other		10,335		9,808		527			5.4			15.6			15.8

Total store expenses	$	48,906	$	41,932	$	6,974			16.6	%		73.9	%		67.6	%


	Three Months Ended September 30,
	2005			2004			Increase (Decrease)						2005	2004
	(in thousands)									(percent)			(percentage of revenue)
Average per store expense	$	42.4		$	40.3		$	2.1			5.2	%
Average per store gross margin	$	15.0		$	19.3			(4.3	)		(22.3	)

Face amount of checks cashed	$	1,230,000		$	1,147,000

Face amount of returned checks	$	9,002		$	5,952
Collections		(7,101	)		(4,041	)

Net write-offs	$	1,901		$	1,911


Net write-offs as a percentage of the face amount of checks cashed ⁽¹⁾		0.15	%		0.17	%


⁽¹⁾		The same percentages apply for the percentage of check cashing fee revenue associated with returned checks as a percentage of total check cashing fee revenue.

Total store expenses increased primarily as a result of the 108 additional stores in operation and growth in the loan business.

The 10% increase in number of stores from the same period last year resulted in increases in salaries and benefits, occupancy, armored and security, information services, and depreciation. In addition to the increase in the number of stores, salaries expense increased as a result of increased training expense related to new loan product introduction, occupancy expenses increased due to higher lease rates, and depreciation expense increased as a result of the new computer roll-out to the stores during the second half of fiscal 2005 and the lease accounting change during the third quarter of fiscal 2005 which resulted in shorter leasehold depreciation lives. Provision for loan losses increased due to growth in both the ACE Loan and Republic Bank loan business, along with the introduction of the First Bank of Delaware loans effective August 1, 2005. Returned checks, net of collections, and cash shortages decreased due to continued focus on operational procedures and controls. Store supplies decreased due to improved order control processes. Telecommunications expenses decreased as a result of the utilization of national accounts. Advertising and marketing expenses increased due to specific advertising and marketing programs introduced this fiscal year to promote our loan products, including the First Bank of Delaware loan product. Miscellaneous expenses increased as a result of increased licensing expense related to the new stores and the new loan products, along with increases in insurance expense. During the quarter, we recorded a pre-tax charge of $1.7 million related to losses from Hurricane Katrina. This charge included an addition to the loan loss provision and the write-off of fixed assets. As of October 27, 2005, 14 of our 22 company-owned stores in the greater New Orleans market remain closed.

Other Expenses Analysis


	Three Months Ended September 30,
	2005			2004		Increase (Decrease)						2005			2004
	(in thousands)								(percent)			(percentage of revenue)
Region expenses	$	5,918		$	5,219	$	699			13.4	%		8.9	%		8.4	%
Headquarters expenses		4,830			4,681		149			3.2			7.3			7.5
Franchise expenses		278			267		11			4.1			0.4			0.4
Other depreciation and amortization		821			706		115			16.3			1.2			1.1
Interest expense, net		810			593		217			36.6			1.2			1.0
Other (income) expenses, net		(67	)		172		(239	)		(139.0	)		(0.1	)		0.3
Income taxes		1,832			3,383		(1,551	)		(45.8	)		2.8			5.5

Region Expenses. Region expenses increased because of the addition of a new region and increases in salaries and benefits expense resulting from additional staffing in collections, facilities and real estate development related to supporting the growth in the number of stores.

Headquarters Expenses. Headquarters expenses increased primarily due to increased professional services.

Franchise Expenses. Franchise expenses relate to the salaries, benefits, and other franchisee support costs for the sales and support personnel in our ACE Franchise Group. Franchise expenses increased slightly from the first quarter last year.

Other Depreciation and Amortization. Other depreciation and amortization expense increased due to the fixed asset additions related to the 108 additional stores compared to the same period last year.

Interest Expense, Net. Interest expense, net, increased for the same period last year due to a higher effective interest rate.

Other (Income) Expenses, Net. Other (income) expenses, net, decreased primarily due to the gain on the sale of a store and the reimbursement of previously recognized expenses.

Income Taxes. A total of $1.8 million was provided for income taxes, a decrease of $1.6 million from $3.4 million in the first quarter of fiscal 2005. The provision for income taxes was calculated based on a statutory federal income tax rate of 35%, plus a provision for state income taxes. The effective income tax rate for the quarters ended September 30, 2005 and 2004 was 39% and 40%, respectively. However, the annual effective income tax rate for the fiscal year ending June 30, 2005 was 39%.

Balance Sheet Variations

Cash and cash equivalents, money orders payable and revolving advances vary because of seasonal and day-to-day requirements resulting primarily from maintaining cash for cashing checks and making short-term consumer loans, and the receipt and remittance of cash from the sale of money orders, wire transfers and bill payments. For the three months ended September 30, 2005, cash and cash equivalents increased $14.7 million, compared to a decrease of $19.0 million, for the three months ended September 30, 2004.

Accounts receivable, net, of $6.2 million as of September 30, 2005 increased $2.2 million from June 30, 2005 due primarily to the loan fee receivable from the First Bank of Delaware for loans we began marketing and servicing on August 1, 2005.

Loans receivable, net, of $24.8 million as of September 30, 2005 increased $4.0 million from June 30, 2005 due to a combination of the additional number of ACE loan stores and the increase in ACE loans as a result of the state regulated loan product introduced in Texas as a result of the revised FDIC guidelines affecting payday lending services provided by Republic Bank which was effective on July 1, 2005. Effective July 1, 2005, we began offering a new loan product to Texas consumers. This new product is in addition to the current loan product offered by Republic Bank and Trust Company. This new loan product allows consumers who exceed the maximum allowable loans under the FDIC Guidance to still have access to short-term credit. Loans receivable, net, does not include any of the Republic Bank loans or First Bank of Delaware loans available through our company-owned stores in Arkansas, Pennsylvania and Texas, because we serve only as marketing and servicing agent for these banks regarding those bank loans and do not acquire or own any participation interest in any of those loans. Our agreement with Republic Bank and First Bank of Delaware provides for us to receive origination and servicing fees from these banks, though such fees are subject to reduction or offset by the losses from uncollected bank loans.

Prepaid expenses, inventories and other current assets of $13.5 million as of September 30, 2005 decreased $0.2 million from June 30, 2005.

Property and equipment, net, at September 30, 2005 increased $0.4 million from June 30, 2005 as a result of fixed asset additions of $2.9 million (including $0.2 million for capitalized software development), offset by depreciation expense of $2.4 million and fixed asset retirements of $0.1 million. Goodwill at September 30, 2005 increased $1.2 million from June 30, 2005 as a result of the two stores acquired during the three months ended

September 30, 2005. During the three months ended September 30, 2005, we opened 29 newly constructed stores, acquired two stores, and closed nine company-owned stores.

Other assets at September 30, 2005 increased by $0.1 million as a result of an increase in notes receivable related to the sale of a store in July 2005.

Revolving advances at September 30, 2005 increased by $9.7 million from June 30, 2005 due to the additional cash required to fund store operations on Friday, September 30^th compared to Thursday, June 30^th.

Accounts payable, accrued liabilities and other current liabilities at September 30, 2005 increased $4.6 million from June 30, 2005, primarily because of increases in liabilities to various service providers and the accrued expenses related to the costs associated with Hurricane Katrina.

ACE Loan Portfolio

We have established a loan loss allowance regarding our ACE Loans receivable at a level that our management believes to be adequate to absorb known or probable losses from ACE Loans made by us. Our policy for determining the loan loss allowance is based on historical experience generally, as well as the results of management’s review and analysis of the payment and collection of the loans within the last fiscal quarter.

