Ace Cash Express 10K 2006 Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

For the fiscal year ended June 30, 2006


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		75-2142963
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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

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

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


		Name of each exchange
Title of each class		on which registered

None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yesþ Noo

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yeso Noþ

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.
Yesþ Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ

As of December 31, 2005, the aggregate market value of voting stock (based upon the last reported sales price on The Nasdaq Stock Market) held by nonaffiliates of the registrant was $279,677,380. As of August 25, 2006, the number of shares of the Common Stock outstanding was 14,039,205.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III is incorporated by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

ACE CASH EXPRESS, INC.
FORM 10-K
For the Year Ended June 30, 2006

Table of Contents


		Page Number
PART I

Item 1.	Business		4
Item 1A.	Risk Factors		24
Item 1B.	Unresolved Staff Comments		33
Item 2.	Properties		34
Item 3.	Legal Proceedings		34
Item 4.	Submission of Matters to a Vote of Security Holders		35

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		35
Item 6.	Selected Financial and Performance Data		36
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		58
Item 8.	Financial Statements and Supplementary Data		58
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		58
Item 9A.	Controls and Procedures		58
	Management’s Report on Internal Control over Financial Reporting		59
	Report of Independent Registered Public Accounting Firm		60

Item 9B.	Other Information		61

PART III

Item 10.	Directors and Executive Officers of the Registrant		61
Item 11.	Executive Compensation		61
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		61
Item 13.	Certain Relationships and Related Transactions		61
Item 14.	Principal Accountant Fees and Services		61

PART IV

Item 15.	Exhibits and Financial Statement Schedules		61

SIGNATURES			68

INDEX TO EXHIBITS			108
Amendment to Installment Loan Marketing and Servicing Agreement
Subsidiaries
Consent of Grant Thornton LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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.

PART I

ITEM 1. BUSINESS

Overview

We are a leading retailer of financial services, including check cashing, short-term consumer loans and bill payment services. As of June 30, 2006, we had a total network of 1,573 stores in 38 states and the District of Columbia, consisting of 1,353 company-owned stores and 220 franchised stores. We are the largest owner, operator and franchisor of check cashing stores in the United States and the second largest owner, operator and franchisor of short-term consumer loans, also known as payday loans, in the United States. We focus on serving unbanked and underbanked consumers, many of whom seek alternatives to traditional banking relationships in order to gain convenient and immediate access to check cashing services and short-term consumer loans. We seek to develop and maintain the largest network of stores in each of the markets where we operate. Our growth strategy is to open new stores, franchise stores in new and existing markets, opportunistically acquire stores, and introduce new services into our store network.

Our stores offer check cashing, loans and other retail financial services at competitive rates in clean settings during hours convenient for our customers. Our stores are located in highly visible, accessible locations, usually in strip shopping centers, free-standing buildings and kiosks located inside retail stores.

Our reportable segments are strategic business units that differentiate between company-owned and franchised stores. Company-owned store revenue is generated from customer-transaction processing in stores owned by the Company, and franchised store revenue is generated from the franchise fees charged for opening the franchised store and on-going royalty fees received from franchisees. For more information on our segment financial information, please see Note 2 to our Consolidated Financial Statements.

On June 6, 2006, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ace Holdings I, LLC, a Delaware limited liability company formed by JLL Partners Fund V, L.P. (“Ace Holdings”), and Ranger Merger Sub, Inc., a Texas corporation and a wholly-owned subsidiary of Ace Holdings (“Merger Sub”), pursuant to which Merger Sub will be merged with and into us, and we will continue as the surviving corporation and be a wholly-owned subsidiary of Ace Holdings (the “Merger”). Under the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of our common stock will be converted into the right to receive $30.00 in cash (the “Merger Consideration”).

A special committee of our board of directors was established to evaluate and negotiate the merger on behalf of our board of directors and subsequently recommended that the board of directors approve and adopt the Merger Agreement. The special committee was comprised of all directors except Jay Shipowitz, our President and Chief Executive Officer, who may be deemed to be an affiliate of Ace Holdings as a result of arrangements with Ace Holdings or its affiliates relating to employment and an equity ownership in Ace Holdings or its affiliates. At a special meeting held on June 5, 2006, our board of directors approved and adopted the Merger Agreement and approved the Merger.

Completion of the Merger is subject to the satisfaction of closing conditions set forth in the Merger Agreement, including the approval by the affirmative vote of a majority of our outstanding shares of Company common stock and the receipt of certain regulatory and other approvals. We currently anticipate that the Merger will close in the second quarter of fiscal 2007.

Website Access to Reports.Through our website atwww.acecashexpress.com we provide free access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Forms 3, 4 and 5 filed by reporting persons, and all amendments thereto, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. In addition, the Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other information regarding the Company atwww.sec.gov.

Industry Overview

We operate in the check cashing and short-term consumer loan industries. Growth in these industries has been fueled by several demographic and socioeconomic trends, including an overall increase in the population and declining to stagnant growth in household income of lower- and middle-income people. At the same time, closings of less profitable or lower traffic bank branches, primarily in lower-income neighborhoods where the branches have failed to attract a sufficient base of customer deposits, have resulted in fewer convenient alternatives for consumers. These trends have combined to increase demand for the basic financial services we provide.

Check cashing.We believe the check cashing industry cashes approximately 180 million checks annually, accounting for approximately $60.0 billion in check volume and generating approximately $1.5 billion in revenue. We believe this industry is mature and stable, but that it remains highly fragmented. In 2005, there were approximately 13,000 check cashing stores, with only nine check cashing companies, including ACE, operating or franchising more than 100 stores. Together, these companies accounted for less than 35% of the total number of such stores.

Check cashing companies focus on and offer services to a customer segment that banks generally do not service and operate at locations and during hours that are typically more convenient than those traditionally offered by banks. In addition, unlike many banks, check cashing stores are willing, for a fee, to assume the risk that checks they cash will “bounce.” For instance, some banks will refuse to cash a check for a person who does not maintain an account with the bank. For account holders, some banks will require an account holder to maintain sufficient funds to cover a check to be cashed or to wait several days for the check to clear. As a result, we believe check cashing stores provide an attractive alternative to customers with relatively small account balances or without bank accounts. Although these customers might save money by depositing their checks in a bank and waiting for them to clear, we believe many prefer paying a fee to take advantage of the convenience and immediate availability of cash offered by check cashing stores.

Short-term consumer loans.The U.S. short-term consumer loan industry has grown steadily since the early 1990s and is estimated to have generated approximately $40.0 billion of loan volume and $6.0 billion of revenue in 2005, up from approximately $3.5 billion of loan volume and $0.5 billion of revenue in 1998. We believe the growth has been fueled by a shortage of available short-term consumer credit alternatives from traditional banking institutions, increased consumer and legislative acceptance of short-term consumer loans and the lower costs of the short-term loan versus other more expensive alternatives. In 2005, there were an estimated 23,000 stores in the U.S. that offered short-term consumer loans. We believe this industry is highly fragmented, as there were only ten companies in 2005, including ACE, that operated or franchised more than 250 stores. Together, these companies accounted for less than 40% of the total number of such stores.

Short-term consumer loans provide a customer with cash in exchange for the customer’s post-dated check or an authorization to debit the customer’s bank account, along with an agreement to defer the deposit of that check or initiation of that debit to the customer’s bank account, as the case may be, until the customer’s next payday, typically two to four weeks later. If the customer returns to the store and repays the loan within that time period, the check is returned to the customer; if not, the short-term consumer lender typically resorts to some form of collection, including depositing the check. Short-term consumer loans provide a simple, quick and confidential way for consumers to meet short-term cash needs between paydays while avoiding the high cost of penalties associated with writing checks with insufficient funds and other penalties and fees associated with making a late payment.

Other financial services.In addition to check cashing and short-term consumer loan services, most stores offer customers a range of other services, including prepaid debit cards, bill payments, money orders and money transfers. Most stores also offer photocopying, fax transmission services and postage stamps.

Competitive Strengths

We offer a suite of retail financial services delivered through our growing network of 1,573 owned and franchised stores conveniently located in close proximity to where our customers live and work. We believe that our store employees provide a professional experience that our customers value, which allows us to better understand their present and future financial service needs. We intend to capitalize on the following competitive strengths in order to grow our company:

Focus on Customer Service.Treating our customers with respect is an integral part of our organizational culture. Unlike many of our competitors, all of our stores display an easy-to-read menu of our services, with costs and fees clearly stated, in order to help our customers make an informed purchasing decision. Additionally, many of our stores located in markets with large Hispanic populations display our services in both English and Spanish. Our customers also receive a receipt with each transaction that details the fees paid. Our store employees are trained to greet customers as they enter the store, assist them in an efficient and helpful manner and thank them for their business. Many of our employees have long-standing relationships with customers who use our services multiple times a year. We believe that providing prompt, friendly and knowledgeable service helps us achieve higher levels of customer satisfaction and generate higher visit frequency. We measure and track our customer service quality at the store and employee levels through customer calls made to our toll-free service line and our annual customer service survey.

Efficient Operating Model.We believe that our operating model and business practices position us to grow our revenues and increase profitability. In our fiscal year ended June 30, 2002, we introduced our Operational Goals program, a standardized set of best practices, to help ensure a clear and consistent benchmark would be used to evaluate the performance of our store employees. Our regional vice presidents, district managers and store employees continue to be focused on their achievement of these goals. We measure their performance on a daily, weekly, monthly and quarterly basis. Each year, we

adjust our Operational Goals and our measurement targets to encourage continued improvement across our store base and maximize profitability.

Our Operational Goals for fiscal 2007 are to:

	•		provide quality customer service and take pride in our store appearance;

	•		reduce cash shortages in our stores;

	•		reduce forgeries;

	•		increase our in-store loan payoffs;

	•		reduce the number of times our stores open late or close early;

	•		properly staff our stores for peak schedules;

	•		increase the number of daily loan transactions;

	•		reduce overtime hours;

	•		increase the number of new customer transactions; and

	•		provide more customers with the ACE prepaid Visa and Mastercard debit cards.

Since implementing our Operational Goals, we have increased comparable store revenue and decreased store operating expenses, resulting in increased gross margin.

Proprietary Information Systems.To better service our customers and manage our stores in the most profitable manner, we have developed proprietary information systems, including a point-of-sale system and a management information system, designed for the efficient delivery of our financial services with the proper balance of corporate management. Our in-house information systems team has built a reliable and scalable technology infrastructure that will allow us to grow our business without significant additional capital expenditures. Our investment in information systems has allowed us to improve functionality, including:

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

	•		evaluating customer transaction patterns to improve our check cashing approval process;

	•		utilizing automated decision-making technology to reduce check cashing risk;

	•		monitoring daily revenue by service on a regional, store and employee basis;

	•		detecting and preventing fraud and other losses, including cash differences, forgery and employee theft;

	•		planning and managing optimal store cash levels and store personnel scheduling; and

	•		facilitating compliance with regulatory requirements.

By maintaining interactive and flexible information systems, we provide more services in a standardized and efficient manner, which we believe allows us to operate our stores with fewer personnel than many of our competitors.

Proven Acquisition Strategy.From 1991 to present, we grew from 181 to 1,353 company-owned stores, in large part, as a result of a disciplined acquisition strategy. Of our 1,353 company-owned stores, 575 were acquired in 121 separate transactions. Acquired stores are quickly integrated into our existing store base following the deployment of our proprietary point-of-sale system. By implementing our Operational Goals and information systems, we are typically able to increase revenue and gross margin in our acquired stores and to enhance the acquired stores’ service offerings. The cost of converting an acquired store to an ACE store consists primarily of expenditures related to security, new signage, introduction of our point-of-sale system and minor store remodeling. We believe there are opportunities to continue to improve the results in some of our recently acquired stores.

Experienced Management Team.Our executive management team is a blend of company veterans and recent key additions that have experience in the check cashing industry as well as other retail-based businesses. These employees have gained extensive experience in the retail industry through new store openings, acquisitions and franchising. Jay Shipowitz, our Chief Executive Officer, who was promoted from President and Chief Operating Officer to Chief Executive Officer on July 1, 2004, has been with us since 1997 and has managed all areas of operations and finance during his tenure. Barry Barron, our Executive Vice President and Chief Operations Officer, has been with us since 2001 and has extensive experience operating company-owned and franchised restaurant locations. We believe that our executive management team’s experience has allowed us to deliver a consistent service offering to our customers, which in turn has generated higher levels of customer loyalty and positioned us to capitalize on future growth opportunities.

Growth Strategy

A key objective of our network growth strategy is to have the most locations in each market and to offer the broadest selection of financial services in our industry. We believe that by offering the convenience of high-density store locations, exceptional customer service and a broad suite of retail financial services, we will achieve a high level of customer satisfaction. The key elements of our growth strategy are as follows:

Open Company-Owned Stores.We have identified several key geographic areas or markets for the development of both ACE Cash Express stores as well as ACE Cash Advance stores. These markets were identified following a review of the country’s top standard metropolitan statistical areas and an internal evaluation of each market’s ability to support our store development program.

Specific trade areas are identified within each geographic market based upon our assessment of the area’s demographics and traffic patterns. Our real estate department then seeks to identify specific site locations within each trade area. The specific site is then presented for approval to our Capital Approval Committee consisting of our President and Chief Executive Officer, Executive Vice President and Chief Operations Officer, and our Executive Vice President and Chief Financial Officer. The Capital Approval Committee bases its decision to approve a specific site and to pursue the development of a store on such factors as the terms of the lease, the visibility of the store, the capital cost of the proposed store and the trade area’s demographics.

We opened 101 company-owned stores in fiscal 2006 (including 50 ACE Cash Advance stores), compared to 80 stores in fiscal 2005 and 53 stores in fiscal 2004. Our current bank credit agreement enables us to pursue our company-owned store growth strategy more aggressively. We expect to open approximately 100 to 125 new ACE Cash Express company-owned stores and ACE Cash Advance company-owned stores, with a net gain of approximately 70 to 100 company-owned stores after store closures, in fiscal 2007.

A decision to close a store is typically based upon store performance or our inability to obtain favorable lease renewal terms. Company-owned stores are evaluated for closure during our quarterly business reviews and at the end of the store’s lease term or any renewals of the lease term. A landlord may also choose not to renew the lease at the end of its term. We closed 23 company-owned stores in fiscal 2006, 32 stores in fiscal 2005, and 24 stores in fiscal 2004. This represents 2%, 3%, and 2%, of total company-owned stores as of June 30, 2006, 2005 and 2004, respectively.

Company-owned stores are sold infrequently. Company-owned stores that are sold are typically located in isolated geographic areas that do not fit into our overall strategic geographic development plans. We sold two stores in fiscal 2006, six stores in fiscal 2005, and five stores in fiscal 2004.

Continue Franchise Store Development.Our goal is to be the industry leader in offering quality franchising opportunities and exceptional support systems and services to existing and potential franchisees. We believe that by offering attractive investment opportunities and exceptional franchisee support systems and services, we will attract potential franchisees to partner with us rather than other franchisors.

Our franchise department seeks to locate franchised stores in geographic markets that are not designated for company-owned development. The franchise department targets specific trade areas within each geographic market and identifies potential franchisees within these trade areas. These potential franchisees are then contacted to determine their level of interest in developing an ACE Cash Express store. Potential franchisees interested in developing stores also contact the franchise department directly.

We opened 32 franchised stores in fiscal 2006, compared to 48 franchised stores in fiscal 2005 and 32 stores in fiscal 2004. As of June 30, 2006, we had 220 franchised stores and we believe our targeted markets will provide additional ACE

franchise store opportunities across the United States. Currently, we have franchise agreements for the development of over 100 new franchise stores.

A franchise agreement may be terminated if the franchisee does not comply with the franchise agreement. Subject to the terms of the franchise agreement, a franchisee may also elect to voluntarily close a store or leave the ACE system based upon a variety of factors specific to the individual franchisee. In either case, we consider these closed stores, whether or not the store actually closes or is re-branded. In fiscal 2006, 23 franchised stores were closed, compared to one franchised store in fiscal 2005, and 15 franchised stores in fiscal 2004.

Pursue Opportunistic Acquisitions.A key element of our network growth strategy is to acquire existing check-cashing stores and to re-brand them as ACE Cash Express stores. Since 1991, we have acquired over 500 check-cashing stores. We have not acquired any monoline payday loan stores but may do so in the future.

Our evaluation of an acquisition candidate is based upon that store’s existing revenue and cash flow, our ability to introduce additional services enhancing revenue growth, our assessment of the store’s geographic market and its consistency with our strategic development plans and our expectation that we can introduce our proprietary information systems and Operational Goals to the store generating operating efficiencies.

A decision to acquire a store is reached following an assessment of the factors noted above and a financial review of our anticipated return on investment. Acquisitions requiring an investment of greater than $1 million are approved by our board of directors.

We believe that our extensive experience with acquisitions allows us to efficiently integrate acquired stores into our network. In fiscal 2006, we acquired 135 stores, compared to 74 stores in fiscal 2005, and 34 stores in fiscal 2004.

Introduce New Services.In addition to our current broad service offering, we continuously evaluate new services for possible introduction into our stores. For example, in fiscal 2002, we entered into a written agreement with NetSpend Corporation, a prepaid payments company, whereby we offer prepaid debit cards in our stores. The Visa and MasterCard prepaid debit cards offered through NetSpend allow our customers to “load” cash onto these cards and use them wherever Visa or MasterCard debit cards are accepted. Pursuant to our agreement, we receive from the customer a portion of the purchase price of the cards and a convenience fee for loads on the cards. In addition, we receive from NetSpend an additional portion of the purchase price of the card and commissions based on the aggregate amount loaded or direct deposited on the cards, the number of purchases or ATM withdrawal transactions made with the cards and account maintenance and subscription fees paid by the customer. Our agreement with NetSpend expires on March 31, 2009, and will automatically renew for one year periods thereafter absent 365 days’ prior notice by either of the parties. Either party may terminate the agreement at an earlier date if the non-terminating party (i) fails to pay to the terminating party amounts when due, (ii) fails to timely cure a default under the agreement or (iii) is bankrupt or insolvent. During fiscal 2006, we and our franchisees sold over 290,000 cards and loaded a total face value of approximately $1 billion. Revenues generated under this NetSpend agreement during fiscal 2006, 2005 and 2004 were $12.5 million, $7.3 million, and $4.6 million, respectively, which represents 4.0%, 2.7%, and 1.9%, of our net revenues for such periods, and are included in Bill Pay revenue. We believe that our distribution network, with 1,573 network stores in 38 states and the District of Columbia, makes us an ideal partner for financial service companies seeking to gain immediate access to our customer base. Our distribution network allows us to offer our customers new services through third parties, without incurring the costs associated with a proprietary research and development process.

Continue Comparable Store Revenue Growth.We believe we have an opportunity to continue comparable store revenue growth. To increase comparable store revenues, we employ a variety of advertising and marketing programs, with a focus on in-store programs that allow us to combine the selling efforts of store personnel with various selling messages displayed on point-of-purchase material. We also employ seasonal marketing campaigns around specific annual events, such as a loan program around the holidays and a tax season promotion at the beginning of the calendar year. In addition to adding new services, we seek to attract additional customers. For example, we recognize the importance of the growing Hispanic demographic and have designed specific advertising and point-of-purchase materials to meet their needs.

Improve Operating Efficiency.As our business grows, we seek to further improve our operating efficiency. We have outlined a list of Operational Goals to maximize the profitability potential of our stores. Our employees are evaluated and compensated, in part, based on their achievement of these goals, which we adjust each year to account for the continued improvement in our business. We believe that by focusing on these specific goals and tying them to employee compensation, we can further enhance the operating efficiency of our stores as well as overall operating margins.

Our Customers

We serve a large and growing demographic group including the nation’s approximately 60 million unbanked and underbanked individuals with services to help them manage their day-to-day financial needs. Our customers generally do not participate in the traditional banking and financial services system and require alternative solutions to gain convenient and immediate access to cash, short-term consumer loans, bill payments, money transfers and prepaid debit cards.