We have determined, based on recent operating history, that we receive payment of approximately 94.8% (for loans maturing in the first, second and fourth fiscal quarters) or 95.7% (for loans maturing during tax refund season in the third fiscal quarter) of the loan volume, or principal amount of the loans. Therefore, the loan loss allowance is approximately 5.2% of the principal amount of the loans maturing in the first, second and fourth fiscal quarters and approximately 4.3% of the principal amount of the loans maturing in the third fiscal quarter. Our policy is to charge off all of our short-term consumer loans, which are 180 days or more past due or delinquent. Charge-offs are applied as a reduction to the loan loss allowance and any recoveries of previously charged-off loans are applied as an increase to the loan loss allowance.

At the end of each fiscal quarter, we analyze the loan loss provision and the allowance that has been computed based on the activity described above to determine if the allowance is adequate based on our understanding of what is occurring in the stores with customers, past loan loss experience, current economic conditions, volume and growth of the loan portfolio, timing of maturity, as well as collections experience. For this purpose, we treat each renewal of a loan in which no additional principal is advanced as a continuation of the initial loan. If necessary, we make adjustments to the provision and the allowance.

An analysis of the loan loss allowance with reference to our gross loans receivable (which does not include any Republic Bank or First Bank of Delaware loans) is as follows:


	Three Months Ended
	September 30,
	2005			2004
	(in thousands)
ACE Loans:
Gross loans receivable, beginning of period	$	31,790		$	27,663
Originations		145,487			111,219
Repayments		(135,556	)		(104,381	)
Charge-offs		(3,728	)		(3,833	)


	Three Months Ended
	September 30,
	2005			2004
	(in thousands)
Recoveries		—			151

Gross loans receivable		37,993			30,819
Less: Allowance for losses on loans receivable		13,221			12,021

Loans receivable, net of allowance	$	24,772		$	18,798


Allowance for losses on loans receivable:
Beginning of period	$	11,003		$	10,616
Provision for loan losses		5,947			5,087
Charge-offs		(3,729	)		(3,833	)
Recoveries		—			151

End of period	$	13,221		$	12,021

Net loan charge-offs as a percent of matured loan volume⁽¹⁾		2.9	%		3.4	%
Allowance as a percent of gross loans receivable		34.8	%		39.0	%


⁽¹⁾		Matured loan volume represents all loans which became due and payable during the reporting period.

All loans not paid on the due date are considered delinquent, and no additional interest accrues after loan maturity. Loans past due (non-accrual) and loans ninety days or more past due at each date presented are as follows:


	September 30,
	2005			2004
ACE Loans:
Gross loans receivables, end of period	$	37,993		$	30,819

Loans past due (unpaid at due date)		13,020			10,315

Percentage of gross loans receivable		34.3	%		33.5	%

Loans past due 90+ days	$	5,514		$	4,672

Percentage of gross loans receivable		14.5	%		15.2	%

Off-Balance Sheet Arrangement with Republic Bank and First Bank of Delaware

We are party to marketing and servicing agreements with two banks, Republic Bank and the First Bank of Delaware. Under these agreements, we provide various services to the banks in connection with our marketing and servicing of their loans in exchange for agency fees equal to a portion of the interest charged by the banks based on loan volume. These services include advertising, application processing and collecting payments from bank customers. As of September 30, 2005, Republic Bank and First Bank of Delaware were offering loans in 428 of our company-owned stores in Arkansas, Pennsylvania and Texas. Approximately $6.4 million, or 9.7% of our total revenues in the quarter ended September 30, 2005 were fees paid to us by Republic Bank and First Bank of Delaware.

Although we market and service these bank loans, Republic Bank and First Bank of Delaware are responsible for reviewing each loan application and determining whether such application is approved for a loan. We are not involved in the loan approval process, including with respect to determining the loan approval procedures or criteria, nor do we acquire or own any participation interest in these loans. Consequently, Republic Bank loans and First Bank of Delaware loans are not included in our loan portfolio or in our loans receivable and loans are not reflected

on our balance sheet. Under our agreement, however, we are obligated to reimburse the banks by paying them an amount equal to the net amount charged off by each bank regarding their loans made in our stores. Therefore, we could be obligated to pay Republic Bank and First Bank of Delaware for loan losses in an amount up to the total outstanding amount of bank loans recorded on their financial statements, which was $5.6 million and $4.1 million as of September 30, 2005 for Republic Bank and First Bank of Delaware, respectively.

Because of our economic exposure for losses related to the bank loans, we have established a payable to reflect our anticipated losses related to uncollected bank loans that are 180 days or more past due. We believe that the loss experience with Republic Bank and First Bank of Delaware loans will be similar to the loss experience with ACE loans because the loan products are similar in amount and credit quality. Accordingly, the payable for amounts due to Republic Bank and First Bank of Delaware for losses regarding bank loans has been established using the same methodology discussed in “- Loan Portfolio” above. We cannot assure you, however, that our estimates will be accurate, and if the Republic Bank and First Bank of Delaware loan losses are materially greater than our recorded amount payable, our financial condition could be materially adversely affected.

An analysis of the loan loss allowance with reference to Republic Bank and First Bank of Delaware’s gross loans receivable (which are not included in our balance sheet) is as follows:


	Republic Bank						First Bank of Delaware
	Three Months Ended						Three Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
	(in thousands)
Gross loans receivable, beginning of period	$	10,713			9,434		$	—		$	—
Originations		28,763			48,454			7,270			—
Repayments		(32,223	)		(46,435	)		(3,148	)		—
Charge-offs		(1,676	)		(1,486	)		—			—
Recoveries		—			19			—			—

Gross loans receivable, end of period ⁽¹⁾		5,577			9,986			4,122			—
Loan losses paid to banks for loans less than 180 days delinquent		4,846			4,344			399			—

Gross bank loans receivable	$	10,423		$	14,330		$	4,521		$	—


Liability for loan losses payable to banks:
Beginning of period	$	4,030		$	3,714		$	—		$	—
Provision		1,557			2,337			609			—
Charge-offs		(1,676	)		(1,486	)		—			—
Recoveries		—			19			—			—

End of period	$	3,911		$	4,584		$	609		$	—


Net loan charge-offs as a percent of matured loan volume ⁽²⁾		5.3	%		3.1	%		—			—
Liability as a percent of gross bank loans receivable		37.5	%		32.0	%		13.5	%		—


⁽¹⁾		Republic Bank loans and First Bank of Delaware loans are not carried on our balance sheet.

⁽²⁾		Matured loan volume represents all loans which became due and payable during the reporting period.

All loans not paid on the due date are considered delinquent, and no additional interest accrues after loan maturity. Bank loans past due (non-accrual) and bank loans ninety days or more past due at each date presented are as follows:


	Republic Bank				First Bank of Delaware
	September 30,				September 30,
	2005		2004		2005		2004
			(in thousands)
Gross bank loans receivables, end of period	$	10,423	$	14,330	$	4,521		—

Loans past due (unpaid at due date)		5,471		4,981		391		—


	Republic Bank						First Bank of Delaware
	September 30,						September 30,
	2005			2004			2005			2004
				(in thousands)
Percentage of gross loans receivable		52.5	%		34.8	%		8.6	%		—

Loans past due 90+ days		2,876			2,079			—			—

Percentage of gross loans receivable		27.6	%		14.5	%		—			—

Loan Collection Trends

We evaluate our loan collection trends on a combined loan portfolio basis. The schedule below indicates the progression of receipts or collections of each “quarterly portfolio” of loans, consisting of ACE loans, Republic Bank loans, and First Bank of Delaware loans. In this case, a “quarterly portfolio” is all of the ACE loans, Republic Bank loans, and First Bank of Delaware loans that matured in a particular fiscal quarter. We can track the payment rates at different points of time for each quarterly portfolio.