Our customer profile is diverse. Based on a survey of our customers, we believe the demographic composition of our customer base to be as follows:

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

	•		a majority ranging in age from 25 to 45;

	•		an average household annual income of approximately $30,000, with approximately 40% above $40,000;

	•		approximately half are male and half are female, with our check cashing customers skewed towards younger males and our short-term consumer loan customers skewed towards older females;

	•		generally rent their housing and move more frequently than the national average; and

	•		pay bills with walk-in payments or money orders.

We believe that the Hispanic population, while an estimated 25% of our customer base today, offers significant growth potential for us. According to the U.S. Census Bureau, Hispanics are the largest minority group in the United States, numbering approximately 39 million and representing the fastest growing demographic segment in the United States, with 58% population growth between 1990 and 2000.

Our Services

We offer convenient, fee-based services to meet the needs of our customers, including check cashing, short-term consumer loans, bill payment, money transfer and money order services and other retail financial services. The following table reflects the major categories of services that we currently offer and the revenues from these services for the indicated fiscal years:


	Fiscal Year Ended June 30,
	2006		2005		2004
	(in thousands)
Check cashing	$	148,065	$	131,619	$	129,194
Short-term consumer loans		108,667		91,793		77,029
Bill payments		25,151		20,266		16,961
Money transfers		13,985		11,868		11,136
Money orders		6,830		6,875		6,330
Franchising		3,242		3,180		2,774
Other fees		3,969		3,048		3,235

Total revenues	$	309,909	$	268,649	$	246,659

Check cashing.Our primary business is cashing checks for a fee. We primarily cash payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts. Our check cashing fees for payroll checks average approximately 2.5% of the face amount of the check, subject to local market conditions, and this fee is deducted from the cash returned to the customer. We may charge higher rates for cashing out-of-state checks, handwritten checks, money orders and insurance checks or drafts, depending on risk and market factors. Unlike many of our competitors, we display our check cashing fees in full view of our customers on a menu board in each store and provide a detailed receipt for each transaction. Although we have established guidelines for approving check cashing transactions, we have no preset limit on the size of the checks we will cash.

During fiscal 2006, our company-owned stores cashed approximately 14.3 million checks with an aggregate face amount of approximately $5.9 billion. The face amount of the average check was $414 and our average fee per check was $10.40, or 2.5%, of the average check.

The full amount of the check fee is recognized as revenue at the time of the transaction with no allowance for anticipated

returned checks. If a check cashed by us is returned for any reason, we record the face amount of the check (which includes the check fee) as a loss in the period in which it is returned in other store expenses. We then transfer the check to our collection department, which contacts the maker and payee of each returned check to initiate the collection process. Our collection department utilizes a proprietary automated tracking system to monitor the status of all returned items. The percent of check fee revenue attributable to returned checks was 0.11%, 0.11%, and 0.15% for the fiscal years ended June 30, 2006, 2005 and 2004, respectively.

Short-term consumer loans.We are engaged in the short-term consumer loan business because we believe that many consumers have limited access to other sources of consumer credit. In general, the short-term consumer loans offered at our stores involve providing a customer with cash in exchange for the customer’s post-dated check or an authorization to debit the customer’s bank account, along with an agreement to defer the deposit of that check or the initiation of that debit on the customer’s account, as the case may be, for a term of 14 days and in some cases until the customer’s next payday, typically two to four weeks later. If the customer returns to the store and repays the loan, we return the check to the customer. If the customer fails to repay the loan, we deposit the check or debit the customer’s checking account. If the check is returned or the debit is rejected for insufficient funds or any other reason, we contact the customer and initiate collection efforts. Customers must have a checking account in order to apply for a short-term consumer loan.

The amount of the customer’s check or debit authorization is the amount of the cash provided to the customer plus our fee. Our short-term consumer loans are authorized by statute or rule in the states in which we offer them and are subject to extensive regulation. The scope of that regulation, including the terms on which short-term consumer loans may be made, by the states is not consistent. All states in which we offer short-term consumer loans establish maximum allowable fees and other charges to consumers for these short-term consumer loans. In addition, many of the states regulate the maximum amount, maturity and renewal or extension of these short-term consumer loans. To comply with the laws and regulations of the states in which short-term consumer loans are offered at our stores, the terms of our short-term consumer loans must vary from state to state. As required, we are licensed to offer short-term consumer loans under the laws and regulations of the states in which we operate.

As of June 30, 2006, we were offering loans made by us in 794 of our company-owned stores, First Bank of Delaware was offering First Bank of Delaware loans in 63 of our company-owned stores in Pennsylvania and Arkansas, and True Financial was offering CSO loans arranged by our affiliate credit services organization (“CSO”) at 384 of our company-owned stores in Texas. As of June 30, 2006, we did not offer short-term consumer loans in 93 of our company-owned stores in Georgia, Maryland and North Carolina due to an unfavorable regulatory environment in those states. The number of consumer loan transactions, the average advance and average customer fee by loan product for 2006 are as follows:


	Number of Loan
Loans Made By or Processed For:	Transactions		Average Advance		Average Customer Fee
	(in thousands)
ACE⁽¹⁾		1,681	$	308	$	45.30
Republic Bank⁽²⁾		221		312	$	55.00
First Bank of Delaware		62		353	$	34.98
True Financial (CSO loans)⁽¹⁾		154		414	$	84.42


⁽¹⁾		Includes new loans and refinances.

⁽²⁾		As of June 30, 2006, we no longer offer Republic Bank loans in any of our stores.

As of June 30, 2006, the gross receivable for short-term consumer loans made by us was approximately $39.7 million. In addition, we are obligated to pay our third-party lenders for loan losses in an amount up to the total outstanding amount of loans recorded on their financial statements, which was $0.5 million, $1.1 million, and $12.0 million as of June 30, 2006 for Republic Bank, First Bank of Delaware and True Financial, respectively.

For the short-term consumer loans we offer, the customer’s application data is electronically transmitted to our centralized computer system, which scores the loan with a proprietary loan-scoring system. An approval or denial is communicated back to the store, where the required loan documentation or adverse action form is printed for the customer. Loans made by our third-party lenders are scored in a similar process, but they 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 or the determination of our third-party lenders’ loan approval procedures or criteria. For fiscal 2006, our provision for loan losses, including our accrual for anticipated payments to our third-party lenders for losses on their loans, as a percentage of matured loan volume (which represents all loans which became due and payable during the reporting period) for our loans and for our third-party loans combined was 4.9%, compared to 4.4% for fiscal 2005. At the end of each fiscal quarter, we analyze the loan loss provision, our loan loss allowance and the accrued liability to our third-party lenders that has been computed to determine if our estimates of the allowance and liability are adequate based on our understanding of past loan loss

experience, current economic conditions, volume and growth of the loan portfolios, timing of maturity, as well as collections experience.

On March 1, 2005, the Federal Deposit Insurance Corporation, or FDIC, issued revised Guidelines for Payday Lending which provide guidance to banks that engage in payday lending, and include a requirement that such banks develop procedures to ensure that a payday loan is not provided to any customer with payday loans outstanding from any lender for more than three months in the previous 12 months. The revised FDIC guidelines became effective on July 1, 2005, and affected the loans offered at our stores by Republic Bank. In the first quarter of fiscal 2006, we introduced two new loan products to our Texas customers and one new loan product to our customers in Arkansas and Pennsylvania that provided alternatives to the loan product offered by Republic Bank. These new loan products provided consumers who exceeded the maximum allowable payday loans under the revised FDIC guidelines access to the credit they require. Pursuant to agreements we entered into with each of Republic Bank and First Bank of Delaware in February 2006, we ceased offering loans made by Republic Bank and First Bank of Delaware in our Texas stores at the end of February 2006. Pursuant to our agreement with Republic Bank, we agreed to cease offering loans made by Republic Bank in our Arkansas and Pennsylvania stores by June 30, 2006 and we no longer offer loans by Republic Bank in any of our stores. On March 1, 2006, we began, through our wholly owned subsidiary, ACE Credit Services, LLC, offering and providing credit services under a CSO program in our Texas stores to customers who apply for short-term loans offered by True Financial Services, LP, an independent third-party lender.

Bill payments.Our stores serve as payment locations for customers to pay many of their utility, telephone and other bills to third parties and also serve as a distribution point for bank-issued prepaid debit cards.

Upon acceptance of the customer’s bill payment, we remit the amount owed to the third-party on the next business day under an agreement with that payee and either receive a service fee from the payee or collect a fee from the consumer. The agreements generally have a three-to-five year term, but oftentimes renew automatically unless written notice is provided by either party. We offer these services primarily through agreements directly with various product and service providers, such as Verizon, Sprint, TXU (a Texas utility company), and Baltimore Gas & Electric. These agreements vary in term and fee structure based on estimated quantity and volume of future customer payments. In fiscal 2006, our company-owned stores processed approximately 7.8 million bill payment transactions through agreements with 182 service providers for revenue of $12.7 million. In fiscal 2005, our company-owned stores processed approximately 8.7 million bill payment transactions through agreements with 139 service providers for revenue of $13.0 million.

Our stores also offer NetSpend’s ACE debit cards, which allow customers to “load” cash onto such a debit card and use it wherever such debit cards are accepted. We receive a fee when customers purchase the card, load cash on the card, use it for a purchase or use it at an automated teller machine for a cash withdrawal. During fiscal 2006, our company-owned stores sold approximately 268,000 prepaid debit cards and loaded more than $917 million onto these cards compared to fiscal 2005, when we sold approximately 172,000 prepaid debit cards and loaded more than $527 million onto these cards.

Money transfers.We are an agent for the transmission and receipt of wire transfers through the MoneyGram^® network, the second largest wire transfer provider after Western Union. Through this network, our customers can transfer funds electronically to any of approximately 100,000 MoneyGram agent locations worldwide, including our stores. MoneyGram establishes the fees for this service and pays us a commission.

Money orders.We sell money orders issued by MoneyGram in any amount up to $1,000. These money orders are generally used by our customers for bill payments, rent payments and other general disbursements. We sold approximately 7.5 million money orders during fiscal 2006. The fees charged for money orders depend on local market conditions and the size of the money order. We remit the face amount of each money order sold to MoneyGram. Our money order revenues include the fee paid by our customers and the recognition of deferred revenue related to contract incentive payments.

Franchising.We sell several types of ACE franchises, including: a standard store franchise; a store-within-a-store or kiosk franchise; a small market franchise for market areas with a population under 15,000; and a conversion franchise that permits an existing check cashing business to convert to an ACE franchisee. Our franchise revenues consist of an initial franchise fee of up to $30,000 and monthly royalties of up to 6% of revenue. There were 220 company-franchised stores in operation as of June 30, 2006, compared to 229 as of June 30, 2005, and we currently have franchise agreements with franchisees to develop over 100 new franchise stores.

We franchise our stores in order to complement our company-owned growth and network expansion plans in a cost effective manner. By expanding into new geographic markets, we increase our brand awareness and create further purchasing power with our vendors and a pipeline for future acquisition opportunities. Typically, we have a right of first refusal to purchase the franchised store. We acquired 18, 22 and 13 franchised stores during fiscal 2006, 2005 and 2004, respectively.

In order to qualify potential franchisees, we primarily evaluate their financing viability, familiarity with the industry and prior business experience. The franchisee is responsible for the capital cost of opening the store, including leasehold improvements, signage, computer equipment and security systems, operating costs and working capital. We have no obligation to finance any costs related to start-up or operations for the franchisees. Franchises are financed by the franchisee with their own financing sources.

Other services.In many company-owned stores, we offer a variety of other retail financial services to our customers, such as photocopying, fax transmission services, postage stamps and various prepaid services, including long-distance telephone cards.

New Store Economics

The capital cost of opening a new ACE Cash Express store varies depending on the size and type of store, but is typically in the range of $65,000 to $85,000, before the MoneyGram incentive. This capital cost includes leasehold improvements, signage, computer equipment and security systems. MoneyGram pays us an incentive for each new ACE Cash Express company-owned location opened, which is accounted for as deferred revenue that is recognized over the remaining life of our contract with MoneyGram. For more information, see “Relationships with the Money Order and MoneyGram Suppliers” below. During fiscal 2006, we opened 51 ACE Cash Express stores. In addition, the typical mature store requires working capital of $80,000 to $100,000 to fund operating cash and the store’s loan portfolio. It typically takes approximately one year for a store to break even on a store margin basis. First-year losses typically average $25,000 per store.

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. During fiscal 2006, we opened 50 ACE Cash Advance stores.

The following tables show the average annual store revenues and the average gross margin for ACE Cash Express company-owned stores (excluding acquired stores) which were opened in the year indicated and were open as of June 30, 2006:


	Number of		Average Store Revenues
	Stores Open at		Year Ended June 30,
Year Opened:	June 30, 2006		2006		2005		2004		2003		2002
			(in thousands)
1997 and earlier		299	$	287.0	$	284.3	$	285.0	$	269.7	$	270.0
1998		44		258.2		256.2		254.8		245.6		230.9
1999		58		241.2		234.1		217.0		206.4		199.9
2000		57		229.8		218.6		210.7		192.5		182.8
2001		41		254.9		236.7		215.1		187.9		143.0
2002		35		224.7		210.6		183.6		128.9		35.6
2003		11		254.5		214.2		165.9		38.0		—
2004		41		178.6		122.6		26.2		—		—
2005		60		138.1		39.9		—		—		—
2006		51		56.4

		697
ACE Cash Advance stores⁽¹⁾		81
Acquired stores⁽¹⁾		575

		1,353


	Number of		Average Store Gross Margin
	Stores Open at		Year Ended June 30,
Year Opened:	June 30, 2006		2006			2005			2004			2003			2002
			(in thousands)
1997 and earlier		299		125.5			121.0			118.1			110.0			113.9
1998		44		97.4			90.5			80.4			85.3			83.0
1999		58		87.1			80.9			63.2			60.6			56.1
2000		57		75.7			67.8			56.2			49.0			48.4
2001		41		83.8			71.2			51.5			39.4			8.6
2002		35		77.7			63.7			37.7			(1.4	)		(26.4	)
2003		11		96.0			66.0			22.8			(15.8	)		—
2004		41		31.0			(13.3	)		(26.1	)		—			—
2005		60		(8.9	)		(29.3	)
2006		51		(27.0	)

		697
ACE Cash Advance stores⁽¹⁾		81
Acquired stores⁽¹⁾		575

		1,353


(1)		ACE Cash Advance store count and acquired store count are provided on this ACE Cash Express store economics table to delineate the mix between ACE Cash Express newly constructed stores, ACE Cash Advance stores and acquired stores in our company-owned store network. A similar table for ACE Cash Advance stores and acquired stores would not provide a useful performance trend because we have just recently begun opening ACE Cash Advance stores, and acquired store performance varies significantly depending on the number of years that the store has been open prior to acquisition

Our store construction and facilities planning staff reviews and negotiates leases for store locations, supervises the construction of new stores and the remodeling of existing stores and performs lease management services once the leases are executed. Since many of our stores are built within existing retail space, the work area of each store is a modular-designed unit that can be customized to meet the varying size and other requirements of each location while giving it a consistent appearance.

We close stores in the normal course of business for various reasons, including inadequate operating performance, lease expirations and shopping center closings. During fiscal 2006, 2005, and 2004, we closed 23, 32, and 24 company-owned stores, respectively.

Company-owned Store Locations and Operations

The following map illustrates the number and location of company-owned stores in operation as of June 30, 2006:

The following table illustrates the development of company-owned stores since June 30, 2002:


	Company-Owned Stores
	As of June 30,
Market Area	2006		2005		2004		2003		2002
Texas		385		368		340		328		329
California		164		92		87		85		88
Arizona		94		73		72		75		72
Florida		89		65		63		68		91
Colorado		88		78		66		53		56
Tennessee		48		38		39		18		18
Pennsylvania		45		43		16		16		16
Ohio		41		38		27		25		24
Washington		40		23		14		13		13
Indiana		38		30		28		26		25
Georgia		37		39		44		46		50
Virginia		36		34		32		29		29
Maryland		34		36		38		39		39
Louisiana		31		33		35		27		27
North Carolina		22		16		18		16		16
Oklahoma		20		20		20		21		23
Arkansas		18		18		8		8		8
South Carolina		17		16		10		10		13
Nevada		15		15		15		14		14
Washington, D.C		15		15		16		16		16
New Mexico		13		13		13		11		10
Oregon		12		9		7		8		8
Missouri		11		11		11		11		11
Illinois		9		—		—		—		—
Kansas		8		6		6		4		4
Nebraska		8		—		—		—		—
Kentucky		5		5		—		—		—
Wisconsin		5		5		—		—		—
Alabama		3		3		1		1		3
Iowa		2		—		—		—		—

Total		1,353		1,142		1,026		968		1,003

We typically locate our company-owned stores in highly visible, accessible locations and operate during convenient hours for our customers. We locate stores on high traffic streets or intersections. Our stores occupy approximately 1,200 square feet on average and are located in strip shopping centers and free-standing buildings. As of June 30, 2006, we also operate approximately 50 smaller kiosks located inside retail stores. We are focused on increasing the customer’s awareness of ACE by using consistent signage and store design at each location. All but two of our company-owned stores are leased.

Normal business hours of our company-owned stores are from 9:00 a.m. until 7:00 p.m., Monday through Thursday, 9:00 a.m. until 8:00 p.m. on Friday and 9:00 a.m. until 6:00 p.m. on Saturday. Approximately 236 stores are also open on Sunday, generally from 10:00 a.m. until 5:00 p.m. The business hours of any store may be changed due to local market conditions. We are open on all holidays except for Thanksgiving, Christmas and New Year’s Day.

Franchised Store Locations

The following map illustrates the states in which our franchisees operate stores and the number of stores in operation as of June 30, 2006:

We are the largest franchisor of check cashing stores in the United States. Our franchises are marketed through a dedicated sales force, supplemented by advertising in newspapers, trade journals and other media. The following table illustrates the development of franchised stores since June 30, 2002:


	Franchised Stores
	As of June 30,
Market Area	2006		2005		2004		2003		2002
Texas		42		42		51		55		56
Ohio		22		21		20		18		16
Arizona		17		15		9		5		3
Oklahoma		16		13		11		11		11
South Carolina		16		15		14		13		8
North Carolina		13		13		8		6		7
Florida		10		14		13		16		14
Kansas		9		7		6		5		4
Louisiana		9		8		6		12		12
Colorado		6		8		7		6		4
Tennessee		6		11		8		7		7
Alabama		5		3		2		—		—
California		5		10		9		10		11
Wisconsin		5		4		2		1		1
Missouri		4		6		6		4		3
Georgia		3		5		4		6		6
Indiana		3		3		2		2		2
Oregon		3		6		5		4		4
Virginia		3		3		1		1		1
Delaware		2		2		2		2		1
Idaho		2		2		2		2		2
Iowa		2		2		—		—		—
Maine		2		2		2		1		1
Michigan		2		2		1		1		1
Minnesota		2		2		2		2		2
Mississippi		2		1		1		2		1
New Mexico		2		2		—		—		—
Arkansas		1		2		2		1		1
Kentucky		1		—		3		3		2
Maryland		1		—		—		—		—
Massachusetts		1		—		—		—		—
Pennsylvania		1		1		1		—		—
South Dakota		1		1		1		1		1
Wyoming		1		1		1		1		1
Hawaii		0		1		1		1		—
New Jersey		0		1		1		1		1

Total		220		229		204		200		184

We are planning to continue our expansion through the sale of new franchises and the opening of additional stores under existing franchise agreements.

Advertising and Marketing

Our marketing efforts are designed to increase revenues by developing products that meet the needs of our consumers, create customer loyalty and introduce new customers to the ACE brand. We achieve this by differentiating our products in ways that are the most relevant to customers, generating interest and use with promotional activity and providing consumers with superior customer service.

We have been effective in marketing our services through in-store programs with high-impact, consumer relevant point-of-purchase materials. We implement additional promotions to maximize key seasonal revenue opportunities, including holidays and tax season.

In fiscal 1996, we introduced a free loyalty and retention program called ACE Plus which rewards customers with free phone cards, discounted transaction fees and cash rebates based on points accumulated for each customer’s check cashing transactions. During fiscal 2006, we launched a new loyalty program in all markets, which provides similar rewards, but allows customers to earn points on all ACE transactions. We record a refund obligation as a reduction of revenue based on the cost of expected point redemption. Since inception, approximately 10 million customers have joined the ACE Plus program. Approximately 2.5 million customers have used their ACE Plus card in the last 12 months.

We are continuously testing new ways of communicating and promoting our products and services, which include direct mail and print in both English and Spanish, telemarketing and enhanced bilingual in-store communications.

Information Systems

Our information systems include a proprietary point-of-sale system in our stores and a management information system that together form the foundation of our operating model.

The point-of-sale system is fully operational in all stores and is licensed to our franchisees. It is designed to facilitate customer service and risk management in a logical and straight-forward manner for our store employees. The point-of-sale system:

	•		records and monitors the details of every transaction, including the service type, amount, fees, employee, time, actions taken and duration;

	•		integrates a proprietary and extensive customer/maker risk management database with an automated decision methodology to guide our employees through the transaction and to better manage risk in check cashing transactions;

	•		provides services in a standardized and efficient manner, which we believe allows us to operate our stores with fewer personnel than many of our competitors (many of our stores are operated by only one person);

	•		reduces the risk of transaction errors by automatically recalling customer data and calculating fees; and

	•		provides fully automated, immediate and statistically validated loan application decisions that help ensure standardization and compliance with state and federal lending regulations.

On at least a daily basis, and in many cases on a real-time basis, all transaction data are transmitted to our centralized database at our headquarters and are integrated into our management information system. This system is designed to provide summary and detailed information to district managers, regional vice presidents and corporate managers at any time through Internet connectivity. The system allows us to:

	•		monitor daily revenue by service on a company, regional, store and employee basis;

	•		monitor and manage daily store exception reports, which record, for example, any cash shortages and late store opening times;

	•		identify cash differences between bank statements and our records, such as differences resulting from missing checks and deposits;

	•		determine, on a daily basis, the amount of cash needed at each store location, allowing centralized cash management personnel to maintain the optimal amount of cash inventory in each store;

	•		electronically transmit information and documents to third-party providers of services offered at our stores;

	•		develop a standardized labor scheduling methodology by store, by day;

	•		facilitate compliance with regulatory requirements; and

	•		post revenue and some expenses to our general ledger system.

Our information systems department has a staff of approximately 60 employees. Our development staff primarily focuses on designing and testing new point-of-sale enhancements as well as ongoing development of the management information systems infrastructure. Our store and customer help desk staff provides assistance to our store managers related to transaction procedures, as well as directly answering customer questions.

We operate a wide area data communications network for our stores that has reduced customer waiting times, increased reliability and allowed the implementation of new service enhancements. Each of our stores has from two to four networked PCs that run the Windows XP^® operating system on standard Intel-based PCs. We run our proprietary point-of-sale software on each of the PCs in order to control and record all retail transactions at the store. Connected to each PC are several peripherals, including a money order dispenser, receipt printer, laser printer, check scanner, cash drawer and debit card PIN pad.

Each store is connected to our host system using either a DSL or frame relay connection that allows the store to quickly access our centralized corporate databases and risk management resources. All transaction posting, processing and storage is performed on the host system, an IBM Series5™ (previously known as an AS/400) mid-range computer with over two terabytes of disk storage.

We maintain and test a comprehensive disaster recovery plan for all critical host systems. The disaster recovery plan is routinely updated to reflect new requirements and business systems. As part of the plan, we have a contract with a third-party to replicate all essential host data changes to the off-site location to provide us immediate access to needed technologies, if necessary.

Security

ACE Cash Express Stores

Employee safety is critical to us. Almost all company-owned ACE Cash Express store employees work behind bullet-resistant Plexiglas^® and steel-reinforced partitions. Each ACE Cash Express company-owned store’s security measures include safes, alarm systems monitored by third parties, teller area entry control, perimeter opening entry detection and tracking of all employee movement in and out of secured areas. All of these stores are currently using a centralized security system through a third-party provider. The centralized security system includes identical alarm systems in all stores, remote control activated alarms, arming/disarming and changing user codes and mechanically and electronically controlled time-delay safes. Although we do not have a contractual indemnification agreement with our security provider for the full amount of store losses, any amounts received from the security provider as compensation for losses (which have historically been minimal) are recorded in store expenses as a reduction of the loss. Under our crime insurance policy for store theft, no claims were made in fiscal 2006, 2005 or 2004. Under our crime insurance policy for self-service machines, one claim was recovered for $0.2 million in fiscal 2006 and was recorded as a reduction of the loss, while no claims were made in fiscal 2005 or 2004.

Our business requires our stores to maintain a significant supply of cash. We are therefore subject to the risk of cash shortages resulting from employee and non-employee theft and employee errors. Although we have implemented various programs to reduce these risks and provide security for our facilities and employees, we cannot assure you that these problems will be eliminated. During fiscal 2006, 2005 and 2004, cash shortages from employee errors and from theft were

approximately $0.8 million (0.3% of revenue), $1.2 million (0.4% of revenue), and $0.9 million (0.4% of revenues), respectively.

Our point-of-sale system allows management to detect cash shortages on a daily basis. In addition to other procedures, district managers conduct audits of each company-owned store’s cash position and inventories on an unannounced, random basis. Daily transportation of currency and checks is provided by professional armored carriers. Our employees generally do not transport currency or checks.

ACE Cash Advance Stores

Our loan stores maintain a minimal amount of cash and promote the face-to-face transaction experience with the customer, so their security risk is reduced. However, we do utilize security alarms and security cameras in these locations.

Human Resources

Our operations consist of company-owned stores, including ACE Cash Express and ACE Cash Advance stores, and franchised stores.

ACE Cash Advance and franchised store operations are each managed by a division vice president. Our company-owned ACE Cash Express store operations are organized by regions. Each region has a regional vice president who reports to one of three division vice presidents of operations and is responsible for the operations, administration, training and supervision of company-owned stores in his or her region. We currently have 13 regional vice presidents who are responsible for the operations of approximately 100 stores each. We currently have 105 district managers, each of whom reports to the regional vice president for his or her region and is directly responsible for the general management of up to 20 stores within his or her territory. These district managers are responsible for hiring, scheduling, store operations, local marketing and employee relations. Each store manager reports to a district manager and has direct responsibility over his or her store’s operations.

Each region also has a human resources manager that coordinates recruiting, hiring and training (initial and on-going) within the region. The majority of the Human Resources Managers are nationally certified by the Society of Human Resources Managers. All human resources managers attend an annual three-day conference at the corporate office and complete several hours of continuing education throughout the year.

Training.Service associates, store managers, district managers and regional vice presidents must complete formal training programs. Those training programs include:

	•		an annual management training program with all regional vice presidents, district managers and human resource managers which covers employee hiring, progressive discipline, retention, sexual harassment, compensation, equal employment opportunity compliance and leadership;

	•		an annual three-day district manager conference at our corporate headquarters which covers topics such as customer service, loss reduction, safety and security, better delivery of services and compliance with legal and regulatory requirements;

	•		quarterly regional vice president meetings that focus on operational goal achievement and human resource issues; and

	•		store employee training which consists of classroom and on-the-job training with experienced store employees for a minimum of three weeks.

The regional human resources manager also coordinates on-going training for store employees to review customer service, compliance and service-focused issues.

Hiring and Retention.District managers, human resource managers and team leaders, who are experienced store managers, are responsible for store employee recruitment. To facilitate this process, we use an Internet-based automated recruitment system that pre-screens all applicants to ensure they meet our position requirements. We believe the automated recruitment system also allows us to identify employee characteristics and recruiting sources that can lead to long-term, successful employees.

Our store employees undergo a criminal background check, social security check, employment verification, drug screening and two-step interview process before employment. We maintain a compensation and career path program to provide employees with competitive pay rates and opportunities for advancement. We offer a complete and competitive benefits package to attract and retain employees.

Employees

At June 30, 2006, we had 3,061 employees, including 989 service associates at company-owned stores, 1,604 store managers, 105 district managers, 13 regional vice presidents, 229 regional support personnel (located in regional offices and the corporate headquarters), 113 corporate employees and eight franchise personnel. We use third-party firms to conduct background checks, credit checks and drug tests of all of our prospective employees.

We consider our employee relations to be good. Our employees are not covered by a collective bargaining agreement, and we have never experienced any organized work stoppage, strike, or labor dispute.

Competition

We believe that the principal competitive factors in the check cashing and short-term consumer loan (also known as payday loan) industry are location, customer service, fees, convenience, range of services offered, speed and confidentiality. We face intense competition and believe that the check cashing and short-term consumer lending markets are becoming more competitive as these industries mature and consolidate. We compete with other check cashing stores, mass merchandisers, grocery stores, banks, savings and loan institutions, short-term consumer lenders, other financial services entities and any retail businesses that cash checks, sell money orders, provide money transfer services, or offer other similar financial services. Some retailers cash checks without charging a fee under limited circumstances. Some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources. Our stores have also recently been facing competition from automated check cashing machines deployed in supermarkets, convenience stores and other public venues by large financial services organizations, as well as retail financial services that our competitors offer over the Internet. We cannot assure you that we will be able to compete successfully with our competitors.

Relationship with Third-Party Lenders

We were party to a marketing and servicing agreement with Republic Bank. Under this agreement, we provided various services to Republic Bank in connection with our marketing and servicing of Republic Bank’s short-term consumer loans in exchange for a service fee equal to a portion of the interest charged by Republic Bank based on loan volume. These services included advertising, application processing and collecting payments from Republic Bank’s customers. As of March 1, 2006, we discontinued offering Republic Bank loans in Texas, and effective June 30, 2006, we ceased offering Republic Bank loans in Arkansas and Pennsylvania. Approximately 4%, 10%, and 10% of our total revenues in fiscal 2006, 2005 and 2004, respectively, were derived from fees paid to us by Republic Bank.

Although we marketed and serviced these Republic Bank loans, Republic Bank was responsible for reviewing each loan application and determining whether such application is approved for a loan. We were not involved in the loan approval process or the determination of the loan approval procedures or criteria, nor did we acquire or own any participation interest in these loans. Consequently, Republic Bank loans are not included in our loan portfolio or in our loans receivable.

Under our agreement with Republic Bank, we are obligated to reimburse Republic Bank by paying it an amount equal to the net amount charged off by Republic Bank, less Republic Bank’s established reserves. We could be obligated to pay Republic Bank for loan losses in an amount up to the total outstanding amount of Republic Bank loans recorded on Republic Bank’s financial statements, which was $0.5 million as of June 30, 2006. Therefore, we record a liability for our anticipated payments to Republic Bank for losses on their loans, partially offset by amounts due to us from Republic Bank. We determine our allowance for loan losses and our payable to Republic Bank based upon a review of historical and recent loan losses and the loan portfolio. For the year ended June 30, 2006, we provided approximately $5.8 million for losses on Republic Bank loans and charged-off $9.1 million related to these loans. The balance of the liability for Republic Bank loan losses reported in accrued liabilities as of June 30, 2006 was $0.8 million.

We are party to an installment loan marketing and servicing agreement with First Bank of Delaware. Under the First Bank of Delaware Agreement, we provide various services to First Bank of Delaware in connection with our marketing and servicing of their installment loans in various company-owned stores (originally in the states of Texas, Pennsylvania and Arkansas, and now in the states of California, Arkansas and Pennsylvania) in exchange for a service fee equal to a portion of the interest charged by First Bank of Delaware based on loan volume. These services include advertising, application processing and collecting payments from First Bank of Delaware’s customers. As of June 30, 2006, First Bank of Delaware was offering its loans in 63 of our company-owned stores in Arkansas and Pennsylvania. Approximately 3% of our total revenues in fiscal 2006 were derived from fees paid to us by First Bank of Delaware. 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 First Bank of Delaware 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 First Bank of Delaware 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 First Bank of Delaware Agreement, or its litigation or risk exposure; or (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 First Bank of Delaware Agreement, or our litigation or risk exposure. Pursuant to amendments to our agreement with First Bank of Delaware entered into effective February 21, 2006, and July 28, 2006, we ceased offering First Bank of Delaware loans in Texas as of the end of February 2006 and commenced offering First Bank of Delaware loans in certain of our California company-owned stores as of the beginning of August 2006.

We are party to a credit services agreement with True Financial Services, LP. Under our agreement with True Financial, we provide various services to True Financial in connection with our marketing and servicing of their short-term loans in our company-owned stores in Texas. Pursuant to our agreement with True Financial, we charge the customer directly for the credit services that we provide to customers who apply for short-term loans offered by True Financial. These services include arranging for a short-term loan from True Financial and, if the customer is approved for and accepts the loan, providing a letter of credit to True Financial to secure the customer’s payment obligations. The term of our agreement with True Financial expires February 27, 2009, subject to annual renewals thereafter, unless either party gives 60 days’ notice of non-renewal. The True Financial agreement may be terminated before its scheduled expiration: (i) by either party upon the occurrence of an event of default by the other party, by giving 30 days’ prior written notice and an opportunity for the defaulting party to cure the event of default, provided that: (A) the non-defaulting party may suspend its performance under the agreement during the 30-day period prior to any cure of the event of default; and (B) the 30-day written notice requirement shall not apply if the event of default is our failure to remit funds to True Financial as required under the agreement, and shall be three business days if the event of default is True Financial’s failure to fund any loan as required under the Agreement or our failure to deliver a guaranty of the loan; (ii) by either party if either party is advised by any federal or state regulatory agency which has or asserts jurisdiction over either party or the loans that the performance of a party’s obligations under the agreement is or may violate any applicable laws, constitute an unsafe or unsound practice, or jeopardize the party’s standing with or any rating from any regulatory agency; (iii) by either party immediately upon written notice to the other party (A) if such party determines in its reasonable discretion that the performance of a party’s obligations under the agreement is or may be illegal under or prohibited by any applicable laws or (B) in the event an act of God or other natural disaster makes the carrying out of the agreement impossible; (iv) by us upon ten days’ prior written notice if True Financial amends its policies or their loan credit underwriting criteria in a way that causes a material adverse effect on our business and True Financial fails to modify such amendment so as to avoid such material adverse effect within such ten day notice period; (v) by either party on 30 days’ written notice to the other party in the event the party becomes aware of any adverse change in applicable laws relevant to the loans or the performance of the parties’ obligations under the agreement (including positions of regulatory authorities on examination or enforcement matters) that materially increases the party’s litigation or risk exposure; and (vi) by True Financial upon 120 days’ written notice if the volume of loans do not meet specified levels.

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

Under our agreements with First Bank of Delaware and True Financial, we are obligated to reimburse them an amount equal to the net amount of loans charged off by them. We could be obligated to pay First Bank of Delaware and True Financial for loan losses in an amount up to the total outstanding amount recorded on their financial statements, which as of June 30, 2006 was $1.1 million and $12.0 million, respectively. Therefore, we establish a liability for our anticipated payments to each of First Bank of Delaware and True Financial for losses on their loans, partially offset by amounts due to us from them. We determine our allowance for loan losses and our payable to First Bank of Delaware and True Financial based upon a review of historical and recent loan losses and the loan portfolio. For the year ended June 30, 2006, we provided approximately $2.8 million and $2.7 million for losses on First Bank of Delaware loans and True Financial loans, respectively, and charged-off $1.2 million related to First Bank of Delaware loans. The balance of the liability for First Bank of Delaware and True Financial loan losses reported in accrued liabilities as of June 30, 2006 was $1.6 million and $2.7 million, respectively.

Relationships with the Money Order and MoneyGram Suppliers

Money Order Agreement.We are a party to a money order agreement with MoneyGram Payment Systems, Inc., which became effective on December 17, 1998 and expires on December 31, 2007. Under this agreement, we exclusively sell MoneyGram money orders that bear our logo. The money order agreement obligates us to make prompt remittances of money order proceeds. Our payment and other obligations to MoneyGram under the money order agreement and the MoneyGram Agreement (described below) are secured by a subordinated lien on our assets in accordance with security agreements described in Note 3 of Notes to Consolidated Financials Statements.

In conjunction with the money order agreement, we received $3 million from MoneyGram in April 1998, and $0.4 million in each of 1999 through 2003, for a total of $5 million. When the term of the money order agreement was extended in October 2003, we received a signing bonus of approximately $2 million and have and will receive annual incentive bonuses of $350,000 on January 1 each of 2004 through 2007. The signing bonus and each annual incentive bonus will be amortized on a straight-line basis over the period for and during which that bonus is paid. If the money order agreement is terminated before its expiration under certain circumstances, we will be obligated to repay MoneyGram a portion of the amendment signing bonus (without interest).

MoneyGram Agreement.We act as an agent for the receipt and transmission of wire transfers of money through the MoneyGram network in accordance with a money transfer agreement with MoneyGram Payment Systems, Inc., that became effective on January 1, 2001 and expires on December 31, 2007. If MoneyGram has paid us a bonus after January 1, 2001, the agreement will extend according to a formula which, as currently calculated, would provide for an extension through April 2009. Other than in limited circumstances, we agreed to offer and sell only MoneyGram wire transfer services during the seven-year term of this MoneyGram Agreement. Under the MoneyGram Agreement, we earn commissions for each transmission and receipt of money through the MoneyGram network effected at a company-owned location; those commissions equal varying percentages of the fees charged by MoneyGram Payment Systems to consumers for the MoneyGram services.

Under the MoneyGram Agreement, we are also entitled to receive a total of approximately $12.5 million in bonuses, payable in equal monthly installments (without interest) over the seven-year term. The amount of those monthly installments will be subject to reduction if we close or sell a significant number of those locations at which MoneyGram services were offered at the beginning of the MoneyGram Agreement. In addition, we will be entitled to receive certain incentive payments regarding new MoneyGram service locations that we open or acquire during the term of the MoneyGram Agreement.

Regulation

General.We are subject to regulation in some jurisdictions in which we operate, including jurisdictions that regulate check cashing fees or require the registration of check cashing companies or money transmission agents. We are also subject to federal and state regulation relating to the recording and reporting of certain financial transactions and relating to the privacy of customer information. Further, our loan-related activities are subject to state regulation and, in certain respects, federal regulation.

State Regulations.In some states, check cashing companies or money transmission agents are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements. We offer check cashing services in 19 states or jurisdictions that have licensing and/or fee regulations regarding check cashing: Arizona, Arkansas, California, Florida, Georgia, Indiana, Kentucky, Louisiana, Maryland, Nevada, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, Wisconsin, and the District of Columbia. We are licensed in each of the states or jurisdictions in which a license is currently required for us to operate as a check cashing company. To the extent these states have adopted ceilings on check cashing fees, those ceilings are in excess of or equal to the fees we charge.

In those states in which we operate as a short-term consumer or payday lender, we are licensed as such and are subject to the various state regulations governing the terms of short-term consumer loans. Typically, the state regulations limit the amount that a lender or service-provider may lend or provide and, in some cases, the number of loans or transactions that a lender or service-provider may make, to any customer at one time, restrict the amount of finance or service charges or fees that the lender or service provider may assess in connection with any loan or transaction and limit a customer’s ability to renew any loans or transactions. The lender or service provider must also comply with various consumer disclosure requirements, which are typically similar or equivalent to the federal Truth in Lending Act and corresponding federal regulations, in connection with the loans or transactions. Collection activities regarding past due loans or similar transactions may also be subject to consumer-debt-collection laws and regulations adopted by the various states.

If we fail to observe applicable legal requirements, we may be forced to discontinue certain product service offerings, which could negatively impact our business. In addition, violation of these laws and regulations could result in fines and other civil and/or criminal penalties. For example, many state usury laws require that parties who charge interest in excess of the usury rates pay a penalty equal to the principal of the loan made and a multiple of the finance charge assessed. Depending on the nature and scope of a violation, fines and other penalties for non-compliance of applicable requirements could be significant and could have a material adverse affect on our results of operation and financial condition.