We have established the following collection targets regarding each quarterly portfolio for fiscal 2006:

	•		Receive or collect 91.5% (or 93.0% in our third fiscal quarter) of the total volume, or principal amount of loans, by the end of the current quarter.

	•		Receive or collect a cumulative 93.2% (or 94.8% in our third fiscal quarter) by 90 days out.

	•		Receive or collect a cumulative 94.8% (or 95.7% in our third fiscal quarter) by 180 days out.

Loans are charged-off when they become delinquent for 180 days. The assumed higher rate of payment in our third fiscal quarter is a result of improved collections during the annual tax season because of the borrowers’ receipt of tax refunds.

Collection Progression for Quarterly Loan Portfolios


	Collection Percentage
				Actual
Days Following Quarter	Target			Fiscal 2006			Fiscal 2005			Fiscal 2004
	First Quarter

30		91.5	%		92.1	%		92.6	%		92.7	%
90		93.2	%					94.3	%		94.9	%
180		94.8	%					94.6	%		95.1	%

	Second Quarter

30		91.5	%					93.1	%		93.8	%
90		93.2	%					95.4	%		95.7	%
180		94.8	%					95.8	%		95.8	%

	Third Quarter

30		93.0	%					94.7	%		94.7	%
90		94.8	%					96.1	%		96.0	%
180		95.7	%					96.5	%		96.1	%

	Fourth Quarter

30		91.5	%					92.7	%		93.2	%
90		93.2	%					94.4	%		94.6	%
180		94.8	%								94.9	%

Liquidity and Capital Resources

Cash Flows from Operating Activities

During the three months ended September 30, 2005 and 2004, net cash provided by operating activities was $8.5 million and $4.4 million, respectively. The increase in cash flows from operating activities resulted from timing of remittances to product or service providers, such as Republic Bank, MoneyGram Payment Systems, Inc., and Travelers Express Company Inc., offset by growth in loans receivable.

Cash Flows from Investing Activities

During the three months ended September 30, 2005 and 2004, net cash used by investing activities was $4.3 million and $6.5 million, respectively. We used $2.9 million and $2.7 million during the three months ended September 30, 2005 and 2004, respectively, for purchases of property and equipment related principally to new store openings and remodeling existing stores. Expenditures related to store acquisitions were $1.3 million and $3.8 million for the three months ended September 30, 2005 and 2004, respectively.

Cash Flows from Financing Activities

Net cash provided by financing activities for the three months ended September 30, 2005 was $10.6 million and net cash used by financing activities for the three months ended September 30, 2004 was $16.8 million. Our revolving advance balance increased from June 30, 2005 due to the additional cash required to fund store operations on Friday, September 30^th compared to Thursday, June 30^th. Gross borrowings related to store acquisition notes payable were $0.6 million. Proceeds from the exercise of restricted stock and stock options were $0.3 million for fiscal 2005, compared to $0.8 million for fiscal 2004.

Certain Contractual Cash Commitments

The table below summarizes our cash obligations for certain leases and acquisition notes payable outstanding as of September 30, 2005:


			Payments Due by June 30,
									2009 and
	Total		2006		2007		2008		thereafter
			(in thousands)
Operating leases	$	63,683	$	18,876	$	20,157	$	13,425	$	11,225
Acquisition notes payable		860		238		337		272		13

Total	$	64,543	$	19,114	$	20,494	$	13,697	$	11,238

As part of our growth strategy, we intend to open new stores in existing and new markets. During the first quarter of fiscal 2006, we opened 29 company-owned stores, including 11 ACE Cash Advance stores. We expect to open a total of approximately 50 to 60 new ACE Cash Express stores and 50 to 60 new ACE Cash Advance stores, resulting in a net gain of approximately 70 to 100 company-owned stores, in fiscal 2006.

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. In addition, the typical store requires working capital of $80,000 to $100,000 to fund operating cash and the store’s loan portfolio.

The capital cost of opening an 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 mature ACE Cash Advance store requires working capital of $70,000 to $100,000.

For the quarter ended September 30, 2005, we spent $2.9 million on capital expenditures. Our total capital expenditures, excluding acquisitions, are anticipated to be approximately $15 million during our fiscal year ending June 30, 2006, in connection with the opening new stores, the relocation or remodeling of certain existing stores, maintenance, and ongoing upgrades of our information system. The actual amount of capital expenditures will depend in part on the number of new stores opened, the number of stores acquired, and the number of existing stores that are relocated or remodeled. We believe that our existing resources, anticipated cash flows from operations, and credit facilities will be sufficient to finance our anticipated capital expenditures and operational requirements during fiscal 2006. The 50 to 60 ACE Cash Express stores and the 50 to 60 ACE Cash Advance stores, after closings and dispositions, will require approximately $10.0 million of working capital to fund operating cash and additions to our loan portfolio

Credit Facilities

Our credit facilities are provided under a First Amended and Restated Credit Agreement with a syndicate of banks led by Wells Fargo Bank, National Association, as administrative agent for itself and the other lenders thereunder. The credit agreement provides two revolving line-of-credit facilities that expire June 30, 2008:

	•		a $140 million primary revolving credit facility that is available throughout the four-year term; and

	•		a $60 million seasonal revolving credit facility that is available during each calendar-year-end holiday and tax season (i.e., December 15 through March 15) during the four-year term.

The outstanding balance as of September 30, 2005 was $53.0 million, with an available balance on the primary revolving credit facility of $87.0 million. The seasonal revolving credit facility of $60 million is only available during tax season.

The revolving line-of-credit facilities include, subject to certain conditions, a letter-of-credit facility from Wells Fargo Bank of up to $10 million.

Borrowings under the credit agreement bear interest at a variable annual rate equal to, at our discretion, either:

	•		The sum of (a) the greatest of (i) the prime rate publicly announced by Wells Fargo Bank, (ii) one percent plus the rate of interest on the secondary market for three-month certificates of deposit reported by the Board of Governors of the Federal Reserve System (the “Board of Governors”), multiplied by a fraction, the numerator of which is one and the denominator of which is one minus the maximum reserve percentages required by the Board of Governors to which Wells Fargo Bank is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities of approximately three months plus the annual assessment rate that is payable by a member of the Bank Insurance Fund classified as “well capitalized,” and (iii) the federal funds rate plus 0.5%; plus (b) a margin that varies from 1.25% to 2.25% per annum based on our debt-to- EBITDA ratio. (For this ratio, “EBITDA” is our earnings before interest, taxes, depreciation, and amortization.) This interest rate adjusts on a daily basis.

	•		The sum of (a) the London Interbank Offered Rate (“LIBOR”) for (at our discretion) one-, two-, three- or six-month maturities, multiplied by a fraction, the numerator of which is one and the denominator of which is one minus the maximum reserve percentages required by the Board of Governors to which Wells Fargo Bank is subject for Eurocurrency funding, plus (b) a margin that varies from 2.25% to 3.25% per annum based on our debt-to-EBITDA ratio. This interest rate adjusts, at our discretion, at one-, two-, three-, or six-month intervals, in accordance with the corresponding LIBOR.

	•		The sum of (a) LIBOR for one-month maturities, plus (b) a margin that varies from 2.25% to 3.25% per annum based on our debt-to-EBITDA ratio. This interest rate adjusts on a daily basis.

We selected the third alternative described above as the annual interest rate for our borrowings under the credit agreement, and as of September 30, 2005, that interest rate was 6.125% (calculated using LIBOR plus 2.25%).

Upon an event of default under the credit agreement, the applicable annual interest rate is increased by three hundred basis points.