We are subject to franchising laws and regulations in the states in which we offer and sell franchises. Those laws and regulations vary by state, but generally include filing or registration requirements, record-keeping requirements and mandated disclosures to prospective franchisees.

Federal Regulations.Under the Bank Secrecy Act regulations of the U.S. Department of the Treasury, we must report transactions involving currency in an amount greater than $10,000, and we must retain records for five years for purchases of monetary instruments for cash in amounts from $3,000 to $10,000. In general, every financial institution, including us, must report each deposit, withdrawal, exchange of currency or other payment or transfer, whether by, through or to the financial institution, that involves currency in an amount greater than $10,000. In addition, multiple currency transactions must be treated as single transactions if the financial institution has knowledge that the transactions are by, or on behalf of, any person and result in either cash in or cash out totaling more than $10,000 during any one business day. Management believes that our point-of-sale system and employee-training programs permit us to comply with these requirements.

The Bank Secrecy Act also requires us to register as a money services business with the Treasury Department. This registration is intended to enable governmental authorities to better enforce laws prohibiting money laundering and other illegal activities. We are registered as a money services business with the Treasury Department and must re-register with the Financial Crimes Enforcement Network of the Treasury Department, or FinCEN, by December 31, 2007, and at least every two years thereafter. We must also maintain a list of names and addresses of, and other information about, our stores and must make that list available to any requesting law enforcement agency (through FinCEN). That store list must be updated at least annually. We do not believe that compliance with these existing requirements has had or will have any material impact on our operations.

In addition, federal regulations require us to report suspicious transactions involving at least $2,000 to FinCEN. The regulations generally describe three classes of reportable suspicious transactions—one or more related transactions that the money services business knows, suspects, or has reason to suspect (1) involve funds derived from illegal activity or are intended to hide or disguise such funds, (2) are designed to evade the requirements of the Bank Secrecy Act, or (3) appear to serve no business or lawful purpose. Because of our point-of-sale system and transaction monitoring systems, we do not believe that compliance with the existing reporting requirement and the corresponding record keeping requirements has had or will have any material impact on our operations.

The Gramm-Leach-Bliley Act and its implementing federal regulations require us to generally protect the confidentiality of our customers’ nonpublic personal information and to disclose to our customers our privacy policy and practices, including those regarding sharing the customers’ nonpublic personal information with third parties. That disclosure must be made to customers at the time that the customer relationship is established and at least annually thereafter.

Federal anti-money-laundering laws make it a criminal offense to own or operate a money transmitting business without the appropriate state licenses. In addition, the USA PATRIOT Act of 2001 and its implementing federal regulations require us, as a “financial institution,” to establish and maintain an anti-money-laundering program. Such a program must include (1) internal policies, procedures and controls designed to identify and report money laundering, (2) a designated compliance officer, (3) an ongoing employee-training program and (4) an independent audit function to test the program. Because of our compliance with other federal regulations having essentially a similar purpose, we do not believe that compliance with these requirements has had or will have any material impact on our operations.

Short-term Consumer Loans.Short-term consumer loans, also known as payday loans, are strictly regulated by federal guidance and state laws and regulations. The Office of the Comptroller of the Currency, which supervises national banks, took action in 2002 to effectively prohibit certain national banks from offering and making short-term consumer loans because of various risks it believes short-term consumer lending poses to those banks. Also, during the last few years, legislation has been introduced in the U.S. Congress and in certain state legislatures, and regulatory authorities have proposed or publicly addressed the possibility of proposing regulations, that would prohibit or severely restrict short-term consumer loans. For example, in December 2002, we ceased offering short-term consumer loans at our stores in Alabama, Georgia and North Carolina as a result of laws enacted restricting short-term consumer loans in those states. As a result of more recently enacted laws in Alabama permitting short-term consumer loans, beginning July 2004, we resumed offering short-term consumer loans at our stores in that state. More recently, the Georgia state legislature passed a law in April 2004 banning short-term consumer loans in that state. We intend to continue, with others in the short-term consumer loan industry, to

inform and educate legislators and to oppose legislative or regulatory action that would prohibit or severely restrict short-term consumer loans. Nevertheless, if legislative or regulatory action with that effect were taken on the federal level or in states in which we have a significant number of stores, that action would have a material adverse effect on our loan-related activities and revenues. Moreover, similar action by states where we are not currently conducting business could result in us having fewer opportunities to pursue our growth strategy.

Since January 1, 2003, all of the consumer loans offered at our stores have consisted of (1) short-term, single-installment consumer loans we made, (2) short-term, single-installment consumer loans Republic Bank made, (3) longer-term, multi-installment loans First Bank of Delaware made or (4) since March 1, 2006, short-term, single-installment consumer loans True Financial Services made. Our activities as a short-term consumer lender obligate us to comply with the consumer-disclosure requirements of the federal Truth in Lending Act and Regulation Z adopted under that act. Our activities as a collection agent for our past-due loans, past-due Republic Bank loans, past-due First Bank of Delaware loans and past-due True Financial loans obligate us to comply with the federal Fair Debt Collection Practices Act and corresponding regulations and certain state laws and regulations regarding collection practices and to register as a collection agency in certain states.

First Bank of Delaware is subject to supervision and regular examinations by the Delaware Department of Banking and the FDIC. The FDIC issued guidelines governing permissible arrangements between a state-chartered bank and a marketer/servicer of its short-term loans, also referred to as payday loans, in July 2003, and issued revised guidelines in March 2005. The guidelines apply to our former and current 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, 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.

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. Pursuant to agreements we entered into with each of Republic Bank and First Bank of Delaware in February 2006, we ceased offering loans made by Republic Bank and First Bank of Delaware in our Texas stores at the end of February 2006. Pursuant to our agreement with Republic Bank, we also ceased offering loans made by Republic Bank in our Arkansas and Pennsylvania stores as of the end of June 2006, and no longer offer any loans by Republic Bank in our stores. It is unclear at this time what procedures and/or alternate products the FDIC may accept as conforming with the revised guidelines and the extent to which we can continue to offer loans made by First Bank of Delaware in our Arkansas, and Pennsylvania stores. 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 State of Delaware or the FDIC, were to have the effect of significantly curtailing First Bank of Delaware’s installment lending services, our revenues derived from fees from 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 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 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 agreement with 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. To the extent an inspection involves review of the Republic Bank loans, the First Bank of Delaware loans or any related processes, the regulatory authority may require us to provide requested information and to grant access to our pertinent locations, personnel and records.

In March 2006, our subsidiary, ACE Credit Services, LLC, a credit services organization registered under Chapter 393 of the Texas Finance Code, commenced offering credit services to prospective borrowers in our Texas stores. These credit services include arranging for a short-term loan from an independent third-party lender, True Financial Services, LP, and, if the customer is approved for and accepts the loan, we provide a letter of credit to True Financial to secure the customer’s payment obligations in the event of a default by them, for which we receive a fee payable by the borrowing customer. If any order, law, rule or regulation by the State of Texas were to have the effect of significantly curtailing the amount or manner in which ACE Credit Services’ may assess fees for the credit services it offers, our revenues derived from offering credit services would be materially adversely affected, unless we could offer, or we could secure an agreement with another party not subject to such limitations to offer, similar or alternate services.

ITEM 1A. 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.

Our significant indebtedness 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 repay some or all of this debt following an event of default, our financial condition and results of operations would be severely and adversely affected.

Our business requires significant amounts of cash for services and inventory. Much of that cash is obtained through borrowing. Therefore, we have, and we expect to have, a significant amount of outstanding debt and may incur additional debt in the future as we seek to expand our business. As of June 30, 2006, our short-term debt was $77.3 million, and our non-current acquisition notes payable totaled $19.4 million.

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;

	•		create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;

	•		repurchase our capital stock;

	•		make investments, loans or other restricted payments;

	•		engage in transactions with shareholders and affiliates;

	•		create or permit certain liens;

	•		use the proceeds from sales of assets and subsidiary stock;

	•		sell or otherwise dispose of assets;

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

	•		engage in mergers and acquisitions.

Any restrictions on our ability to borrow additional funds under our revolving credit facility would have a material adverse effect on our ability to operate our business because we require frequent advances to provide cash to our stores to dispense to our customers.

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 were 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 cross-default, or that we would be able to refinance or restructure the payments on any of those debt agreements. Further, if we were 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.

In addition to our high level of indebtedness, we have significant fixed and contingent rental obligations with respect to our stores leases. For the year ended June 30, 2006, our aggregate rental payments for these leases, including taxes and operating expenses, was approximately $28.3 million. These obligations could further increase the risks described above.

Our existing and future debt obligations could adversely affect our business, results of operations and financial condition.

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 to service our debt, we may be required to:

	•		refinance all or a portion of our debt;

	•		obtain additional financing;

	•		sell some of our assets or operations;

	•		reduce or delay capital expenditures and/or acquisitions; or

	•		revise or delay our strategic plans.

If we are required to take any of these actions, it could have a material adverse effect on our business, results of operations, and financial condition. In addition, we cannot assure you that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt instruments.

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

Based on our current level of operations and anticipated revenue growth, we believe our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs. However, we have substantial working capital needs, contractual commitments and debt service obligations. We cannot assure you that our business will generate sufficient cash flow from operations, that our anticipated revenue growth will be realized or that future borrowings will be available to us 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. States may also seek to impose new licensing requirements or interpret or enforce existing requirements in new ways. 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. For example, as a result of the revised FDIC guidelines issued in March 2005 regarding short-term consumer loans, which are more fully described below, we ceased offering loans made by Republic Bank & Trust Company, a Kentucky state-chartered bank, and First Bank of Delaware, a Delaware state-chartered bank, in our Texas stores as of the end of February 2006, and ceased offering loans made by Republic Bank in our Arkansas and Pennsylvania stores as of the end of June 2006. Changes in laws or regulations may have a material adverse effect on our business, results of operations and financial condition.

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 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 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. More recently, the Georgia state legislature passed a law in April 2004, banning short-term consumer loans in that state. We intend to continue, with others in the short-term consumer loan industry, to inform and educate legislators and to oppose legislative or regulatory action that 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 National Bank loans in our stores on December 31, 2002.

In addition, we act or have acted as marketer and servicer of loans for Republic Bank and First Bank of Delaware, and they 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 also regulates each bank. 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 formerly marketed and serviced a shorter-term (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 short-term consumer loan marketing and servicing relationships. They address bank capital requirements, allowances for loan losses and loan classifications as well as income recognition, collection-recovery practices and compliance with consumer protection laws when a bank engages in short-term consumer lending.

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 short-term consumer loan is not provided to any customer that has received such 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. Pursuant to agreements we entered into with each of Republic Bank and First Bank of Delaware in February 2006, we ceased offering loans made by Republic Bank and First Bank of Delaware in our Texas stores at the end of February 2006. For the first six months of 2006, such loans accounted for approximately 10% of our revenues. Pursuant to our agreement with Republic Bank, we also ceased offering loans made by Republic Bank in our Arkansas and Pennsylvania stores at the end of June 2006 and no longer offer loans by Republic Bank at any of our stores. It is unclear at this time what procedures and/or alternate products the FDIC may accept as conforming with the revised guidelines. In particular, the installment loan product that we offer with First Bank of Delaware has only been available since August 2005 and there remains some level of uncertainty regarding the extent to which we can continue to offer loans made by First Bank of Delaware in our Arkansas and Pennsylvania stores.

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 State of Delaware or the FDIC, were to have the effect of significantly curtailing First Bank of Delaware’s installment lending services, our revenues derived from fees from 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 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 financial institution or to establish relationships with new financial institutions in other states as part of our growth strategy. Any alternate or similar services or agreement with a replacement or new financial institution may also not be on terms as favorable to us as our current agreement with 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.

Any order, rule or regulation of the State of Texas curtailing the amount or manner in which True Financial Services offers CSO loans in our Texas stores could materially adversely affect our revenues derived from offering credit services.

In March 2006, our subsidiary, ACE Credit Services, LLC, a credit services organization registered under Chapter 393 of the Texas Finance Code, commenced offering credit services to prospective borrowers in our Texas stores. For the fourth quarter of 2006, such loans accounted for approximately 13% of our revenue. These credit services include arranging for a short-term loan from an independent third-party lender, True Financial Services, LP, and, if the customer is approved for and accepts the loan, we provide a letter of credit to True Financial to secure the customer’s payment obligations in the event of a default by them, for which we receive a fee payable by the borrowing customer. This is a novel product and, as a result, there

remains uncertainty regarding the future actions of regulators with respect to this product. If any order, law, rule or regulation by the State of Texas were to have the effect of significantly curtailing the amount or manner in which ACE Credit Services’ may assess fees for the credit services it offers, our revenues derived from offering credit services would be materially adversely affected, unless we could offer, or we could secure an agreement with another party not subject to such limitations to offer, similar or alternate services.

A significant portion of our revenue is generated by our stores in Texas and a limited number of states.

Approximately 30% of our stores are located in Texas and accounted for approximately 30% of our revenue in 2006 in the aggregate. As a result, if any of the events noted in these risk factors were to occur at our stores in these states, including changes in the regulatory environment, it could significantly reduce our revenue and cash flow and materially adversely affect us.

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 historically 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 any of Republic Bank, First Bank of Delaware or True Financial. If we were to be recharacterized as the lender of the Republic Bank loans, the First Bank of Delaware loans or the CSO 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, First Bank of Delaware loans and the CSO loans, principally that we do not acquire participations in any such loans, and while we believe we are not the lender under any of our arrangements with Republic Bank, First Bank of Delaware or True Financial, 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, First Bank of Delaware and True Financial.

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, the Georgia state legislature passed a short-term consumer loan prohibition law in April 2004. In addition, we may become subject to lawsuits against us for loans we make or have made, or loans we service or have serviced, for any of Republic Bank, First Bank of Delaware or True Financial. If changes in the laws affecting any of our short-term consumer loans, the Republic Bank loans, the First Bank of Delaware loans or the CSO 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 year ended June 30, 2006, our loan loss provision was $23.3 million, and we charged-off $21.2 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 or our loan losses increase, 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. With respect to the CSO loans, we are obligated to reimburse the lender for the principal, interest and a portion of any insufficient funds fees assessed by the lender. As a result, we could be potentially obligated to pay each of Republic Bank, First Bank of Delaware and True Financial for loan losses in an amount up to the total outstanding amount of loans made by each such lender as recorded on their respective financial statements, and for True Financial, also liable for a portion of any insufficient funds fees assessed by the lender. We commenced offering First Bank of Delaware loans on August 1, 2005 and CSO loans on March 1, 2006. We ceased offering Republic Bank loans and First Bank of Delaware loans in our Texas stores as of the end of February 2006, and ceased offering Republic Bank loans in our Arkansas and Pennsylvania stores as of the end of June 2006.

As of June 30, 2006, Republic Bank’s financial statements reflect a total outstanding amount of $0.5 million for Republic Bank loans, First Bank of Delaware’s financial statements reflect a total outstanding amount of $1.1 million for First Bank of Delaware loans, and True Financial’s financial statements reflect a total outstanding amount of $12.0 million for the CSO loans. These amounts are not included on our balance sheet. For the year ended June 30, 2006, we incurred an expense of approximately $5.8 million to provide for losses on Republic Bank loans and charged-off $9.1 million related to Republic Bank loans, incurred an expense of approximately $2.8 million to provide for losses on First Bank of Delaware loans and charged-off $1.2 million related to First Bank of Delaware loans, and incurred an expense of $2.7 million to provide for losses on CSO loans, with no amounts charged off as of June 30, 2006. The balance of the liability for Republic Bank loan losses reported in accrued liabilities as of June 30, 2006 was $0.8 million. The balance of the liability for First Bank of Delaware loan losses reported in accrued liabilities as of June 30, 2006 was $1.6 million. The balance of the liability for CSO loan losses reported in accrued liabilities as of June 30, 2006 was $2.7 million. The liabilities for loan losses to Republic Bank, First Bank of Delaware and True Financial are however, estimates. If actual loan losses are materially greater than our recorded amount payable to either of these banks or True Financial, our financial condition could be materially adversely affected.

A significant portion of our consumer lending business is derived from our relationships with third-party lenders, and a loss of any of these relationships could adversely affect our business.

We provide various services to third-party lenders in connection with loans they make in some of our stores. In the case of the Republic Bank loans and the First Bank of Delaware loans, we are paid a fee by the banks for our marketing and servicing of these bank loans. In the case of the CSO loans, we are paid a fee by the borrowing customer to assist them in obtaining the CSO loan. Approximately 7% of our total revenues in the year ended June 30, 2006 was derived from marketing and servicing fees paid to us by Republic Bank and First Bank of Delaware, but we expect this percentage of total revenues to decline because we ceased offering Republic Bank loans and First Bank of Delaware loans in our Texas stores as of the end of February 2006 and ceased offering Republic Bank loans in our Arkansas and Pennsylvania stores as of the end of June 2006. Approximately 13% of our total revenues in the quarter ended June 30, 2006 (the first full quarter after we introduced the CSO loan product) was derived from providing credit services for customers seeking CSO loans made by True Financial in 384 of our Texas stores, which we began offering on March 1, 2006.

If a termination of or significant adverse change in our relationship with either True Financial or First Bank of Delaware were to occur, the revenues we derive from providing credit services for the customers seeking CSO loans or from marketing and servicing the First Bank of Delaware loans would decline unless we were able to find a replacement relationship with a new financial institution to offer the same or similar services. We cannot assure you that we would be able to secure a new relationship with a financial institution or that the terms of any such new relationship would be as favorable to us as those of our existing relationship with True Financial or First Bank of Delaware. As a result, any significant changes in our relationship with True Financial or First Bank of Delaware could lead to such third-party lenders ceasing the making of their loans in our stores or change the way we conduct business in certain states, either of which could materially adversely affect our results of operations.

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

Our agreement with First Bank of Delaware provides for us to market and service loans offered by them at our company-owned stores in Arkansas, Pennsylvania and California. Our agreement with True Financial provides for us to provide credit services to borrowers at our company-owned stores in Texas, which credit services include arranging for loans from True Financial and issuing on the borrower’s behalf a letter of credit to True Financial securing the principal, interest and a portion of any insufficient funds fee assessed by True Financial. Each lender 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 First Bank of Delaware and True Financial, we are required to reimburse the lender for loan losses and, in the case of True Financial, a portion of any insufficient funds fee assessed by True Financial. If any lender’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 have ceased offering loans made by Republic Bank at any of our stores as of the end of June 2006.

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 openings and acquisitions, and our failure to manage our growth or integrate or manage new stores we open or acquire may adversely affect our business, prospects, results of operations and financial condition.

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

	§		identification of new locations and negotiation of acceptable lease terms;

	§		assimilation of 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.

We opened 101 company-owned stores in fiscal 2006 and expect to open an additional 100 to 125 company-owned stores in fiscal 2007. 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 expand our business successfully through new store openings and acquisitions. Our failure to expand,

manage or complete the integration of any new stores or 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.

We are dependent on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including minimum wage laws.

Our workforce is comprised primarily of employees who work on an hourly basis. In certain areas where we operate, there is significant competition for employees. The lack of availability of an adequate number of hourly employees or increase in wages and benefits to current employees could adversely affect our operations. We are subject to applicable rules and regulations relating to our relationship with our employees, including minimum wage and break requirements, health benefits, unemployment and sales taxes, overtime and working conditions and immigration status. Accordingly, legislated increases in the federal minimum wage, as well as increases in additional labor cost components, such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines would increase our labor costs, which could have a material adverse effect on our business.

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, mass merchandisers, 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 as a result of technological development or the amount of checks we cash that are uncollected significantly increases.

For the year ended June 30, 2006, approximately half of our revenues were generated by 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 debit cards, direct deposit of payroll checks, electronic payroll payments and electronic transfer of government benefits. To the extent that checks are replaced with such electronic transfers or electronic transfer systems developed in the future, demand for our check cashing services could decrease, which decrease could be material.

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 revenues, cash flow and 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 revenues, cash flow and net income.

We are a party to a money order agreement with MoneyGram under which we exclusively sell their 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 MoneyGram. Approximately 7% of our total revenues for the year ended June 30, 2006 were derived from

these agreements. Our relationship with MoneyGram is therefore significant to our business. Accordingly, if any disruption in this relationship occurs, it could materially and adversely affect our revenues, cash flow and net income.

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. Our 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 the Internet. Any disruption in the availability of our information systems could affect our operations and could adversely affect our business.

Our business may suffer if our trademarks and service marks are infringed.

We rely on trademarks and service marks to protect our brand name in our markets around the country. Many of these trademarks and service marks have been a key part of establishing our business in the community. We believe these trademarks and service marks have significant value and are important to the marketing of our services. These can be no assurance that the steps we have taken or will take to protect our proprietary rights will be adequate to prevent misappropriation of our rights or the use by others of features based upon, or otherwise similar to, ours. In addition, although we believe we have the right to use our trademarks and service marks, there can be no assurance that our trademarks and service marks do not or will not violate the proprietary rights of others, that our trademarks and service marks will be upheld if challenged, or that we will not be prevented from using our trademarks and service marks, any of which occurrences could harm 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, 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 June 30, 2006, our principal shareholders, directors and executive officers, and entities affiliated with them, owned approximately 13% 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 adversely impact 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 adversely impact 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.

Our business may be adversely affected if the acquisition by Ace Holdings is not completed.

On June 6, 2006, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ace Holdings I, LLC, a Delaware limited liability company formed by JLL Partners Fund V, L.P. (“Ace Holdings”), and Ranger Merger Sub, Inc., a Texas corporation and a wholly-owned subsidiary of Ace Holdings (“Merger Sub”), pursuant to which Merger Sub will be merged with and into us, and we will continue as the surviving corporation and be a wholly-owned subsidiary of Ace Holdings (the “Merger”). Under the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of ACE will be converted into the right to receive $30.00 in cash.

The Merger is subject to several customary conditions, including the approval by the affirmative vote of a majority of the outstanding shares of Company common stock and the receipt of certain regulatory and other approvals. If this acquisition is not completed, we could be subject to a number of risks that may adversely affect our business, including:

	§		the consequences of our management’s attention having been diverted from our day-to-day business over an extended period of time; and

	§		the significant costs and expenses that we will have incurred relating to the acquisition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

Our average store size is approximately 1,200 square feet. Our stores are located in strip shopping centers, free-standing buildings and kiosks located inside retail stores. All but two of our stores are leased, generally under leases providing for an initial term of three years and optional renewal terms of three to six years. We own the land and building at one store in Indianapolis, Indiana and one store in Tampa, Florida. Our corporate headquarters in Irving, Texas, a suburb of Dallas, currently occupies approximately 73,000 square feet under a lease that expires in 2016.

ITEM 3. LEGAL PROCEEDINGS

Pending Putative Class Actions

On August 19, 2004, Donna Reuter filed in the Circuit Court for Palm Beach County, Florida, a putative class action seeking damages against us, one of our subsidiaries and some of our current and former officers alleging, among other things that certain deferred check cashing transactions conducted by us and our subsidiary at stores in Florida prior to October 1, 2002 violated Florida lending practices and usury statutes, the Florida Deceptive and Unfair Trade Practices Act and the Florida Civil Remedies for Criminal Practices Act. This lawsuit is substantially similar to a lawsuit previously filed by Wendy Betts and other individuals against the same defendants in a different judicial district in Florida in which the trial court granted summary judgment in our favor and the district court of appeals affirmed the dismissal. Ms. Betts filed a similar lawsuit against defendants unrelated to us, in the same judicial district as the current lawsuit brought by Ms. Reuter, in which the trial court granted summary judgment in favor of the defendants and the district court of appeals reversed such ruling. Because the decision of the district court of appeals in favor of Ms. Betts was appealed to the Florida Supreme Court and in conflict with the prior decision in our favor, Ms. Reuter and we agreed to stay her lawsuit against us until a decision was rendered by the Florida Supreme Court. On April 27, 2006, the Florida Supreme Court upheld the decision in favor of Ms. Betts. As a result of the recent Florida Supreme Court decision, the stay has been lifted.

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. In December 2005, Your Financial Resource, Inc. filed for bankruptcy protection and was subsequently dismissed from the lawsuit by the plaintiffs, without prejudice.

On November 10, 2005, Latoya Jackson filed in the Superior Court for the City and County of Alameda, a putative class action seeking damages and injunctive relief against us and some of our subsidiaries alleging, among other things, that we failed to provide adequate meal periods and rest breaks to our employees as required under California law.

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 defend ourselves vigorously against these lawsuits.

On June 21, 2006, The Joel & Zehava Rosenfeld Family Foundation Trust filed a purported class action lawsuit in the United States District Court, Northern District of Texas, Dallas Division on behalf of itself and all of our other public shareholders (“together with the plaintiff, the “class”), against us, Ace Holdings, Mr. Shipowitz, Robert P. Allyn, J. M. Haggar, III, Marshall B. Payne, Michael S. Rawlings, Charles Daniel Yost, Raymond C. Hemmig, and Edward W. Rose III. The plaintiff alleges that the defendants breached their fiduciary duties of loyalty, honesty and fair dealing to the shareholders because the plaintiff alleges that the consideration payable to the shareholders is at an unfair price and is a result of unfair dealing. In its complaint, the plaintiff requested that the court certify the class. In addition, the Plaintiff seeks: to enjoin us, Ace Holdings and the directors from proceeding with or consummating the merger; to invalidate and set aside the $15 million break-up fee; to rescind, set aside or award rescissory and/or compensatory damages to the class if the merger is consummated; punitive damages; costs and disbursements of the class action and reasonable attorneys’ and experts’ fees; and other relief as the court deems just and proper. We believe this lawsuit is without merit and, if negotiations with the plaintiff are unsuccessful, intend to vigorously defend against this action.

Other Incidental Proceedings

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 or cash flows.

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

No matters were submitted to a vote of our shareholders during the fourth quarter of fiscal 2006.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is quoted on The Nasdaq Stock Market (“NASDAQ”) under the symbol “AACE.” At August 25, 2006, there were approximately 141 holders of record of the Common Stock, and there were approximately 2,700 beneficial holders of the Common Stock held in nominee or street name.

The following table sets forth the high and low sale prices of the Common Stock as reported by NASDAQ for the past two fiscal years:


	High		Low
Fiscal 2005
Quarter ended September 30, 2004	$	28.74	$	22.24
Quarter ended December 31, 2004		30.50		24.29
Quarter ended March 31, 2005		29.99		22.17
Quarter ended June 30, 2005		25.87		19.61

Fiscal 2006
Quarter ended September 30, 2005	$	27.39	$	18.40
Quarter ended December 31, 2005		25.38		18.90
Quarter ended March 31, 2006		27.35		22.38
Quarter ended June 30, 2006		30.13		24.15

On August 25, 2006, the last reported sale price of the Common Stock on NASDAQ was $29.31 per share. We have never paid dividends on the Common Stock and have no plans to pay dividends in the foreseeable future.

The information under the caption, “Equity Compensation Plan Information,” in our 2006 Proxy Statement for our Annual Meeting of Shareholders is incorporated herein by reference.

The following table sets forth information regarding our repurchases of shares of Common Stock during the quarter ended June 30, 2006:


					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)
April 1 – April 30		—		—		—	$	2,291,966
May 1 – May 31		738	$	0.01		—	$	20,000,000
June 1 – June 30		—		—		—	$	20,000,000

Total		738	$	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)		Previously, our board of directors had authorized up to $5 million for the repurchase of shares of our Common Stock on the open market or in negotiated transactions. During Fiscal 2000 and 2001, we repurchased 211,400 shares at an average price of $12.81 per share. In May 2005, our board of directors terminated the previous repurchase program and established a new program authorizing up to $20 million for the repurchase of shares. Since then, 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 6. SELECTED FINANCIAL AND PERFORMANCE DATA


	Year Ended June 30,
	2006		2005			2004			2003		2002
	(in thousands, except per share and store data)
Statement of Earnings Data:
Revenue	$	309,909	$	268,649		$	246,659		$	234,289	$	229,266
Store expenses:
Salaries and benefits		77,044		65,293			59,593			58,170		57,864
Occupancy		42,629		34,768			30,563			29,194		28,207
Provision for loan losses and doubtful accounts		34,725		27,090			24,235			22,892		22,064
Depreciation		8,831		7,684			7,563			6,966		7,180
Hurricane Katrina related expenses		1,154		—			—			—		—
Other		43,777		38,398			40,066			38,192		36,512

Total store expenses		208,160		173,233			162,020			155,414		151,827

Gross margin		101,749		95,416			84,639			78,875		77,439

Region expenses		25,807		22,971			19,251			17,056		17,495
Headquarters expenses		22,441		19,245			18,681			17,133		16,594
Franchise expenses		1,230		1,227			1,196			1,225		993
Other depreciation and amortization		3,663		3,094			3,893			5,423		7,570
Interest expense		6,872		4,880			10,231			16,004		14,934
Other (income) expenses:
Restructuring		—		—			—			—		(163	)
Legal settlements		—		—			—			1,050		1,984
Loss on early extinguishment of debt		668		—			4,858			270		—
Other (income) expense, including store closing expense		54		(864	)		(1,893	)		264		1,006

Total other (income) expenses		722		(864	)		2,965			1,584		2,827

Income from continuing operations before income taxes		41,014		44,863			28,422			20,450		17,026
Provision for income taxes		15,997		17,497			11,370			8,174		6,913

Income from continuing operations		25,017		27,366			17,052			12,276		10,113
Gain on sale of discontinued operations, net of income tax⁽¹⁾		—		—			—			499		—

Net income	$	25,017	$	27,366		$	17,052		$	12,775	$	10,113


Income (loss) from continuing operations per share	$	1.76	$	1.98		$	1.49		$	1.20	$	1.00
Diluted earnings per share	$	1.76	$	1.98		$	1.49		$	1.25	$	1.00

Weighted average number of diluted shares		14,377		13,821			11,477			10,206		10,141

Balance Sheet Data:
Cash and cash equivalents	$	152,652	$	109,430		$	123,041		$	108,110	$	116,264
Loans receivable, net		26,663		20,787			17,047			13,000		17,356
Total assets		392,534		292,621			270,262			255,383		263,677
Revolving advances		77,300		43,300			60,000			83,900		97,500
Term advances (current portion)		—		—			—			3,833		48,350
Term advances (noncurrent portion)		—		—			—			34,436		—
Shareholders’ equity		225,797		196,685			162,604			75,156		62,311

SELECTED FINANCIAL AND PERFORMANCE DATA (continued)


	Year Ended June 30,
	2006			2005			2004			2003			2002
Operating Data:
Company-owned stores in operation:
Beginning of year		1,142			1,026			968			1,003			988
Acquired		135			74			34			2			8
Opened		101			80			53			14			39
Sold		(2	)		(6	)		(5	)		(23	)		—
Closed		(23	)		(32	)		(24	)		(28	)		(32	)

End of year		1,353			1,142			1,026			968			1,003

Franchised stores in operations:
Beginning of year		229			204			200			184			175
Opened		32			48			32			26			22
Acquired by ACE		(18	)		(22	)		(13	)		(2	)		(8	)
Closed		(23	)		(1	)		(15	)		(8	)		(5	)

End of year		220			229			204			200			184

Total store network		1,573			1,371			1,230			1,168			1,187


Percentage increase (decrease) in comparable company-owned store revenues from prior year:⁽²⁾
Total revenue		7.1	%		3.1	%		5.0	%		1.9	%		17.2	%
Check fees including tax check fees		1.7	%		(3.8	%)		4.1	%		5.4	%		9.7	%
Loan fees and interest		12.1	%		12.7	%		7.8	%		(4.4	%)		36.1	%

Capital Expenditures:(in thousands)
Purchases of property and equipment, net	$	18,134		$	18,951		$	7,439		$	4,721		$	6,992
Store acquisition costs:
Property and equipment		2,150			958			511			50			135
Intangible assets		38,025			18,429			6,403			673			1,177

Check Cashing Data:
Face amount of checks cashed (in millions)	$	5,928		$	5,277		$	5,103		$	5,040		$	4,843
Face amount of average check	$	414		$	396		$	388		$	383		$	378
Average fee per check	$	10.40		$	9.98		$	9.91		$	9.65		$	9.36
Fees as a percentage of average check		2.51	%		2.52	%		2.55	%		2.52	%		2.48	%
Number of checks cashed (in thousands)		14,331			13,325			13,151			13,148			12,821

Collections Data:(in thousands, except percentages)
Face amount of returned checks	$	37,380		$	26,914		$	21,705		$	24,087		$	23,637
Collections		30,824			20,951			13,947			16,935			16,090

Net write-offs	$	6,556		$	5,963		$	7,758		$	7,152		$	7,547


Collections as a percentage of returned checks		82.5	%		77.8	%		64.3	%		70.3	%		68.1	%
Net write-offs as a percentage of revenues		2.1	%		2.2	%		3.1	%		3.1	%		3.3	%
Net write-offs as a percentage of the face amount of checks cashed		0.11	%		0.11	%		0.15	%		0.14	%		0.16	%

SELECTED FINANCIAL AND PERFORMANCE DATA (continued)


	Year Ended June 30,
	2006			2005			2004			2003			2002
	(in thousands, except averages and percentages)
Combined Small Consumer Loans Operating Data:
Volume – new loans and refinances	$	685,388		$	624,257		$	527,723		$	484,026		$	502,013
Average advance	$	315		$	290		$	278		$	274		$	269
Average customer fee	$	47.95		$	45.87		$	43.71		$	44.55		$	45.61
Number of loan transactions – new loans and refinances		2,118			2,139			1,909			1,798			1,866
Matured loan volume	$	708,333		$	613,380		$	516,741		$	488,940		$	489,887
Loan fees and interest	$	108,667		$	91,793		$	77,029		$	70,806		$	74,197
Loan loss provision	$	34,545		$	26,941		$	24,280		$	22,293		$	21,924
Gross margin on loans⁽³⁾		68.2	%		70.7	%		68.5	%		68.5	%		70.5	%
Loan loss provision as a percent of matured loan volume		4.9	%		4.4	%		4.7	%		4.6	%		4.5	%

Loans Processed for Republic Bank:⁽⁴⁾
Volume – new loans	$	68,951		$	184,646		$	159,692		$	63,897			—
Average advance	$	312		$	319		$	296		$	302			—
Average customer fee	$	55.00		$	56.30		$	52.11		$	53.35			—
Number of loan transactions		221			578			541			211			—
Matured loan volume	$	74,968		$	181,153		$	157,018		$	56,040			—
Loan fees and interest	$	10,861		$	27,880		$	24,036		$	9,037			—
Provision for loan losses payable to Republic Bank	$	5,807		$	8,686		$	7,390		$	2,932			—

Loans Processed for First Bank of Delaware:⁽⁵⁾
Volume – new loans⁽⁶⁾	$	21,739			—			—			—			—
Average advance	$	353			—			—			—			—
Average customer fee⁽⁷⁾	$	34.98			—			—			—			—
Number of loan transactions⁽⁸⁾		62			—			—			—			—
Matured loan volume⁽⁹⁾	$	71,553			—			—			—			—
Loan fees and interest	$	9,960			—			—			—			—
Provision for loan losses payable to First Bank of Delaware	$	2,822			—			—			—			—

Credit Services Organization Loans (CSO):⁽¹⁰⁾
Volume — new loans and refinances	$	66,932			—			—			—			—
Average advance	$	414			—			—			—			—
Average customer fee	$	84.42			—			—			—			—
Number of loan transactions – new loans and refinances		154			—			—			—			—
Matured loan volume	$	51,128			—			—			—			—
Loan fees and interest	$	12,131			—			—			—			—
Provision for loan losses payable to True Financial	$	2,665			—			—			—			—

ACE Loans:⁽¹¹⁾
Volume – new loans and refinances	$	527,766		$	439,610		$	368,031		$	420,129		$	502,013
Average advance	$	308		$	277		$	269		$	268		$	269
Average customer fee	$	45.30		$	41.17		$	39.40		$	42.71		$	45.61
Number of loan transactions – new loans and refinances		1,681			1,561			1,368			1,587			1,866
Matured loan volume	$	510,684		$	432,227		$	359,723		$	432,900		$	489,887
Loan fees and interest	$	75,715		$	63,913		$	52,993		$	61,769		$	74,197
Loan loss provision	$	23,251		$	18,255		$	16,890		$	19,361		$	21,924

SELECTED FINANCIAL AND PERFORMANCE DATA (continued)


	Year Ended June 30,
	2006			2005			2004			2003			2002
	(in thousands, except percentages)
ACE Loans Balance Sheet Data:
Gross loans receivable	$	39,736		$	31,790		$	27,663		$	21,734		$	29,569
Less: Allowance for losses on loans receivable		13,073			11,003			10,616			8,734			12,213

Loans receivable, net of allowance	$	26,663		$	20,787		$	17,047		$	13,000		$	17,356


Allowance for losses on loans receivable:
Beginning of period	$	11,003		$	10,616		$	8,734		$	12,213		$	13,382
Provision for loan losses		23,251			18,255			16,890			19,361			21,924
Charge-offs		(21,261	)		(18,996	)		(15,295	)		(23,729	)		(24,519	)
Recoveries		80			1,128			287			889			1,426

End of period	$	13,073		$	11,003		$	10,616		$	8,734		$	12,213


Allowance as a percent of gross loans receivable		32.9	%		34.6	%		38.3	%		40.2	%		41.3	%


(1)		Discontinued operations related to our sale of 19 underperforming stores in Florida for a pre-tax gain of $0.8 million and an after-tax gain of $0.5 million recorded in the three months ended December 31, 2002.

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

(3)		Gross margin on loans represents loan fees and interest less loan loss provision.

(4)		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. Effective March 1, 2006, we discontinued offering Republic Bank loans in Texas and effective June 30, 2006, discontinued offering Republic Bank loans in Arkansas and Pennsylvania.

(5)		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. Effective March 1, 2006, we discontinued offering First Bank of Delaware loans in Texas.

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

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

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

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

(10)		True Financial began offering CSO loans at our company-owned stores in Texas on March 1, 2006.

(11)		Operating data for ACE loans include short-term consumer loans made by Goleta National Bank at our company-owned stores until we discontinued offering Goleta loans on December 31, 2002.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a leading retailer of certain financial services focused on serving unbanked and underbanked consumers, many of whom seek alternatives to traditional banking relationships in order to gain convenient and immediate access to retail cashing services. Our services include check cashing, short-term consumer loans, also known as payday loans, bill payments and pre-paid debit cards, money orders and money transfers. As of June 30, 2006, we had a total network of 1,573 stores in 38 states and the District of Columbia, consisting of 1,353 company-owned stores and 220 franchised stores. We generally lease our stores for three year terms with multiple renewal options. We are the largest owner, operator and franchisor of check cashing stores in the United States and the second largest owner, operator and franchisor of payday loan stores in the United States. 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 our third-party loans offered by Republic Bank (“Republic Bank loans”) and First Bank of Delaware (“First Bank of Delaware loans”), we receive marketing and servicing fees from such banks and for our credit services loans made by True Financial (“CSO loans”), we receive credit services fees from the customer.

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 and interest expense.

As part of our growth strategy, we intend to open new stores in existing and new markets. During fiscal 2006, we opened 101 company-owned stores, including 50 ACE Cash Advance stores. We expect to open approximately 100 to 125 new ACE Cash Express stores and ACE Cash Advance stores, resulting in a net gain of approximately 70 to 100 company-owned stores, in fiscal 2007.