Interest on the outstanding principal amount borrowed under the credit agreement is payable monthly. The outstanding principal amount borrowed and all interest accrued under the primary revolving line-of-credit facility is payable on June 30, 2008. The outstanding principal amount and all interest accrued under the seasonal revolving line-of-credit facility is payable on March 15 of each year. At the end of each fiscal quarter, beginning September 30, 2004, we must pay the lenders a commitment fee equal to 0.5% per annum of the average daily unused portion of the credit available under the credit agreement (which is the unused portion of the $140 million throughout the year and the unused portion of the $60 million seasonal facility from December 15 through March 15 each year). We must also pay Wells Fargo Bank an annual agency fee of $60,000 in advance on each July 30. We paid $1.2 million in arrangement fees and up-front fees relating to the credit agreement. We may (a) at any time reduce, in whole or in part (in $5 million increments), the available amount of the credit facilities provided in the credit agreement and (b) subject to certain conditions, prepay, in whole or in part, the revolving credit facilities provided by the credit agreement without penalty or premium.

The credit agreement may be terminated before the stated expiration or maturity date of the revolving credit facilities — requiring all unpaid principal and accrued interest to be paid to the lenders — upon any “event of default” as defined in the credit agreement. The events of default in the credit agreement include (a) nonpayment of amounts due under the credit agreement, (b) the failure to observe or perform covenants set forth in the credit agreement and in the documents ancillary thereto that are not cured, (c) a change in control of us, and (d) any event or circumstance that has a material adverse effect on the collateral secured under the credit agreement or on our business, assets, liabilities, condition (financial or otherwise), or prospects.

We are subject to various restrictive covenants stated in the credit agreement. Those restrictive covenants, which are typical of those found in credit agreements of these types, include restrictions on the incurrence of indebtedness from other sources, restrictions on advances to or investments in other persons or entities, restrictions on the payment of dividends to shareholders and on the repurchase of shares, and the requirement that various financial ratios be maintained. Certain of the covenants in the credit agreement require us:

	•		to limit our capital expenditures during each fiscal year to $20 million;

	•		to limit any single acquisition of assets or capital stock of an entity in the retail financial services business to a purchase price of no more than $10 million and to assets or entities that have a positive cash flow for the 12 months preceding such acquisition, unless otherwise agreed upon by the lenders;

	•		to reduce our risk of increases in interest rates by entering into one or more interest-rate swap agreements to convert to fixed-rate obligations our floating- or variable-rate interest obligations with respect to the lesser of (a) $30 million and (b) 50% of the average amount of the unpaid loans outstanding during the prior month; and

	•		to maintain the following financial coverage ratios:

	-		our consolidated net worth at any time cannot be less than $133.7 million plus 75% of all net income earned in a calendar quarter, without deduction for any quarterly losses, plus 100% of the proceeds of any equity offering;

	-		at the end of any fiscal quarter, our debt-to-EBITDA ratio cannot be more than 2.75-to-1.00 through December 31, 2005 and 2.50-to-1.00 thereafter;

	-		at the end of each fiscal quarter, our cash flow coverage ratio cannot be less than 1.25-to-1.00.

As of September 30, 2005, we were in compliance with all of our covenants under our credit agreement.

The payment and performance of our obligations under the credit agreement and the documents ancillary thereto are secured by liens on all or substantially all of our and its subsidiaries’ (other than Ace Funding, LLC’s) assets. All of our subsidiaries (other than Ace Funding, LLC) guaranteed our obligations under the credit agreement. The collateral arrangements entered into by us and our guarantor subsidiaries are substantially similar for each of Wells

Fargo Bank, as administrative agent for the lenders, and Travelers Express Company, Inc., which has a subordinate lien to secure the payment and performance of our obligations under the money order agreement and under the MoneyGram Agreement. We are party to a First Amended and Restated Intercreditor Agreement dated as of July 30, 2004 that includes agreements regarding the priority of distributions to the lenders and Travelers Express upon foreclosure and liquidation of the collateral subject to the security agreements executed by us and our guarantor subsidiaries and certain other intercreditor arrangements.

Swap Agreements

To reduce our risk of greater interest expense because of interest-rate fluctuations, we enter into interest-rate swap agreements from time to time, which effectively convert a portion of our floating-rate interest obligations to fixed-rate interest obligations.

On April 23, 2003, we entered into an interest-rate swap agreement with JP Morgan Chase Bank, regarding a notional amount of $60 million, associated with the revolving advance facility under our bank credit agreement, to be effective until March 31, 2006. On May 31, 2004, the notional amount was reduced from $60 million to $30 million and increased to $45 million on January 1, 2005. On April 29, 2005, the interest-rate swap agreement was amended to reduce the notional amount to $35 million and extend the effective date from March 31, 2006 to September 29, 2006. The fixed rate effective on September 30, 2005, prior to adding the applicable margin, was 3.925%.

Stock Repurchase Program

In May 2005, our board of directors established a program authorizing up to $20 million for the repurchase of shares of our common stock in the open market or negotiated transactions. As of September 30, 2005, no shares have been repurchased. The repurchase program does not have an expiration date, but will terminate when we have made all of the authorized repurchases or earlier by our board of directors.

Seasonality

Our business is seasonal to the extent of the impact of cashing tax refund checks and tax refund anticipation loan checks. The impact of these services is in the third and fourth quarters of our fiscal year. Our loan business declines slightly in the third fiscal quarter as a result of the customers’ receipt of tax refund checks and tax refund anticipation loans.

Impact of Inflation

We believe our results of operations are not dependent upon the levels of inflation.

Liquidity Outlook

Based on our current level of operations and anticipated revenue growth, we believe our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our liquidity needs for the next 12 months. However, we have substantial working capital needs, contractual commitments and debt service obligations. We cannot assure you that our business will generate sufficient cash flow from operations, that our anticipated revenue growth will be realized or that future borrowings will be available to us under credit facilities in amounts sufficient to enable us to pay our existing indebtedness or fund our other liquidity needs. In addition, if we undertake expansion efforts in the future, our cash requirements may increase significantly.

Forward-looking Statements

This report contains, and from time to time we or certain of our representatives may make, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally identified by the use of words such as “anticipate,” “expect,” “estimate,” “believe,” “intend,” “plan,” “should,” “would,” and terms with similar meanings.

Although we believe that the current views and expectations reflected in these forward-looking statements are reasonable, those views and expectations, and the related statements, are inherently subject to risks, uncertainties, and other factors, many of which are not under our control and may not even be predictable. Those risks, uncertainties, and other factors could cause the actual results to differ materially from these in the forward-looking statements. Those factors are described under “Risk Factors” below.

We expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations, or otherwise. We make no prediction or statement about the performance of our common stock.

Risk Factors

Our current business and future results may be affected by a number of risks and uncertainties, including those described below. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.

We have significant existing debt and the restrictive covenants under our debt agreements may limit our ability to expand or pursue our business strategy. In addition, if we are forced to pay some or all of this debt following an event of default, our financial condition and results of operations would be severely and adversely affected.

Our business requires significant amounts of cash for services and inventory. Much of that cash is obtained through borrowing. Therefore, we have, and we expect to have, a significant amount of outstanding debt and may incur additional debt in the future as we seek to expand our business. As of September 30, 2005, our short-term debt was $53.0 million, and we had no material long-term debt.

Our debt agreements require us to maintain compliance with numerous financial covenants. The covenants restrict our ability to take certain actions to some extent, including our ability to:

	•		incur additional indebtedness;

	•		pay dividends and make distributions in respect of our capital stock;

	•		repurchase our capital stock;

	•		make capital expenditures;

	•		make investments or other restricted payments;

	•		engage in transactions with shareholders and affiliates;

	•		create liens;

	•		sell or otherwise dispose of assets;

	•		make payments on our debt, other than in the ordinary course; and

	•		engage in mergers and acquisitions.