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. During fiscal 2006, we opened 51 ACE Cash Express stores. In addition, the typical store requires working capital of $80,000 to $100,000 to fund operating cash and the store’s loan portfolio.

Completion of the Merger is subject to the satisfaction of closing conditions set forth in the Merger Agreement, including the approval by the affirmative vote of a majority of our outstanding shares of common stock and the receipt of certain regulatory and other approvals. We currently anticipate that the Merger will close in the second quarter of fiscal 2007.

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 former and current marketing and servicing agreements with Republic Bank and First Bank of Delaware regarding the offering of their bank’s loans at our stores in Arkansas, Pennsylvania and Texas and our servicing activities of 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.

The revised FDIC guidelines issued in March 2005 include a requirement that FDIC member 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. Assuming an average term of approximately 15 days, this limits the number of payday loans a customer may have from all lenders during any 12-month period to six. The revised FDIC guidelines also suggest that FDIC-supervised lenders should offer a customer subject to such a limitation, or refer such a customer to, a longer-term loan product. The revised FDIC guidelines became effective July 1, 2005. Pursuant to agreements we entered into with each of Republic Bank and First Bank of Delaware in February 2006, we ceased offering loans made by Republic Bank and First Bank of Delaware in our Texas stores at the end of February 2006. Pursuant to our agreement with Republic Bank, we have also agreed to cease offering loans made by Republic Bank in our Arkansas and Pennsylvania stores by June 30, 2006. It is unclear at this time what procedures and/or alternative products the FDIC may accept as conforming with the revised guidelines and the extent to which we can continue to offer loans made by First Bank of Delaware in our Arkansas and Pennsylvania stores. 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 State of Delaware or the FDIC, were to have the effect of significantly curtailing First Bank of Delaware’s installment lending services, our revenues derived from fees from 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 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 financial institution or to establish relationships with new financial institutions in other states as part of our growth strategy. Any alternate or similar services or agreement with a replacement or new financial institution 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, First Bank of Delaware and True Financial, 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. A full description of all of our significant accounting policies is included in Note 1 – Summary of Significant Accounting Policies to our consolidated financial statements included in this Annual Report on Form 10-K.

Allowance for Loan Losses and Accrued Liability for Loan Losses Payable to Republic Bank, First Bank of Delaware and True Financial.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, First Bank of Delaware and True Financial based on our estimates of the amount of uncollectible loans in each lender’s loan portfolio. The loan loss allowance and liability to Republic Bank, First Bank of Delaware and True Financial 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 experience 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, First Bank of Delaware and True Financial.

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 Annual Results

Our fiscal 2006 total revenue increase was approximately $41.3 million, or 15%, higher than our fiscal 2005 total revenue. This increase resulted primarily from an approximate $16.9 million, or 18%, increase in loan-related revenue, an approximate $16.4 million, or 13%, increase in check cashing fees, and an approximate $4.9 million, or 24%, increase in bill-payment (including debit card) revenue. Our 2006 net income was approximately $25.0 million, with diluted earnings per share of $1.76, compared to our 2005 net income of approximately $27.4 million, with diluted earnings per share of $1.98. The year ended June 30, 2006 was impacted by the implementation of the revised FDIC Guidelines for payday lending effective July 1, 2005, Hurricane Katrina which occurred in late August 2005, and the decision to discontinue operating self-service machines at H&R Block locations during the 2007 tax season. During the second quarter ending December 31, 2005, we completed the acquisition of 107 stores in Arizona, California, Florida and Texas from Popular Cash Express, Inc. for $33.6 million During the third quarter ending March 31, 2006, we discontinued offering our Republic Bank loan product and the First Bank of Delaware loan product in Texas, and on March 1, 2006, we introduced the new CSO loan product in Texas. Effective June 30, 2006, we discontinued offering the Republic Bank loan product in Arkansas and Pennsylvania.

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 First Bank of Delaware 20-week installment loan product in Arkansas, Pennsylvania and Texas on August 1, 2005. Though this product was well-received, it has lower income potential compared to the Republic Bank loan product, and therefore has impacted our results of operations this fiscal year. The CSO loan product, which was introduced in March 2006, has also been well-received. In addition, incremental marketing and training costs were incurred during the first quarter and third quarters to accomplish the timely introduction of the new loan products.

We operated 20 stores in markets affected by Hurricane Katrina and had another two stores under construction at the time of the hurricane. As of June 30, 2006, 16 stores have re-opened including one previously under construction, and we are continuing to evaluate our options for re-opening each of the remaining stores. During the first quarter of fiscal 2006, we recorded a pre-tax charge of $1.7 million related to the write-off of fixed assets and loans receivable in the areas affected by Hurricane Katrina. During the balance of fiscal 2006, we reversed $0.3 million of the original charge due to better than expected loan collections and received an initial insurance reimbursement of $0.5 million, of which $0.3 million was related to business interruption and therefore, recorded as revenue. As a result of lost revenue from the stores closed following the hurricane, the gross margin impact for the year ended June 30, 2006 was $1.3 million before any insurance reimbursement.

We operated 128 self-service machines in H&R Block locations during the 2006 tax season and recorded approximately $3.1 million of revenue and a pre-tax loss of approximately $0.3 million during the year ended June 30, 2006 related to these self-service machines. During the third quarter of fiscal 2006, we decided to discontinue operating self-service machines in H&R Block locations during the 2007 tax season. As a result, during the third quarter of fiscal 2006, we recorded expense of $0.8 million associated with the early extinguishment of the DZ bank facility ($0.7 million), which was used to fund the self-service machine operations, and the termination of the self-service machine lease agreements ($0.1 million).

Results of Operations

Revenue Analysis


	Year Ended June 30,
	2006		2005		2004		2006			2005			2004
	(in thousands)						(percentage of revenue)
Check cashing fees	$	148,065	$	131,619	$	129,194		47.8	%		49.0	%		52.4	%
Loan fees and interest		108,667		91,793		77,029		35.1			34.2			31.2
Bill-payment services		25,151		20,266		16,960		8.1			7.5			6.9
Money transfer services		13,985		11,868		11,136		4.5			4.4			4.5
Money order fees		6,830		6,875		6,330		2.2			2.6			2.6
Franchise revenues		3,242		3,180		2,774		1.0			1.2			1.1
Other fees		3,969		3,048		3,236		1.3			1.1			1.3

Total revenues	$	309,909	$	268,649	$	246,659		100.0	%		100.0	%		100.0	%


Average revenue per store (excluding franchise revenues)	$	243.9	$	244.6	$	247.8

Fiscal 2006 Compared to Fiscal 2005.Our total revenue growth resulted from a $17.7 million, or 7.1%, increase in comparable company-owned store revenues (1,041 stores) and a $23.6 million increase from stores that were not open for both of the full periods compared. The number of company-owned stores increased by 211, or 18%, to 1,353 stores open at June 30, 2006 from 1,142 stores open at June 30, 2005. During fiscal 2006, we opened 101 newly constructed stores, acquired 135, sold two, and closed 23 company-owned stores.

Check cashing fees, including tax check fees, increased because of a 5% increase in the average size check and an 8% increase in the number of checks cashed. Comparable store check cashing fees, including tax check fees, increased by 1.7%, despite a decline in comparable store tax check fees of 1.6%. Tax check fees of $21.6 million for fiscal 2006 increased by $1.3 million, from $20.3 million in fiscal 2005. We received $3.1 million of tax check fees from our 128 self-service machines located in H&R Block offices in fiscal 2006, compared to $3.5 million of tax check fees from our over 130 self-service machines in H&R Block offices in fiscal 2005. During the third quarter of fiscal 2006, we decided to discontinue operating self-service machines in H&R Block locations for the 2007 tax season.

Loan fees and interest for fiscal 2006 increased $16.9 million, or 18%, from fiscal 2005 due to an increase in comparable store loan fees of 12.1% and the increased number of store locations offering loan services. As of June 30, 2006, we offered loan services in 1,241 of our company-owned stores, compared to 1,048 of our company-owned stores as of June 30, 2005. 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. We did not offer, and therefore we did not receive any fees from the First Bank of Delaware loan product or the CSO loan product in Texas in fiscal 2005. During the third quarter of fiscal 2006, we

discontinued offering Republic Bank loans and First Bank of Delaware loans in Texas, and introduced the CSO loan product in Texas. For the fiscal 2006, loan fees and interest as a percent of our total loan revenue from our ACE loan products represent 70%, from Republic Bank loans represent 10%, from First Bank of Delaware loans represent 9%, and from the CSO loan product represent 11%.

The increase in bill payment fees in fiscal 2006 was a result of growth in revenues from our services related to prepaid debit cards. Fees from our money transfer services increased as a result of the increase in the number of stores in the ACE network. The decrease in the number of money orders sold relates to the increased customer usage of electronic bill-payment services. Revenue from guarantees, incentives and bonuses paid under vendor agreements (which presently pertains only to money transfers and money orders) are recorded in their respective revenue product line. The MoneyGram Agreement provides incentive bonuses for opening new store locations at which MoneyGram services are offered as well as certain other performance incentives. Incentive bonuses are recognized as revenue over the remaining term of the agreement. The amounts recorded as guarantees, incentive and bonus, and commission revenue for the years ended June 30, 2006, 2005 and 2004 are as follows:


	Year Ended June 30,
	2006		2005		2004
	(in thousands)
Money transfer services:
Incentive and store opening bonuses	$	3,077	$	2,868	$	2,559
Guarantees		1,468		1,319		1,326
Commissions		9,440		7,681		7,251

Total money transfer service revenue	$	13,985	$	11,868	$	11,136


Money order fees:
Incentive bonuses	$	808	$	808	$	854
Commissions		6,022		6,067		5,476

Total money order revenue	$	6,830	$	6,875	$	6,330

Franchise revenues consist of royalties and initial franchise fees. Franchise revenues for fiscal 2006 remained unchanged from fiscal 2005. During fiscal 2006, we opened 32 franchised stores, acquired 18 former ACE franchised stores, and closed 23 franchised store, resulting in a net decrease of 9 franchised stores.

Fiscal 2005 Compared to Fiscal 2004.Our total revenue growth resulted from a $7.1 million, or 3.1%, increase in comparable company-owned store revenues (956 stores) and a $14.9 million increase from stores that were not open for both of the full periods compared. The number of company-owned stores increased by 116, or 11%, to 1,142 stores open at June 30, 2006 from 1,026 stores open at June 30, 2004. During fiscal 2005, we opened 80 newly constructed stores, acquired 74, sold six, and closed 32 company-owned stores.

Check cashing fees, including tax check fees, increased because of a 2% increase in the average size check and a 1% increase in the number of checks cashed. Comparable store check cashing fees decreased 3.8% in fiscal 2005 from fiscal 2004. Tax check fees of $20.3 million for fiscal 2005 decreased by $0.5 million, from $20.8 million in fiscal 2004. We received $3.5 million of tax check fees from our 130 self-service machines located in H&R Block offices in fiscal 2005, compared to $4.3 million of tax check fees from our over 200 self-service machines in H&R Block offices in fiscal 2004.

The increase in loan fees and interest in fiscal 2005 resulted from a 21% increase in loan volume in both the ACE loan product and the Republic Bank loan product. Comparable store loan fees increased 12.7% in fiscal 2005 from fiscal 2004.

The increase in bill payment fees in fiscal 2005 was a result of growth in revenues from our services related to prepaid debit cards. During the fiscal 2006, our company-owned stores sold approximately 268,000 prepaid debit cards and our customers loaded approximately $917 million on these cards, which was an 56% increase in prepaid debit cards sold and a 74% increase in dollars loaded from the same period last year. Money transfer services increased as a result of the increase in the number of stores in the ACE network. Despite a decrease in the number of money orders sold (which relates to increased customer usage of electronic bill-payment services), money order fees increased as a result of rate increases. Revenue from guarantees, incentives and bonuses paid under vendor agreements (which presently pertains only to money transfers and money orders) are recorded in their respective revenue product line. The MoneyGram Agreement provides incentive bonuses for opening new store locations at which MoneyGram services are offered as well as certain other performance incentives. Incentive bonuses are recognized as revenue over the remaining term of the agreement.

Other fees decreased in fiscal 2005 as a result of the discontinuation of certain miscellaneous products. Franchise revenues consist of royalties and initial franchise fees. Franchise revenues increased in fiscal 2005 as a result of the increased

number of franchised store openings. During fiscal 2005, we opened 48 franchised stores, acquired 22 former ACE franchised stores, and closed one franchised store, resulting in a net increase of 25 franchised stores.

Store Expense Analysis


	Year Ended June 30,
	2006			2005			2004			2006			2005			2004
	(in thousands)									(percentage of revenue)									]
Salaries and benefits	$	77,044		$	65,293		$	59,593			24.9	%		24.3	%		24.2	%
Occupancy		42,629			34,768			30,563			13.8			13.0			12.4
Provision for loan losses and doubtful accounts		34,725			27,090			24,235			11.2			10.1			9.8
Depreciation		8,831			7,684			7,563			2.9			2.9			3.1
Hurricane Katrina related expenses		1,154			—			—			0.4			—			—
Other:
Armored and security		9,745			8,750			7,954			3.1			3.2			3.2
Returns and cash shorts		7,876			7,288			9,350			2.5			2.7			3.8
Information services		3,868			3,884			5,860			1.2			1.4			2.4
Bank charges		6,218			5,839			5,093			2.0			2.2			2.1
Store supplies		4,056			4,423			4,219			1.3			1.6			1.7
Telecommunications		1,917			1,977			2,211			0.6			0.7			0.9
Advertising and marketing		5,449			2,863			2,072			1.8			1.1			0.8
Miscellaneous		4,648			3,374			3,307			1.5			1.3			1.3

Other		43,777			38,398			40,066			14.0			14.2			16.2

Total store expenses	$	208,160		$	173,233		$	162,020			67.2	%		64.5	%		65.7	%


Average per store expense	$	165.5		$	159.6		$	164.6

Average per store gross margin	$	78.3		$	85.0		$	83.2

Face amount of returned checks	$	37,380		$	26,914		$	21,705
Collections		(30,824	)		(20,951	)		(13,947	)

Net write-offs	$	6,556		$	5,963		$	7,758


Net write-offs as a percentage of the face amount of checks cashed		0.11	%		0.11	%		0.15	%

Fiscal 2006 Compared to Fiscal 2005.Total store expenses increased as a result of the expenses related to the increased number of stores, additional costs related to the introduction of new loan products in Texas, Arkansas and Pennsylvania, additional loan provision and losses related to Hurricane Katrina.

Total store expenses increased primarily as a result of the 211 additional company-owned stores in operation and introduction of a new loan product in Texas, Arkansas and Pennsylvania. The 18% increase in number of company-owned 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 the overall loan business, as well as a lower overall collection rate on loans in Texas, Arkansas, and Pennsylvania. The allowance for loan losses of $13.1 million at June 30, 2006 represented 32.9% of gross loans receivable, an increase from the allowance for loan losses of $11.0 million at June 30, 2005, representing 34.6% of gross loans receivable, at June 30, 2005. Loan losses are charged to this allowance, which is reviewed for adequacy (and may be adjusted) on a quarterly basis. Returned checks, net of collections, and cash shortages increased due to the increased number of stores in operation, while decreasing as a percent of revenue from 2.7% to 2.5%. The percent of check fee revenue attributable to returned checks was 0.11%, 0.11%, and 0.15%, for the fiscal years ended June 30, 2006, 2005 and 2004. Store supplies decreased due to improved order control processes. Telecommunications expenses decreased as a result of more favorable pricing from our suppliers. Advertising and marketing expenses increased due to specific advertising and marketing programs introduced this fiscal year to promote our First Bank of Delaware and CSO loan products and our prepaid debit card 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 first quarter of fiscal 2006, 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 June 30, 2006, six of our 22 company-

owned stores in the greater New Orleans market remain closed due to damage from Hurricane Katrina. During the balance of fiscal 2006, we reversed $0.3 million of the original charge for losses from Hurricane Katrina due to improved loan collections on loans outstanding at the time of the hurricane, and we received an initial insurance reimbursement of $0.5 million.

Fiscal 2005 Compared to Fiscal 2004.Total store expenses increased as a result of the expenses related to the increased number of stores, and additional loan provision related to the growth in the loan business.

Salaries and benefits, occupancy, depreciation, armored and security, bank charges, store supplies and advertising and marketing increased primarily as a result of the 11% increase in the number of stores compared to the same period last year. Returned checks, net of collections, and cash shortages decreased due to continued improvements in operational procedures and controls and the sale of aged checks. Returned checks, net of collections, and cash shortages as a percentage of revenues also decreased, to 2.7% in fiscal 2005 from 3.7% in fiscal 2004. The percent of check fee revenue attributable to returned checks was 0.11%, 0.15%, and 0.14% for the fiscal years ended June 30, 2005, 2004 and 2003. The reduction in information services was primarily related to a reduction in lease expense related to the reduced number of self-service machines deployed in H&R Block locations during the fiscal 2005 tax season, along with the prior year’s incremental lease expense of $1.4 million related to the buyout of 105 self-service machine leases. Loan loss provision increased primarily due to growth of both the ACE and Republic Bank loan business. As a result of our regular review of our loan loss exposure, effective July 1, 2004, the provision rate was reduced by 25 basis points from the same period last year. During fiscal 2005, we also recovered $1.2 million from the sale of previously charged off loans, which consisted of approximately $0.9 million related to ACE loans and $.0.3 million related to Republic Bank loans. The allowance for loan losses of $11.0 million at June 30, 2005, represented 34.6% of gross loans receivable, an increase from the allowance for loan losses of $10.6 million, representing 38.3% of gross loans receivable, at June 30, 2004. Loan losses are charged to this allowance, which is reviewed for adequacy (and may be adjusted) on a quarterly basis.

Other Expenses Analysis


	Year Ended June 30,
	2006		2005			2004			2006			2005			2004
	(in thousands)								(percentage of revenue)
Region expenses	$	25,807	$	22,971		$	19,251			8.3	%		8.6	%		7.8	%
Headquarters expenses		22,441		19,245			18,681			7.2			7.1			7.6
Franchise expenses		1,230		1,227			1,196			0.5			0.5			0.5
Other depreciation and amortization		3,663		3,094			3,893			1.2			1.1			1.6
Interest expense, net		6,872		4,880			10,231			2.2			1.8			4.1
Loss on early extinguishment of debt		668		—			4,858			0.2			—			2.0
Other (income) expenses, net		54		(864	)		(1,893	)		0.0			(0.3	)		(0.8	)

Total other expenses	$	60,735	$	50,553		$	56,217			19.6	%		18.8	%		22.8	%

Region Expenses

Fiscal 2006 Compared to Fiscal 2005.Region expenses increased $2.8 million because we increased the number of region offices from 13 to 14 to accommodate the increase in the number of stores and due to increases in salaries and benefits expense resulting from additional staffing in collections, facilities and real estate development related to supporting the growth in the number of stores.

Fiscal 2005 Compared to Fiscal 2004.Region expenses increased $3.7 million primarily because of the addition of two new regions 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

Fiscal 2006 Compared to Fiscal 2005.Headquarters expenses increased $3.2 million primarily due to increased bonus expense and expenses related to restricted stock and stock option expense.

Fiscal 2005 Compared to Fiscal 2004.Headquarters expenses increased $0.5 million in fiscal 2005. Increased professional fees related to the completion of the internal control audit requirements of Section 404 of the Sarbanes-Oxley Act approximate $0.3 million of the increase; and expense related to restricted stock granted under our 1997 Stock Incentive Plan constituted $0.6 million of the increase; and these increases were partially offset by a reductions in bonus expense and a lease accounting reclassification recorded in the third quarter of fiscal 2005. Landlord allowances, which had previously been recorded as a reduction to related leasehold improvements, are reflected as deferred rent and amortized over the reasonably assured lease term as a reduction to rent expense rather than depreciation expense.

Franchise Expenses

Fiscal 2006 Compared to Fiscal 2005.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 remained unchanged from the prior fiscal year.

Fiscal 2005 Compared to Fiscal 2004.Franchise expenses relate to the salaries, benefits, and other franchisee support costs for the sales and support personnel in our ACE Franchise Group. Franchise expenses in fiscal 2005 remained unchanged from fiscal 2004.

Other Depreciation and Amortization

Fiscal 2006 Compared to Fiscal 2005.Other depreciation and amortization expense increased $0.6 million due to the fixed asset additions related to the 211 additional company-owned stores, 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.

Fiscal 2005 Compared to Fiscal 2004.Other depreciation and amortization decreased $1.2 million because of the decrease in the amount of debt financing costs amortized in fiscal 2005 compared to fiscal 2004, offset by increases in depreciation and amortization related to opening 80 and acquiring 74 new stores.

Interest Expense, Net

Fiscal 2006 Compared to Fiscal 2005.Interest expense, net, increased $2.0 million due to increased borrowings and a higher interest rate. Our average revolver balance for the year ended June 30, 2006 of $63.3 million increased $8.5 million from an average revolver balance for the year ended June 30, 2005 of $54.8 million.

Fiscal 2005 Compared to Fiscal 2004.Interest expense, net, decreased $5.4 million because of the repayment in May 2004 of our term notes issued to American Capital Strategies, Ltd., along with lower interest expense from lower average revolver advances.

Loss on Early Extinguishment of Debt

Fiscal 2006 Compared to Fiscal 2005.During the third quarter of fiscal 2006, we decided to discontinue operating self-service machines in H&R Block locations during the 2007 tax season. As a result, we recorded $0.7 million for the early extinguishment of the DZ bank facility used to fund the self-service machine operations.

Other (income) expense, net

Fiscal 2006 Compared to Fiscal 2005.Other (income) expenses, net, of $0.1 million was due primarily to the gain from the sale of stores, offset by store closing expense and the expense associated with the termination of the self-service machine lease agreements resulting from the decision to discontinue operating self-service machines in H&R Block locations during the 2007 tax season.

Fiscal 2005 Compared to Fiscal 2004.In each of fiscal 2005 and fiscal 2004, we recognized a gain on sale of certain stores to franchisees and expense incurred in connection with closing certain other stores. The net amount of these two components in fiscal 2005 were more than the amounts in fiscal 2004. Over half of the Other (income) expense in fiscal 2004 consisted of gain from the exercise of a warrant to purchase shares of common stock of NetSpend Corporation and the sale of those shares. We received that warrant in January 2004 in connection with entering into an agreement with NetSpend to distribute stored-value or debit cards at our stores. We exercised that warrant and sold the shares in May 2004. A small portion of the gain from the exercise of the warrant was recognized in fiscal 2005.

Income Taxes

Fiscal 2006 Compared to Fiscal 2005.A provision of $16.0 million was recorded for income taxes, for fiscal 2006, compared to $17.5 million for 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. Our annual effective income tax rate for fiscal 2006 and fiscal 2005 was 39%.

Fiscal 2005 Compared to Fiscal 2004.A provision of $17.5 million was recorded for income taxes for fiscal 2005, compared to $11.4 million for fiscal 2004. The provision for income taxes was calculated based on a statutory federal income tax rate of 35%, plus a provision for state income taxes. Our effective income tax rate was 39% for fiscal 2005 and 40% for fiscal 2004.

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 year ended June 30, 2006, cash and cash equivalents increased $43.2 million, compared to a decrease of $13.6 million for the year ended June 30, 2005.

Accounts receivable, net, of $7.7 million as of June 30, 2006 increased $3.7 million from June 30, 2005 due primarily to the loan fee receivable from True Financial for the loans we began marketing and servicing on March 1, 2006.

Loans receivable, net, of $26.7 million as of June 30, 2006 increased $5.9 million from June 30, 2005 due to the additional number of ACE loan stores. As of June 30, 2006, we offered our loan product in 794 of our company-owned stores, compared to 621 of our company-owned stores as of June 30, 2005. Loans receivable, net, does not include any of the Republic Bank loans, First Bank of Delaware loans or CSO loans available through our company-owned stores in Arkansas, Pennsylvania and Texas, because we serve only as a marketing and servicing agent for the banks and a credit services provider for the CSO lender, and do not acquire or own any participation interest in any of those loans. Our agreements with our third-party lenders provide for us to receive fees, though such fees are subject to reduction or offset by the losses from uncollected loans.

Prepaid expenses, inventories and other current assets of $14.0 million as of June 30, 2006 increased $0.4 million from June 30, 2005 due to an increase of $1.0 million in prepaid licenses and supplies related to new stores, and an increase in the current value of the interest rate swap of $0.3 million, offset by a decrease of $0.6 million in the current portion of deferred financing costs related to the extended term of the amended credit agreement and the early extinguishment of the DZ credit agreement as a result of the termination of the H&R Block agreement, a decrease of $0.2 million in the deferred tax asset, and a decrease of $0.1 million in bus pass inventory .

Property and equipment, net, as of June 30, 2006 increased $9.0 million from June 30, 2005 as a result of fixed asset additions of $20.3 million (including $0.6 million for capitalized software development), offset by depreciation expense of $10.4 million and fixed asset retirements of $0.9 million. During fiscal 2006, we opened 101 newly constructed stores, acquired 135 stores, closed 23 company-owned stores, and sold 2 company-owned stores.

Goodwill as of June 30, 2006 increased $35.7 million from June 30, 2005 as a result of the acquisition of 135 stores during fiscal 2006, including a single acquisition of 107 stores from Popular Cash Express, Inc. and Popular Cash Express – California, Inc. during the second quarter of fiscal 2006.

Other assets, noncurrent, as of June 30, 2006 increased by $1.6 million from June 30, 2005, primarily as a result of an increase in other intangibles (acquired relationships) related to store acquisitions during fiscal 2006.

Revolving advances at June 30, 2006 increased by $34.0 million from June 30, 2005 due to the increase in loans receivable, store acquisitions, and additional newly constructed stores, along with the increased store cash requirements related to the month ending on a Friday. Our average revolver balance for the year ended June 30, 2006 of $63.3 million increased $8.5 million from an average revolver balance for the year ended June 30, 2005 of $54.8 million.

Accounts payable, accrued liabilities and other current liabilities as of June 30, 2006 increased $9.8 million from June 30, 2005, primarily due to an $8.6 million increase in liabilities to various service providers due to the Friday month-end and a $1.3 million increase in accrued bonuses payable.

Money orders payable as of June 30, 2006 increased by $5.7 million from June 30, 2005 due to the timing of remittances at the end of June 2006.

Convertible notes payable of $19.4 million are related to the acquisition of 107 stores from Popular Cash Express, Inc. and Popular Cash Express – California, Inc. during the second quarter of fiscal 2006.

Other liabilities increased $0.9 million from June 30, 2005 due to increases in deferred rent and acquisition notes payable.

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 restore 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 loans, First Bank of Delaware loans or CSO loans) is as follows:

All loans not repaid 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:


	Year Ended June 30,
	2006			2005			2004
	(in thousands)
ACE Loans:
Gross loans receivable, beginning of period	$	31,790		$	27,663		$	21,734
Originations		527,765			455,710			368,031
Repayments		(498,638	)		(433,715	)		(347,094	)
Charge-offs		(21,261	)		(18,996	)		(15,295	)
Recoveries		80			1,128			287

Gross loans receivable, end of period		39,736		$	31,790		$	27,663
Allowance for losses on loans receivable		(13,073	)		(11,003	)		(10,616	)

Loans receivable, net of allowance	$	26,663		$	20,787		$	17,047


Allowance for losses on loans receivable:
Beginning of period	$	11,003		$	10,616		$	8,734
Provision for loan losses		23,992			18,255			(16,890	)
Katrina-related loan loss provision adjustment		(741	)		—			—
Charge-offs		(21,261	)		(18,996	)		(15,295	)
Recoveries		80			1,128			287

End of period	$	13,073		$	11,003		$	10,616


Net loan charge-offs as a percent of matured loan volume⁽¹⁾		4.1	%		3.9	%		4.1	%
Allowance as a percent of gross loans receivable		32.9	%		34.6	%		38.3	%


⁽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. Even when payments are subsequently received for delinquent loans, no additional interest is accrued on those loans. Our policy is to charge off all ACE loans that are 180 days or more past due. The following table provides loans past due (non-accrual) and loans ninety days or more past due at each balance sheet date:


	Year Ended June 30,
	2006			2005			2004
	(dollars in thousands)
ACE Loans:
Gross loans receivable, end of period	$	39,736		$	31,790		$	27,663

Loans past due < 90 days	$	9,321		$	7,065		$	6,261

Percentage of gross loans receivable		23.5	%		22.2	%		22.6	%

Loans past due > 90 days	$	4,823		$	3,927		$	3,653

Percentage of gross loans receivable		12.1	%		12.4	%		13.2	%

Off-Balance Sheet Arrangement with Third-party Lenders

We have been a party to marketing and servicing agreements with two banks, Republic Bank and First Bank of Delaware. Under these agreements, we have provided various services to the banks in connection with our marketing and servicing of their loans in exchange for marketing and servicing 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.

During February 2006, we entered into amendments to these marketing and servicing agreements to cease offering each bank’s loans in Texas. With respect to Republic Bank, we also agreed to cease offering Republic’s short-term loans in Arkansas and Pennsylvania by June 30, 2006. On March 1, 2006, we began, through our wholly owned subsidiary, ACE Credit Services, LLC, offering and providing credit services under a CSO program in our stores in Texas to customers who apply for short-term loans offered by True Financial Services, LP, an independent third-party lender. When a customer enters into a CSO loan with True Financial at one of our stores, we agree, for a fee payable to us by the customer, to provide a variety of credit services to the customer, one of which is to provide a letter of credit to True Financial to secure the customer’s obligation to repay the CSO loan if the customer fails to do so.

True Financial began offering CSO loans in our company-owned Texas stores on March 1, 2006, and as of June 30, 2006, it was being offered in 384 of our company-owned Texas stores. As of June 30, 2006, First Bank of Delaware was offering loans in 63 of our company-owned stores in Arkansas and Pennsylvania. Approximately $19.2 million, or 7%, of our total revenues in the year ended June 30, 2006 were fees paid to us by Republic Bank and First Bank of Delaware. Approximately $12.1 million, or 4%, of our total revenues in the year ended June 30, 2006 were fees paid to us related to the CSO loan product.

Although we offer these third-party loans in our stores, each lender is responsible for reviewing each loan application and determining whether such application is approved for a loan. We are not involved in the loan approval process, including with respect to determining the loan approval procedures or criteria, nor do we acquire or own any participation interest in these loans. Consequently, these third-party loans are not included in our loan portfolio or in our loans receivable and loans are not reflected on our balance sheet. Under our agreements with the lenders, however, we are obligated to reimburse them by paying them an amount equal to the net amount charged off by each lender regarding their loans made in our stores. Therefore, we could be obligated to pay each lender for loan losses in an amount up to the total outstanding amount of third-party loans recorded on their financial statements, and with respect to CSO loans, also obligated to pay a portion of any insufficient funds fees assessed by the lender. As of June 30, 2006, our potential obligation to each lender is as follows:


	As of June 30,
	2006
	(in millions)
Republic Bank	$	0.5
First Bank of Delaware	$	1.1
True Financial	$	12.0

Because of our economic exposure for losses related to the third-party loans, we have established a payable to reflect our anticipated losses related to uncollected third-party loans that are 180 days or more past due. We believe that the loss experience with our third-party lenders’ 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 the third-party lenders for losses regarding their loans has been established using the same methodology discussed in “- ACE Loan Portfolio” above. We cannot assure you, however, that our estimates will be accurate, and if the third-party lender loan losses are materially greater than our recorded amount payable, our financial condition could be materially adversely affected.

An analysis of the loan losses payable related to Republic Bank’s gross loans receivable (which are not included in our balance sheet) is as follows:


	Year Ended June 30,
	2006			2005			2004
	(in thousands)
Republic Bank Loans:
Gross loans receivable on Republic Bank’s financial statements, beginning of period	$	10,713		$	9,434		$	10,356
Originations		68,951			184,646			159,692
Repayments		(70,132	)		(174,997	)		(154,084	)
Charge-offs		(9,051	)		(8,755	)		(6,545	)
Recoveries		—			385			15

Gross loans receivable on Republic Bank’s financial statements, end of period⁽¹⁾		481			10,713			9,434
Loan losses paid to Republic Bank for loans less than 180 days delinquent		1,525			3,352			2,976

Gross bank loans receivable	$	2,006		$	14,065		$	12,410


Liability for loan losses payable to Republic Bank, beginning of period	$	4,030		$	3,714		$	2,854
Provision for loan losses payable to Republic Bank		5,807			8,686			7,390
Charge-offs		(9,051	)		(8,755	)		(6,545	)
Recoveries		—			385			15

Liability for loan losses payable to Republic Bank, end of period	$	786		$	4,030		$	3,714


Net loan charge-offs as a percent of matured loan volume⁽²⁾		12.1	%⁽³⁾		4.6	%		4.2	%
Liability as a percent of gross receivable		39.2	%		28.7	%		29.9	%


⁽¹⁾		Republic Bank loans are not carried on our balance sheet.

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

⁽³⁾		Net loan charge-off percentage increased due to discontinuation of Republic Bank loan product offering in Texas in February 2006.

Our relationships with First Bank of Delaware and True Financial began during fiscal 2006. An analysis of the loan losses payable related to First Bank of Delaware’s gross loans receivable and True Financial’s gross loans receivable, both of which are not included in our balance sheet, is as follows:


	Year Ended June 30, 2006
	First Bank of			True
	Delaware			Financial
	(in thousands)
First Bank of Delaware/True Financial (CSO) Loans:
Gross loans receivable, beginning of period	$	—		$	—
Originations		21,739			66,932
Repayments		(19,447	)		(54,913	)
Charge-offs		(1,242	)		—
Recoveries		—			—

Gross loans receivable on third-party lender’s financial statements, end of period⁽¹⁾		1,050			12,019
Loan losses paid to third-party lender for loans less than 180 days delinquent		922			3,146

Gross loans receivable	$	1,972		$	15,165


Liability for loan losses payable to third-party lenders, beginning of period	$	—		$	—
Provision for loan losses payable		2,823			2,665
Charge-offs		(1,242	)		—
Recoveries		—			—

Liability for loan losses payable to third-party lenders, end of period	$	1,581		$	2,665


Net loan charge-offs as a percent of matured loan volume⁽²⁾		1.7	%		—	%
Liability as a percent of gross receivable		80.2	%		17.6	%


⁽¹⁾		First Bank of Delaware loans and True Financial 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. Third-party loans past due (non-accrual) and third-party loans ninety days or more past due at each date presented are as follows:


										First
										Bank of			True
	Republic Bank									Delaware			Financial
	As of June 30,
	2006			2005			2004			2006			2006
	(in thousands, except percentages)
Gross third-party loans receivables, end of period	$	2,006		$	14,065		$	12,410		$	1,972		$	15,165

Loans past due < 90 days	$	289		$	2,365		$	2,776		$	377		$	4,966

Percentage of gross loans receivable		14.4	%		16.8	%		22.3	%		19.1	%		32.7	%

Loans past due > 90 days	$	1,333		$	2,522		$	1,509			593			164

Percentage of gross loans receivable		66.5	%		17.9	%		12.2	%		30.1	%		1.1	%

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, First Bank of Delaware loans and CSO loans. In this case, a “quarterly portfolio” consists of all of the ACE loans, Republic Bank loans, First Bank of Delaware loans, and CSO loans that matured in a particular fiscal quarter. We can track the payment rates at different points of time for each quarterly portfolio.

We 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 maturing in any particular fiscal quarter 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

Current		91.5	%		92.1	%		92.6	%		92.7	%
90		93.2	%		93.9	%		94.3	%		94.9	%
180		94.8	%		94.5	%		94.6	%		95.1	%

	Second Quarter

Current		91.5	%		92.8	%		93.1	%		93.8	%
90		93.2	%		94.7	%		95.4	%		95.7	%
180		94.8	%		95.2	%		95.8	%		95.8	%

	Third Quarter

Current		93.0	%		95.1	%		94.7	%		94.7	%
90		94.8	%		95.9	%		96.1	%		96.0	%
180		95.7	%					96.5	%		96.1	%

	Fourth Quarter

Current		91.5	%		92.1	%		92.7	%		93.2	%
90		93.2	%					94.4	%		94.6	%
180		94.8	%					94.9	%		94.9	%

Liquidity and Capital Resources

Cash Flows from Operating Activities

During fiscal 2006, 2005 and 2004, we had net cash provided by operating activities of $47.2 million, $35.8 million, and $23.2 million, respectively. The increase in cash flows provided from operating activities in fiscal 2006 compared to fiscal 2005 was due to performance improvements in our operations and to growth in the both the loan and bill pay products.

During fiscal 2006, 2005 and 2004, we recognized $3.1 million, $3.5 million, and $2.0 million, respectively, in deferred revenue related to franchise fees, and money order and MoneyGram incentive bonuses. The MoneyGram Agreement provides incentive bonuses for opening new locations at which MoneyGram services are offered as well as certain other performance incentives. Incentive bonuses are recognized as revenue over the term of the agreement. (See “Business – Relationships with the Money Order and MoneyGram Suppliers.”)

Cash Flows from Investing Activities

During fiscal 2006, 2005 and 2004, we used $18.1 million, $19.0 million, and $7.4 million, respectively, for purchases of property and equipment related principally to new store openings and remodeling existing stores. Expenditures related to acquisitions were $20.2 million, $19.1 million, and $6.9 million, for the fiscal years ended June 30, 2006, 2005, and 2004, respectively. During the second quarter of fiscal 2006, we acquired 107 stores in a single acquisition from Popular Cash Express, Inc. for a purchase price of $33.6 million, of which $19.4 million was evidenced by a series of convertible promissory subordinated notes, with the remaining balance paid in cash.

Cash Flows from Financing Activities

Net cash provided by financing activities for year ended June 30, 2006 was $34.4 million and net cash used by financing activities for year ended June 30, 2005 was $11.4 million, and net cash provided by financing activities for the year ended June 30, 2004 was $6.0 million. Our revolving advance balance increased $34.0 million from June 30, 2005 due to the cost of new store construction and store acquisitions and the additional funds required to operate the increased number of stores, along with the increased store cash requirements related to the month ending on a Friday. Our average revolver balance for the year ended June 30, 2006 of $63.3 million increased $8.5 million from an average revolver balance for the year ended June 30, 2005 of $54.8 million. Gross borrowings related to store acquisition notes payable were $0.6 million. Proceeds from the exercise of restricted stock and stock options were $0.6 million for the year ended June 30, 2006.

Contractual Commitments

The table below summarizes our cash obligations for certain leases and acquisition notes payable outstanding as of June 30, 2006:


	Payments Due by June 30,
											2011 and
	Total		2007		2008		2009		2010		thereafter
	(in thousands)
Operating leases	$	98,570	$	30,315	$	23,444	$	16,841	$	11,620	$	16,350
Convertible note payable		19,400		—		—		—		—		19,400
Acquisition notes payable		623		338		272		13		—		—

Total	$	118,593	$	30,653	$	23,716	$	16,854	$	11,620	$	35,750

stores, in fiscal 2007.

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. During fiscal 2006, we opened 51 ACE Cash Express stores. In addition, the typical store requires working capital of $80,000 to $100,000 to fund operating cash and the store’s loan portfolio.

For fiscal 2006, we spent $18.1 million on capital expenditures excluding acquisitions. Our total capital expenditures, excluding acquisitions, are anticipated to be approximately $13 million during fiscal 2007, 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 its anticipated capital expenditures and operational requirements during fiscal 2007. The 100 to 125 new ACE Cash Express stores and 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.

Existing Credit Facilities

On February 28, 2006, we entered into a Second Amendment to amend our existing First Amended and Restated Credit Agreement dated as of July 30, 2004, as amended, with a syndicate of bank lenders led by Wells Fargo Bank, National Association, as administrative agent for itself and the other lenders thereunder.