As long as our indebtedness remains outstanding, the restrictive covenants could impair our ability to expand or pursue our growth strategy. In addition, the breach of any covenants or any payment obligations in any of these debt agreements will result in an event of default under the applicable debt instrument. If there is an event of default under one of our debt agreements, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable, subject to applicable grace periods. This could trigger cross-defaults under our other debt agreements. We cannot assure you that our assets or cash flow would be sufficient to repay fully borrowings under our outstanding debt agreements if accelerated upon an event of default, or that we would be able to refinance or restructure the payments on any of those debt agreements. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt agreements, the lenders under such agreements could proceed against the collateral securing that indebtedness. Substantially all of our assets are pledged to secure the outstanding indebtedness. Forced repayment of some or all of our indebtedness would reduce our available cash and have an adverse impact on our financial condition and results of operations.

Our existing and future debt obligations could adversely affect our results of operations and financial condition as we may be required to secure additional financing to meet our future capital needs and cannot assure you that we will be able to do so on favorable terms, if at all.

Our significant amount of debt could have important consequences. For example, it could:

	•		make it more difficult for us to satisfy our obligations to the holders of our outstanding debt;

	•		make us vulnerable to interest rate increases, because a significant portion of our borrowings is, and will continue to be, at variable rates of interest;

	•		require us to dedicate a substantial portion of our cash flow from operations to payments on our debt obligations, which will reduce our funds available for working capital, capital expenditures and other general corporate expenses;

	•		limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•		place us at a disadvantage compared to our competitors that have proportionately less debt;

	•		restrict our operational flexibility, because of restrictive covenants that will limit our ability to make acquisitions, explore certain business opportunities, dispose of assets and take other actions; and

	•		limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our debt agreements.

If our debt levels increase, the related risks that we face will also increase. If we fail to generate sufficient cash flow from future operations to meet our debt service obligations, we may need to seek refinancing of all or a portion of our indebtedness or obtain additional financing in order to meet our obligations with respect to our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing on satisfactory terms or at all, particularly because of our high levels of debt and the debt-incurrence restrictions imposed by our current debt agreements.

If we do not generate a sufficient amount of cash, which depends on many factors beyond our control, our liquidity and our ability to service our indebtedness and fund our operations would be harmed.

liquidity needs. However, we have substantial working capital needs, contractual commitments and debt service obligations. We cannot assure you that our business will generate sufficient cash flow from operations, that our anticipated revenue growth will be realized or that future borrowings will be available to us under credit facilities in amounts sufficient to enable us to pay our existing indebtedness or fund our other liquidity needs. In addition, if we undertake expansion efforts in the future, our cash requirements may increase significantly.

The industry in which we operate is strictly regulated at both the federal and state level. Changes in current laws and regulations, or the application of future laws and regulations, may have a significant negative impact on our business, results of operations and financial condition.

Our business is subject to numerous state and certain federal laws and regulations which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. These regulations govern or affect, among other things:

	•		check cashing fees;

	•		licensing and posting of fees;

	•		lending practices, such as truth in lending;

	•		interest rates and usury;

	•		currency reporting;

	•		recording and reporting of certain financial transactions;

	•		franchising in the states in which we offer and sell franchises;

	•		privacy of personal consumer information; and

	•		prompt remittance of proceeds for the sale of money orders.

As we develop new services, we may become subject to additional federal and state regulations. In addition, changes in current laws and future laws or regulations may restrict our ability to continue our current methods of operation or expand our operations and may have a material adverse effect on our business, results of operations and financial condition. States may also seek to impose new licensing requirements or interpret or enforce existing requirements in new ways.

Short-term consumer loan services have come under increased scrutiny and regulation. If the restrictions created by such regulations increase, or if short-term consumer loans become prohibited in the states where we offer these loans, our business would be materially adversely affected.

A significant portion of our revenues is based on loan interest and fees from short-term consumer loans, also known as payday loans, that we offer in our company-owned stores. Short-term consumer loans have come under increased scrutiny and regulation in recent years. Legislation has been introduced in the United States Congress and in certain state legislatures, and regulatory authorities have proposed or publicly addressed the possibility of proposing regulations, that may prohibit or severely restrict short-term consumer loans. For example, in December 2002, we ceased offering short-term consumer loans at our stores in Alabama, Georgia and North Carolina as a result of laws enacted restricting short-term consumer loans in those states. As a result of more recently enacted laws in Alabama permitting short-term consumer loans, we resumed offering short-term consumer loans at our company-owned store in that state in July 2004. We intend to continue, with others in the short-term consumer loan industry, to inform and educate legislators and to oppose legislative or regulatory action that may prohibit or severely restrict short-term consumer loans. Nevertheless, if legislative or regulatory action with that effect were taken on the federal level or in states in which we have a significant number of stores, that action may have a material adverse effect on

our loan-related activities and revenues. Moreover, similar action by states in which we are not currently offering short-term consumer loans could result in us having fewer opportunities to pursue our growth strategy.

In 2002, the Office of the Comptroller of the Currency, which supervises national banks, took action to effectively prohibit certain national banks from offering and making short-term consumer loans because of the agency’s view that they posed various risks to those banks. As a result, we discontinued offering Goleta loans in our stores on December 31, 2002.

In addition, Republic Bank & Trust Company, a Kentucky state-chartered bank, and First Bank of Delaware, a Delaware state-chartered bank, for each of which we act as marketer and servicer of their loans, are subject to federal and state banking regulations. The States of Kentucky and Delaware are the primary regulators for Republic Bank and First Bank of Delaware, respectively, and the Federal Deposit Insurance Corporation, or FDIC, is the back-up federal regulator of each bank. In July 2003, the FDIC issued guidelines governing permissible arrangements between a state-chartered bank and a marketer and servicer of its short-term loans in July 2003, and issued revised guidelines in March 2005. The guidelines apply to our marketing and servicing agreements with Republic Bank, for which we market and service a shorter-term (currently 14-day), single-installment loan, and First Bank of Delaware, for which we market and service a longer-term (currently 20-week), multi-installment loan, regarding the offering of each such bank’s loans at our stores in Arkansas, Pennsylvania and Texas. The guidelines describe the FDIC’s expectations for a bank’s prudent risk-management practices regarding payday 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 payday lending.

The revised FDIC guidelines issued in March 2005 include a requirement that banks (such as Republic Bank and First Bank of Delaware) develop procedures to ensure that a payday loan is not provided to any customer with payday loans from any lender for more than three months in the previous 12 months. The revised FDIC guidelines also suggest that supervised lenders should offer a customer subject to such a limitation, or refer such a customer to, a longer-term loan product. In response to the revised FDIC guidelines, customers at our stores in Texas, Pennsylvania and Arkansas who are denied a shorter-term Republic Bank loan, may apply for a longer-term First Bank of Delaware installment loan. It is unclear at this time what procedures and/or alternate products the FDIC may accept as conforming with the revised guidelines. If the implementation and enforcement of the revised FDIC guidelines or any newly promulgated guidelines by the FDIC, or any order, law, rule or regulation by the States of Kentucky or Delaware or the FDIC, were to have the effect of significantly curtailing either Republic Bank’s short-term consumer lending services or First Bank of Delaware’s installment lending services, our revenues derived from fees from Republic Bank or First Bank of Delaware would be materially adversely affected, unless we could offer, or we could secure an agreement with another financial institution not subject to such limitations to offer, similar or alternate services. We cannot assure you that we would be successful in offering similar or alternate services or finding such a replacement financial institution, in the latter case especially because arrangements like ours with Republic Bank and First Bank of Delaware are coming under increasing political and regulatory scrutiny. Lawsuits filed against banks offering short-term consumer loans, such as one filed by the New York State Attorney General’s office in September 2003 discussed below, may hinder our ability to partner with a replacement bank or to establish relationships with new banks in other states as part of our growth strategy. Any alternate or similar services or agreement with a replacement bank or new bank may also not be on terms as favorable to us as our current agreements with Republic Bank and First Bank of Delaware.

Republic Bank and First Bank of Delaware are also subject to FDIC inspection and authority, and as a result of our marketing and servicing activities, we too are subject to such inspection and authority. We cannot assure you that the regulatory scheme affecting Republic Bank or First Bank of Delaware, or FDIC inspection or authority with respect to Republic Bank, First Bank of Delaware or us, will not negatively impact our operations.

Potential litigation and regulatory proceedings regarding our consumer loans could materially adversely affect our financial condition.

During the last few years, we and our competitors have been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of consumer loans, particularly those with a shorter-term. In our

case, such litigation and regulatory proceedings primarily involved attempts by plaintiffs to recharacterize us as the true lender of short-term consumer loans made by Goleta National Bank through our stores, in part because we acquired participations in the Goleta loans. Although our relationship with Goleta has been terminated and we have settled the related class action lawsuit, we cannot assure you that we will not be subject to future lawsuits associated with our consumer loan services.

In particular, we may become subject to litigation or regulatory proceedings focusing on our relationship with either Republic Bank or First Bank of Delaware. If we were to be recharacterized as the lender of the Republic Bank loans or the First Bank of Delaware loans, then the interest charged for these loans would violate most of the applicable states’ usury laws which impose maximum rates of interest or finance charges that a non-bank lender may charge, and any resulting refunds or penalties we would likely incur would materially adversely affect our results of operations and financial condition. While there are differences between the Goleta loans and each of the Republic Bank loans and First Bank of Delaware loans, principally that we do not acquire participations in Republic Bank loans or First Bank of Delaware loans, and while we believe we are not the lender under either of our arrangements with Republic Bank or First Bank of Delaware, we cannot assure you that a regulator or a borrower will not try to recharacterize us as the true lender. For example, although we do not offer short-term consumer loans in New York, in September 2003 the New York State Attorney General’s office filed a lawsuit against a Delaware state-chartered bank and the companies servicing its short-term consumer loans through a structure that is in some respects similar to our agreements with Republic Bank and First Bank of Delaware.

Media reports and public perception of short-term consumer loans as being predatory or abusive could materially adversely affect our business.

Over the past few years, consumer advocacy groups and certain media reports have advocated governmental action to prohibit or severely restrict consumer loans, particularly those with a shorter-term. The consumer groups and media reports typically focus on the cost to a consumer for this type of loan, which is higher than the interest typically charged by credit card issuers to a more creditworthy consumer. This difference in credit cost is more significant if a consumer does not promptly repay the loan, but renews, or rolls over, that loan for one or more additional short-term periods. The consumer groups and media reports typically characterize these short-term consumer loans as predatory or abusive toward consumers. If this negative characterization of our short-term consumer loan service becomes increasingly accepted by consumers, demand for our short-term consumer loans could significantly decrease, which could materially adversely affect our results of operations and financial condition.

Negative perception of our short-term consumer loans or other activities could also result in us being subject to more restrictive laws and regulations. For example, a short-term consumer loan prohibition law was recently passed by the Georgia state legislature. In addition, we may become subject to lawsuits against us for loans we make, or loans we offer made by Republic Bank or First Bank of Delaware. If changes in the laws affecting any of our short-term consumer loans, the Republic Bank loans or the First Bank of Delaware loans are enacted, or if we become subject to such lawsuits, our financial condition and results of operations would be materially adversely affected.

If our estimates of our loan losses are not adequate to absorb known or probable losses, our financial condition may be materially adversely affected.

We maintain an allowance for loan losses at levels to cover the anticipated losses in the collection of the portfolio of loans that we make. We determine our allowance for loan losses based upon a review of historical loan losses and the loan portfolio. Our allowance for loan losses is periodically reviewed by our management. For the three months ended September 30, 2005, our loan loss provision was $5.9 million, and we charged-off $3.7 million related to our loans. Our loan loss provision, however, is an estimate, and if actual loan losses are materially greater than our loan loss provision, our financial condition could be materially adversely affected.

With respect to the Republic Bank loans and First Bank of Delaware loans, we are obligated to reimburse each bank for all loan losses. As a result, we could be potentially obligated to pay each of Republic Bank and First Bank of Delaware for loan losses in an amount up to the total outstanding amount of loans made by each such bank as recorded on their respective financial statements. We commenced offering First Bank of Delaware loans on August 1, 2005.

As of September 30, 2005, Republic Bank’s financial statements reflect a total outstanding amount of $5.6 million for Republic Bank loans and First Bank of Delaware’s financial statements reflect a total outstanding amount of $4.1 million for First Bank of Delaware loans. These amounts are not included on our balance sheet. For the three months ended September 30, 2005, we provided a payable of approximately $1.6 million for losses on Republic Bank loans and charged-off $1.7 million related to Republic Bank loans, and provided a payable of approximately $0.6 million for losses on First Bank of Delaware loans and charged-off no amounts since we only began marketing and servicing First Bank of Delaware loans on August 1, 2005. The balance of the liability for Republic Bank loan losses reported in accrued liabilities as of September 30, 2005 was $3.9 million. The balance of the liability for First Bank of Delaware loan losses reported in accrued liabilities as of September 30, 2005 was $0.6 million. The payables to Republic Bank and First Bank of Delaware are however, estimates. If actual loan losses are materially greater than our recorded amount payable to either of these banks, our financial condition could be materially adversely affected.

A significant portion of our consumer lending business is derived from our relationships with Republic Bank and First Bank of Delaware, and a loss of either relationship could adversely affect our liquidity and profits.

Under our marketing and servicing agreements with each of Republic Bank and First Bank of Delaware, we provide various services to such banks in connection with our marketing and servicing of their loans in exchange for which we receive a portion of the interest, and in the case of First Bank of Delaware, a portion of certain other fees, collected from borrowers. As of September 30, 2005, each of Republic Bank and First Bank of Delaware was offering its loans in 428 of our company-owned stores in Texas, Pennsylvania and Arkansas. Approximately 10% of our total revenues in the three months ended September 30, 2005 was derived from agency fees paid to us by Republic Bank and First Bank of Delaware.

The term of our agreement with Republic Bank expires January 1, 2008. The agreement may be terminated before its scheduled expiration: (i) by either party if the other party fails to cure a material default under, or an inaccurate representation or warranty in, the agreement within ten days of notice of such default or inaccuracy; (ii) by either party if a party’s performance under the agreement is rendered illegal or materially adversely affected as a result of changes in law; (iii) by either party, upon six months notice, unless early termination is required by a governing regulatory agency, if such party is notified by such agency that such party’s performance of its obligations under the agreement may be unlawful, unsafe or unsound or may jeopardize such party’s standing or rating with such agency; (iv) by either party if the other party is bankrupt or is in receivership and, where Republic Bank is the terminating party, the subject proceeding is not stayed within 30 days of its filing; (v) provided we are not in default under the agreement, by us, upon ten days notice, if Republic Bank ceases to fund the short-term consumer loans we market for them or if applicable law is amended or changed in a manner that has an adverse effect on us; or (vi) provided we are not in default under the agreement, by us if Republic Bank breaches its obligation to honor and pay any check or other negotiable instrument given to a borrower as proceeds for a Republic Bank loan.

The term of our agreement with First Bank of Delaware expires July 21, 2008, and will renew for an additional 12 months unless either party elects to terminate it as of July 21, 2008 by providing at least 90 days’ notice to the other party before that date. The agreement may be terminated before its scheduled expiration: (i) automatically if either party seeks protection under any federal or state bankruptcy, insolvency, receivership, or similar law; (ii) automatically if First Bank of Delaware is placed into conservatorship or receivership with the FDIC or other authority; (iii) automatically if an involuntary bankruptcy or insolvency petition is filed against us and not dismissed within 30 days of that filing or a receiver or any regulatory authority takes control of us; (iv) by either party if the other party commits a material breach of, or other specified default under, the agreement and fails to cure such breach or default within 30 days of notice; (v) by First Bank of Delaware, upon 90 days notice, if First Bank of Delaware becomes aware of any adverse legal, regulatory, or other developments that could have a material adverse

impact on First Bank of Delaware, the profitability of its activities under the agreement, or its litigation or risk exposure; (vi) by us, upon 90 days notice, if First Bank of Delaware changes its loan-related policies in a manner that is reasonably likely to have, or if we become aware of any adverse legal, regulatory, or other developments that could have, a material adverse impact on us, the profitability of our activities under the agreement, or our litigation or risk exposure; or (vii) by us, upon 90 days notice, if we determine that we can profitably engage in installment-loan or deferred-deposit transactions in Texas independent of First Bank of Delaware, except that upon any termination for this reason on or before December 31, 2006, we must pay First Bank of Delaware a termination fee of $100,000.

The FDIC has set limits on the dollar amount of short-term consumer loans that either Republic Bank or First Bank of Delaware can have outstanding at any given time based on its capital. In addition, the revised guidelines for short-term, also referred to as payday, lending issued by the FDIC in March 2005 include a requirement that banks (such as Republic Bank and First Bank of Delaware) develop procedures to ensure that a payday loan is not provided to any customer with payday loans from any lender for more than 3 months in the previous 12 months. If the FDIC were to reduce the limits on the dollar amount of short-term consumer loans or installment loans that either Republic Bank or First Bank of Delaware can have outstanding at any time, further limit the number of short-term, payday loans a borrower may have outstanding, or characterize the longer-term installment loans made by First Bank of Delaware as a payday loan, or any other events involving either Republic Bank or First Bank of Delaware outside of our control were to occur, our ability to grow this portion of our business could be materially adversely affected.

If a termination of or significant adverse change in our relationship with either Republic Bank or First Bank of Delaware occurred, we could be required to seek replacement relationships with new financial institutions. We cannot assure you that we would be able to secure new relationships or that the terms of any such new relationships would be as favorable to us as those of our existing relationship with Republic Bank and First Bank of Delaware. As a result, any significant changes in our relationship with either Republic Bank or First Bank of Delaware could cause us to change the way we conduct business in certain states or adversely affect our results of operations.

If the loan approval process for either Republic Bank or First Bank of Delaware is flawed and more loans go uncollected, our revenues could be materially adversely affected.

Our agreements with Republic Bank and First Bank of Delaware provide for us to market and service loans offered by each bank at our company-owned stores in Texas, Pennsylvania and Arkansas. Each bank is responsible for reviewing each respective loan application and determining whether such application is approved for a loan. We are not involved in the loan approval process, including with respect to determining the loan approval procedures or criteria. However, under each of our agreements with Republic Bank and First Bank of Delaware, we are required to reimburse the bank for loan losses. If either bank’s loan approval process is flawed and an increased number of loans that are made are uncollected, our results of operations could be materially adversely affected.

We are subject to franchise law and regulations that govern our status as a franchisor and regulate some aspects of our franchise relationships. Our ability to develop new franchised stores and to enforce contractual rights against franchisees may be adversely affected by these laws and regulations, which could cause our franchise revenues to decline and adversely affect our growth strategy.

We are subject to federal and state laws and regulations, including the regulations of the Federal Trade Commission as well as similar authorities in individual states, in connection with the offer, sale and termination of franchises and the regulation of the franchisor-franchisee relationship. Our failure to comply with these laws could subject us to liability to franchisees and to fines or other penalties imposed by governmental authorities. In addition, we may become subject to litigation with, or other claims filed with state or federal authorities by, franchisees based on alleged unfair trade practices, implied covenants of good faith and fair dealing, payment of royalties, location of stores, advertising expenditures, franchise renewal criteria or express violations of franchise agreements. We cannot assure you that we will not encounter compliance problems from time to time or that material disputes will not arise with one or more franchisees. Accordingly, our failure to comply with applicable franchise laws and regulations, or disputes with franchisees, could have a material adverse effect on our results of operations financial condition and growth strategy.

Our current and future business growth strategy involves new store acquisitions and new store openings, and our failure to manage our growth or integrate or manage new store acquisitions may adversely affect our business, prospects, results of operations and financial condition.

Our expansion strategy consists principally of combining acquisitions and new store openings (both company-owned and franchised stores) and increasing comparable store sales of existing services. Acquisitions may entail numerous integration risks and impose costs on us, including:

	•		difficulties in assimilating acquired operations or services, including the loss of key employees from acquired businesses;

	•		diversion of management’s attention from our core business;

	•		dilutive issuances of our equity securities (if necessary to finance acquisitions or new stores);

	•		incurrence of additional indebtedness (if necessary to finance acquisitions or new stores);

	•		assumption of contingent liabilities;

	•		the potential impairment of acquired assets; and

	•		incurrence of significant immediate write-offs.

Our continued growth is dependent upon a number of factors, including the availability of adequate financing and suitable store locations, acquisition opportunities and experienced management employees, the ability to obtain any required government permits and licenses and other factors, some of which are beyond our control. We cannot assure you that we will be able to grow our business successfully through acquisitions and new store openings. Our failure to grow or complete the integration of any acquired business could have a material adverse effect on our business, prospects, results of operations and financial condition.

If we lose key management or are unable to attract and retain the talent required for our business, our operating results and growth could suffer.

Our future success depends to a significant degree upon the members of our senior management, particularly Jay Shipowitz, our President and Chief Executive Officer. The loss of the services of Mr. Shipowitz or other members of senior management could harm our business and development. Our continued growth also will depend upon our ability to attract and retain additional skilled management personnel. If we are unable to attract and retain personnel as needed in the future, our operating results and growth could suffer.

Competition in the retail financial services industry is intense and could cause us to lose market share and revenues.

The industry in which we operate is highly fragmented and very competitive. In addition, we believe that the market will become more competitive as the industry matures and consolidates. We compete with other check cashing stores, short-term consumer lenders, grocery stores, banks, savings and loan institutions, other financial services entities and other retail businesses that also cash checks, offer short-term consumer loans, sell money orders, provide money transfer services, or other similar financial services. Some of our competitors that are not check cashing companies have larger and more established customer bases and substantially greater financial, marketing and other resources. Our stores also face competition from automated check cashing machines deployed in supermarkets, convenience stores and other public venues by large financial services organizations. We cannot assure you that we will be able to compete successfully. As a result, we could lose market share and our revenues could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations.

Our revenues and net income from check cashing services may be materially adversely affected if the number of consumer check cashing transactions decreases or the amount of checks we cash that are uncollected significantly increases.

Historically, over half of our revenues come from our check cashing business. Any changes in economic factors that materially adversely affect consumer transactions could reduce the volume of transactions that we process and have a material adverse effect on our business, financial condition and results of operations. Recently, there has been increasing penetration of electronic banking services into the check cashing and money transfer industry, including direct deposit of payroll checks and electronic transfer of government benefits. To the extent that checks are replaced with such electronic transfers, demand for our check cashing services could decrease.

In addition, the risk that we assume upon cashing a check is that the check will be uncollected because of insufficient funds, stop payment orders, or fraud. If the amount of checks we cash that are uncollected increases significantly, our net income will be materially adversely affected.

Our money transfer and money order revenues are derived from a key third-party relationship and a loss of that relationship could adversely affect our liquidity and profits.

We are a party to a money order agreement with Travelers Express under which we exclusively sell Travelers Express money orders that bear our logo. Under this agreement, we are obligated to make prompt remittances of money order proceeds. We are also an agent for the receipt and transmission of wire transfers of money through the MoneyGram network in accordance with an agreement with Travelers Express and MoneyGram Payment Systems, Inc., an affiliate of Travelers Express. Approximately 7% of our total revenues for the fiscal year ended June 30, 2005 were derived from these agreements. Our relationship with Travelers Express and its affiliates is therefore significant to our business. Accordingly, if any disruption in this relationship occurs, it could materially and adversely affect our liquidity and profits.

Any disruption in the availability of our information systems could adversely affect operations at our stores.

Our information systems include a proprietary point-of-sale system in our stores and a management information system. The personal computer-based point-of-sale system is fully operational in all company-owned stores, is used by our self-service machines for cashing checks and accepting third-party bill payments and is licensed for use by our franchised stores. The management information system is designed to provide summary and detailed information to district managers, regional vice presidents and corporate managers at any time through Internet connectivity. Any disruption in the availability of our information systems could affect our operations and could adversely affect our business.

Part of our business is seasonal, which causes our revenues to fluctuate and may adversely affect our ability to service our debt.

Our business is seasonal to the extent of the impact of cashing tax refund checks and tax refund anticipation loan checks. The impact of these services is primarily in the third and fourth quarters of our fiscal year. Also, our consumer loan business declines slightly in the third fiscal quarter as a result of customers’ receipt of tax refund checks and tax refund anticipation loans. This seasonality requires us to manage our cash flows over the course of the year. If our revenues were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted and our ability to service our debt may also be adversely affected.

Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to employee error and theft.

Since our business requires us to maintain a significant supply of cash in each of our stores and (during tax season) each of our self-service machines, we are subject to the risk of cash shortages resulting from employee errors and theft. Although we have implemented various procedures and programs to reduce these risks, maintain insurance coverage for theft and provide security for our employees and facilities, we cannot assure you that employee error

and theft will not occur. Material occurrences of error and theft could lead to cash shortages and could adversely affect our results of operations.

The price of our common stock may be volatile.

In the past three years, stocks listed on the Nasdaq National Market, as our common stock is, have experienced high levels of volatility and significant declines in value from their historic highs. The trading price of our common stock has fluctuated, and may continue to fluctuate, substantially from time to time. The fluctuations could cause you to lose part or all of your investment in our shares of common stock. Those factors that could cause fluctuations in the trading price of our common stock include, but are not limited to, the following:

	•		price and volume fluctuations in the overall stock market from time to time,

	•		significant volatility in the market price and trading volume of financial services companies,

	•		actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts,

	•		general economic conditions and trends,

	•		major catastrophic events,

	•		loss of a significant client or clients,

	•		sales of large blocks of our stock, or

	•		departures of key personnel.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.

Insiders have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control.

As of September 30, 2005, our principal shareholders, directors and executive officers, and entities affiliated with them, owned approximately 15% of the outstanding shares of our common stock. As a result, these shareholders, if acting together, are able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium of their common stock as a party of a sale of our company and might ultimately affect the market price of our common stock.

Our operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses.

Our operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For example, in August 2005, certain of our stores in the New Orleans and Baton Rouge area were closed for varying periods as a result of Hurricane Katrina. In addition, the occurrence and threat of terrorist attacks may directly or indirectly affect economic conditions, which could in turn adversely affect demand for our services. In the event of a major natural or manmade disaster, we could experience loss of life of our employees, destruction of facilities or business interruptions, any of which could materially adversely affect us. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States economy and worldwide financial markets. Any of

these occurrences could have a material adverse effect on us and also may result in volatility of the market price for our securities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, particularly including changes in interest rates that might affect the costs of our financing under our existing credit agreement. To mitigate the risks of changes in interest rates, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. To reduce our risk of greater interest expense because of interest-rate fluctuations, we have entered into interest-rate swap agreements, which effectively converted a portion of our floating-rate interest obligations to fixed-rate interest obligations, as described in Note 3 to Notes to Interim Consolidated Financial Statements.

The fair value of our existing interest-rate swaps was an asset of $125,000 as of September 30, 2005. The associated underlying debt has equaled or exceeded the notional amount for each swap throughout the existence of the swap, and we anticipate that it will continue to do so. Each existing swap is based on the same index as, and repriced on a consistent basis with its corresponding underlying debt.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Putative Class Actions

Because these lawsuits purport to be class actions, the amount of damages for which we might be responsible is uncertain. In addition, any such amount depends upon proof of the allegations and on the number of persons who constitute the class of plaintiffs (if permitted by the court). While no assessment of outcome can be made at this time, we intend to vigorously defend ourselves against these lawsuits.

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 none of these incidental legal proceedings, or any other threatened legal proceedings, will result in any material impact on our financial condition, results of operations and cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding our repurchases of shares of common stock during the quarter ended September 30, 2005:


					Total Number		Maximum
					of Shares		Approximate
					Purchased as		Dollar Value of
	Total				Part of Publicly		Shares that May
	Number of		Average		Announced		Yet Be Purchased
	Shares		Price Paid		Plans or		Under the Plans
	Purchased		Per Share		Programs		or Programs
Period	(1)		(1)		(2)		(2)
July 1 — July 31		—		—		—	$	20,000,000
August 1 — August 31		—		—		—	$	20,000,000
September 1 — September 30		625	$	0.01		—	$	20,000,000

Total		625	$	0.01		—	$	20,000,000


(1)		All of these shares were issued as restricted stock under our 1997 Stock Incentive Plan, and upon forfeiture, we privately repurchased them from the grantees of the restricted stock for the per share amount (par value) paid by them. These repurchases were not made as part of our publicly announced repurchase program.

(2)		Our board has established a new program authorizing up to $20 million for the repurchase of shares of our common stock. As of September 30, 2005, no shares have been repurchased. The repurchase program does not have an expiration date, but will terminate when we have made all of the authorized repurchases or earlier by our board of directors.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS


Exhibit Number		Exhibit
10.1		Asset Purchase Agreement dated September 30, 2005, between the Company and Popular Cash Express, Inc.

10.2		Form of Convertible Promissory Note issuable to Popular Cash Express, Inc.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ACE CASH EXPRESS, INC.

November 7, 2005	By:	/s/ WILLIAM S. MCCALMONT

		William S. McCalmont Executive Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer)


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements:

	Consolidated Balance Sheets as of September 30, 2005 (unaudited) and June 30, 2005		3

	Interim Unaudited Consolidated Statements of Earnings for the Three Months Ended September 30, 2005 and 2004		4

	Interim Unaudited Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2005 and 2004		5

	Notes to Interim Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		47

Item 4.	Controls and Procedures		47

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48

Item 3.	Defaults Upon Senior Securities		48

Item 4.	Submission of Matters to a Vote of Security Holders		48

Item 5.	Other Information		48

Item 6.	Exhibits		48

SIGNATURES			49

INDEX TO EXHIBITS			50
Asset Purchase Agreement
Form of Convertible Promissory Note
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


(1)		Calculated based on changes in revenue for all company-owned stores open in both periods and open for at least 13 months.

(2)		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.

(3)		First Bank of Delaware loans are 20-week installment loans made by First Bank of Delaware at our company-owned stores in Arkansas, Pennsylvania, and Texas since August 2005.

(4)		Includes only the loan origination amount for each installment loan.

(5)		The loans processed for First Bank of Delaware are 20-week loans; the average finance charge is presented based upon the 14-day average duration of the ACE loans and the Republic Bank loans.

(6)		Includes the initial 20-week loan transaction only.

(7)		Includes maturing principal amount for each 2-week payment.

(8)		Includes the recovery of $1.2 million from the sale of previously charged-off ACE loans.