The existing credit agreement provides two revolving line-of-credit facilities that expire December 31, 2010:

	•		a $200 million primary revolving credit facility that is available throughout the term of the credit agreement, which permits us to request an increase in this facility of up to $25 million during the term of the credit agreement; and

	•		a $75 million seasonal revolving credit facility that is available during each calendar-year-end holiday and tax season (i.e., January 1 through March 15) during the term of the credit agreement.

The outstanding balance as of June 30, 2006 was $77.3 million, with an available balance on the primary revolving credit facility of $122.7 million. The seasonal revolving credit facility of $75 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 0.75% to 1.75% per annum based on our debt-to-EBITDA ratio. (For this ratio, “EBITDA” is our earnings before interest, taxes, depreciation, and amortization.) This interest rate 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 1.75% to 2.75% 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 1.75% to 2.75% per annum based on our debt-to-EBITDA ratio. This interest rate adjusts on a daily basis.

We selected the third alternative described above as the annual interest rate for our borrowings under the credit agreement, and as of June 30, 2006, that interest rate was 7.375% (calculated using LIBOR plus 2.00%). Upon an event of default under the existing credit agreement, the applicable annual interest rate is increased by three hundred basis points.

Interest on the outstanding principal amount borrowed under the existing credit agreement is payable monthly. The outstanding principal amount borrowed and all interest accrued under the primary revolving line-of-credit facility is payable on December 31, 2010. 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, we must pay the lenders a commitment fee equal to 0.375% per annum of the average daily unused portion of the credit available under the existing credit agreement (which is the unused portion of the $200 million throughout the year and the unused portion of the $75 million seasonal facility from January 1 through March 15 each year). We must also pay Wells Fargo Bank an annual agency fee of $65,000 in advance on each July 30. We paid $0.8 million in arrangement fees and up-front fees relating to the existing credit agreement. We may (a) at any time reduce, in whole or in part (in $5 million increments), the available amount of the credit facilities provided in the existing credit agreement and (b) subject to certain conditions, prepay, in whole or in part, the revolving credit facilities provided by the existing credit agreement without penalty or premium.

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

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

	•		to limit 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 $175.5 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; and

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

As of June 30, 2006, we were in compliance with all of our covenants under the existing credit facilities. The payment and performance of our obligations under the existing credit agreement and the documents ancillary thereto are secured by liens on all or substantially all of our and its subsidiaries’ (other than Ace Funding, LLC’s) assets. All of our subsidiaries (other than Ace Funding, LLC) guaranteed our obligations under the existing credit agreement. The collateral arrangements entered into by us and our guarantor subsidiaries are substantially similar for each of Wells Fargo Bank, as administrative agent for the lenders, and MoneyGram Payment Systems, Inc., which has a subordinate lien to secure the payment and performance of our obligations under the money order agreement and under the MoneyGram Agreement. We and all of our secured creditors or agents for them entered into a First Amended and Restated Intercreditor Agreement dated as of July 30, 2004 that includes agreements regarding the priority of distributions to the lenders and MoneyGram upon foreclosure and liquidation of the collateral subject to the security agreements executed by us and our guarantor subsidiaries and certain other intercreditor arrangements. This intercreditor agreement replaced the Intercreditor Agreement dated as of March 31, 2003, as amended, that was in effect with our prior credit agreement.

Previous Credit Facilities

From July 30, 2004 until February 28, 2006, (when we entered into the second amendment described above), we were a party to the First Amended and Restated credit agreement with a syndicate of banks led by Wells Fargo Bank Texas, National Association as administrative agent for itself and other lenders. This credit agreement, which amended and restated the credit agreement that we originally entered into on March 31, 2003 and that was effective (as amended) throughout fiscal 2004, provided for the following two revolving line-of-credit facilities that were to expire on June 30, 2008:

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

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

The revolving line-of-credit facilities included, 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 June 30, 2005, that interest rate was 5.625% (calculated using LIBOR plus 2.25%). Upon an event of default under the existing credit agreement, the applicable annual interest rate is increased by three hundred basis points.

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 June 30, 2006, prior to adding the applicable margin, was 4.263%.

On June 2, 2003, we entered into an interest-rate swap agreement with National City Bank regarding a notional amount of $20 million, corresponding to our term notes, to be effective until March 31, 2006. In May 2004, we paid the notes in full and terminated the swap agreement. There was no material gain or loss recorded as a result of the swap termination.

During the first quarter of fiscal 2006, we entered into an additional swap agreement with 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%.

Self-Service Machine Funding Arrangements

We placed 128 and 130 of our self-service check cashing machines in certain retail offices of H&R Block Tax Services, Inc. (“H&R Block”) during the 2006 and 2005 tax seasons, respectively. The self-service machines were made available to cash only tax refund anticipation loan checks of H&R Block customers. H&R Block was entitled to a portion of the tax fees collected varying by level of fees collected.

During fiscal 2006 and fiscal 2005, we utilized the DZ Bank funding of $190 million for the self-service machines placed in the H&R Block retail offices through an arrangement with Ace Funding LLC, our wholly owned subsidiary, as borrower, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt am Main, a German bank, as arranger and liquidity agent, and Autobahn Funding Company LLC, as lender. For financial reporting purposes, Ace Funding is our consolidated subsidiary and all borrowings by Ace Funding under this arrangement, all amounts paid by Ace Funding under this arrangement and all check cashing fees received by us from the self-service machines subject to this arrangement are reflected in our consolidated financial statements. All borrowings under this arrangement for the 2006 and 2005 tax seasons were repaid in full by March 31^st of each tax season.

For the year ended June 30, 2006, we recorded approximately $3.1 million of revenue and a pre-tax loss of approximately $0.3 million and for the year ended June 30, 2005, we recorded approximately $3.5 million of revenue and pre-tax income of approximately $0.2 million related to these self-service machines. During the third quarter of fiscal 2006, we decided to discontinue operating self-service machines at H&R Block locations during the 2007 tax season. As a result, during the three months ended March 31, 2006, we recorded expense of $0.8 million associated with the early extinguishment of the DZ bank facility ($0.7 million), which was used to fund the self-service machine operations, and the termination of the self-service machine lease agreements ($0.1 million).

Effects of Financing Arrangements

We believe that our long-term credit facilities under the existing credit agreement and our anticipated cash flows from operations will provide adequate working capital for our operations. Although the credit agreement places restrictions on capital expenditures and acquisitions, we believe that these restrictions do not prohibit us from pursuing our growth strategy as currently planned.

Stock Repurchase Program

In fiscal 2000, our board of directors authorized up to $5 million for the repurchase of shares of our Common Stock in the open market or in negotiated transactions. No additional shares have been repurchased since fiscal 2001.

In May 2005, our board of directors terminated the previous repurchase program and established a new program authorizing up to $20 million for the repurchase of common stock in the open market or negotiated transactions. Since then, 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.

Litigation Expenses

We have been required in the past to defend ourselves and, in some matters, our directors, officers and others in various lawsuits and state regulatory proceedings regarding our current and past loan-related activities. We incurred significant legal expenses in conducting those defenses. In accordance with our bylaws, we paid the expenses of defense for our directors, officers and other employees named as additional defendants in these lawsuits.

Seasonality

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

Impact of Inflation

We believe that our results of operations are not impacted by fluctuations in 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The fair value of our existing interest-rate swaps was $0.4 million as of June 30, 2006. The associated underlying debt has equaled or exceeded the notional amount for each swap throughout the existence of the swap, and we anticipate that it will continue to do so. Each existing swap is based on the same index as, and repriced on a consistent basis with its corresponding underlying debt.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Part IV, Item 15(a)(1) for information required for this item.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the year ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Ace Cash Express, Inc., together with its consolidated subsidiaries (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of June 30, 2006 and 2005. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of June 30, 2006 and 2005 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006 and 2005 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report appearing on page 60, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006 and 2005.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of Ace Cash Express, Inc.

We have audited the accompanying consolidated balance sheets of Ace Cash Express, Inc. (a Texas corporation) and Subsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ace Cash Express, Inc. and Subsidiaries as of June 30, 2006 and 2005, and the consolidated results of their operations and their consolidated cash flows for each of three years in the period ended June 30, 2006, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ace Cash Express, Inc. and Subsidiaries’ internal control over financial reporting as of June 30, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 29, 2006, expressed an unqualified opinion on management’s assessment that Ace Cash Express, Inc. and Subsidiaries’ internal control over financial reporting as of June 30, 2006, was effective based on criteria established inInternal Control Integrated Frameworkissued by the Committee of Sponsoring Organization of the Treadway Commission (COSO) and an unqualified opinion on the effectiveness of Ace Cash Express, Inc. and Subsidiaries’ internal control over financial reporting as of June 30, 2006, based on criteria established inInternal Control Integrated Frameworkissued by the Committee of Sponsoring Organization of the Treadway Commission (COSO).

Dallas, Texas
August 29, 2006

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference from the information provided under the caption “Directors and Executive Officers” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our Annual Meeting of Shareholders (“our 2006 Proxy Statement”). Registrant has adopted a code of ethics that applies to the principal executive officer, principal financial officer, and principal accounting officer or controller or person performing similar functions.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference from the information provided under the captions “Executive Compensation” and “Stock Performance Chart” in our 2006 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference from the information provided under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our 2006 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the information provided under the caption “Directors and Executive Officers Certain Relationships” in our 2006 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference from the information provided under the caption “Relationships with Independent Certified Public Accountants” in our 2006 Proxy Statement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Report:


(1)Financial Statements.

Report of independent registered public accounting firm			69

Consolidated balance sheets as of June 30, 2006 and 2005			70

Consolidated statements of earnings for the years ended June 30, 2006, 2005 and 2004			71

Consolidated statement of shareholders’ equity for the years ended June 30, 2006, 2005 and 2004			72

Consolidated statements of cash flows for the years ended June 30, 2006, 2005 and 2004			73

Notes to consolidated financial statements			74

(2)Financial Statement Schedules.

Report of independent registered public accounting firm on schedule			106

Schedule II — Valuation and Qualifying Accounts			107

(3)Exhibits.


Exhibit Number		Exhibits

3.1		Restated Articles of Incorporation of the Company, as amended through January 31, 1998. (Included as Exhibit 3.6 to the Company’s Form 10-Q for the quarter ended December 31, 1997 (Commission File Number 0-20774) and incorporated herein by reference.)

3.2		Amended and Restated Bylaws of the Company, as amended through January 31, 1998. (Included as Exhibit 3.7 to the Company’s Form 10-Q for the quarter ended December 31, 1997 (Commission File Number 0-20774) and incorporated herein by reference.)

3.3		Certificate of Amendment to the Company’s Bylaws dated January 3, 2000. (Included as Exhibit 3.3 to the Company’s Form 10-Q for the quarter ended December 31, 1999 (Commission File Number 0-20774) and incorporated herein by reference.)

4.1		Form of Certificate representing shares of Registrant’s Common Stock. (Included as Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (No. 33-53286) and incorporated herein by reference.)

10.1		Lease Agreement dated October 1, 1987, between the Company and Greenway Tower Joint Venture, as amended by First Amendment to Lease Agreement dated April 29, 1988, Second Amendment to Lease Agreement dated August 24, 1988, Third Amendment to Lease Agreement dated December 29, 1988 and Fourth Amendment to Lease Agreement dated January 29, 1991. (Included as Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (No 33-53286) and incorporated herein by reference.)

10.2		Fifth Amendment to Lease Agreement dated June 13, 1994, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.10 to the Company’s Form 10-K for the fiscal year ended June 30, 1994 (Commission File Number 0-20774) and incorporated herein by reference.)

10.3		Ace Cash Express, Inc. 401(k) Profit Sharing Plan, adopted July 1, 1994. (Included as Exhibit 10.13 to the Company’s Form 10-K for the fiscal year ended June 30, 1994 (Commission File Number 0-20774) and incorporated herein by reference.) #

10.4		Ace Cash Express, Inc. Deferred Compensation Plan, adopted July 1, 1994. (Included as Exhibit 10.14 to the Company’s Form 10-K for the fiscal year ended June 30, 1994 (Commission File Number 0-20774) and incorporated herein by reference.) #

10.5		Ace Cash Express, Inc. Non-Employee Directors Stock Option Plan dated March 27, 1995. (Included as Exhibit 10.19 to the Company’s Form 10-K for the fiscal year ended June 30, 1995 (Commission File Number 0-20774) and incorporated herein by reference.) #

10.6		Sixth Amendment to Lease Agreement dated February 1, 1996, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.25 to the Company’s Form 10-Q for the quarter ended March 31, 1996 (Commission File Number 0-20774) and incorporated herein by reference.)

10.7		Amendment No.1 to the Ace Cash Express 401K Profit Sharing Plan effective January 1, 1998. (Included as Exhibit 10.33 to the Company’s Form 10-Q for the quarter ended March 31, 1998 (Commission File Number 0-20774) and incorporated herein by reference.) #

10.8		Amendment No. 1 to Ace Cash Express, Inc. Non-Employee Directors Stock Option Plan. (Included as Exhibit 10.34 to the Company’s Form 10-K for the fiscal year ended June 30, 1998 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.9		Amendment No. 2 to Ace Cash Express, Inc. Non-Employee Directors Stock Option Plan. (Included as Exhibit 10.35 to the Company’s Form 10-K for the fiscal year ended June 30, 1998 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.10		Ace Cash Express, Inc. 1997 Stock Option Plan. (Included as Exhibit A to the Company’s Proxy Statement for the 1997 Annual Meeting of Shareholders, filed on Form DEF 14A on October 20, 1997 (Commission File No. 0-20774), and incorporated herein by reference.) #


Exhibit Number		Exhibits

10.11		Amendment No. 1 to Ace Cash Express, Inc. 1997 Stock Option Plan. (Included as Exhibit 10.37 to the Company’s Form 10-K for the fiscal year ended June 30, 1998 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.12		Money Order Agreement dated as of April 16, 1998, but effective as of December 16, 1998, between the Company and Travelers Express Company, Inc. (Included as Exhibit 10.39 to the Company’s Form 10-K for the fiscal year ended June 30, 1998 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.13		Amendment No. 3 to Ace Cash Express, Inc. Non-Employee Directors Stock Option Plan. (Included as Exhibit 10.44 to the Company’s Form 10-Q for the quarter ended December 31, 1998 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.14		Amendment No. 2 to Ace Cash Express, Inc. 1997 Stock Option Plan. (Included as Exhibit 10.45 to the Company’s Form 10-Q for the quarter ended December 31, 1999 (Commission File Number 0-20774) and incorporated herein by reference.) #

10.15		Money Transfer Agreement dated as of June 30, 2000, among the Company, Travelers Express Company, Inc., and MoneyGram Payment Systems, Inc. (Included as Exhibit 10.48 to the Company’s Form 10-K for the fiscal year ended June 30, 2000 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.16		Amendment No. 3 to Ace Cash Express, Inc. 1997 Stock Option Plan. (Included as Exhibit 10.50 to the Company’s Form 10-Q for the quarter ended December 31, 2000 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.17		Change-in-Control Executive Severance Agreement dated as of May 15, 2001, between the Company and Barry M. Barron. (Included as Exhibit 10.56 to the Company’s Form 10-K for the fiscal year ended June 30, 2001 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.18		Separation Agreement dated as of February 28, 2002, between the Company and R. Edward McCarty. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2002 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.19		Consulting Agreement dated as of February 28, 2002, between the Company and R. Edward McCarty. (Included as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2002 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.20		Seventh Amendment to Lease Agreement dated December 20, 2000, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.66 to the Company’s Form 10-K for the fiscal year ended June 30, 2002 (Commission File No. 0-20774) and incorporated herein by reference.)

10.21		Eighth Amendment to Lease Agreement dated May 10, 2001, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.67 to the Company’s Form 10-K for the fiscal year ended June 30, 2002 (Commission File No. 0-20774) and incorporated herein by reference.)

10.22		Ace Cash Express, Inc. Executive Non-Qualified Excess Plan Adoption Agreement with the First Amendment to the Ace Cash Express, Inc. Executive Non-Qualified Excess Plan, dated as of October 1, 2001. (Included as Exhibit 10.68 to the Company’s Form 10-K for the fiscal year ended June 30, 2002 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.23		Stipulation and Consent to the Issuance of a Consent Order between Ace Cash Express, Inc. and the Office of the Comptroller of the Currency dated October 25, 2002. (Included as Exhibit 10.1 to the Company’s Form 8-K filed on November 5, 2002 (Commission File No. 0-20774) and incorporated herein by reference.)

10.24		Consent Order issued by the Office of the Comptroller of the Currency In the Matter of Ace Cash Express, Inc., Irving, Texas, as Agent and Bank Service Provider for Goleta National Bank, Goleta, California, dated October 25, 2002. (Included as Exhibit 10.2 to the Company’s Form 8-K filed on November 5, 2002 (Commission File No. 0-20774) and incorporated herein by reference.)

10.25		Amendment No. 4 to Ace Cash Express, Inc. 1997 Stock Option Plan. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended December 31, 2002 (Commission File No. 0-20774) and incorporated herein by reference.) #


Exhibit Number		Exhibits

10.26		License Agreement dated November 22, 2000, with Addendum No. 1 thereto dated as of May 31, 2001, by and between H&R Block Tax Services, Inc. and the Company. (Included as Exhibit 10.1 to the Company’s Form 8-K filed on January 21, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.27		Loan and Servicing Agreement dated as of December 18, 2002, among Ace Funding LLC, the Company, Autobahn Funding Company LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt am Main, and U.S. Bank National Association, together with the material Schedules, Exhibits and Annexes thereto (Included as Exhibit 10.3 to the Company’s Form 8-K filed on January 21, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.28		Marketing and Servicing Agreement dated as of October 21, 2002, with First Amendment to Marketing and Servicing Agreement dated as of January 28, 2003, between Republic Bank & Trust Company and the Company. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.29		Restricted Stock Agreement dated January 28, 2003 between the Company and Barry M. Barron. (Included as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.30		Restricted Stock Agreement dated July 2, 2003 between the Company and Jay B. Shipowitz. (Included as Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended September 30, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.31		Restricted Stock Agreement dated July 2, 2003 between the Company and Barry M. Barron. (Included as Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended September 30, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.32		Restricted Stock Agreement dated October 30, 2003, between the Company and William S. McCalmont. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended December 31, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.33		Change-in-Control Executive Severance Agreement executed December 5, 2003, but effective as of August 5, 2003, between the Company and William S. McCalmont. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended December 31, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.34		Amendment Number One to Money Order Agreement dated as of February 18, 1999, between the Company and Travelers Express Company, Inc. (Included as Exhibit 10.1 to the Company’s Form 8-K filed on November 4, 2003 (Commission File No. 0-20774) and incorporated herein by reference.)

10.35		Amendment No. 2 to Money Order Agreement dated as of October 29, 2003, between the Company and Travelers Express Company, Inc. (Included as Exhibit 10.2 to the Company’s Form 8-K filed on November 4, 2003 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.36		Cash Services Agreement dated as of December 30, 2003, by and between the Company and Texas Capital Bank, National Association, together with the material Exhibits and Annexes thereto. (Included as Exhibit 10.1 to the Company’s Form 8-K filed on January 14, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.37		First Amendment dated as of December 22, 2003, among Ace Funding LLC, the Company, Autobahn Funding Company LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt am Main, and U.S. Bank National Association, together with the Schedules thereto. (Included as Exhibit 10.2 to the Company’s Form 8-K filed on January 14, 2004 (Commission File No. 0-20774) and incorporated herein by reference.)

10.38		First Amended and Restated Credit Agreement dated July 30, 2004, by and among the Company, Wells Fargo Bank, National Association, as administrative agent for the lenders, JPMorgan Chase Bank, J.P. Morgan Securities, Inc., U.S. Bank, National Association, Bank of America, N.A., Union Bank of California, N.A., Keybank National Association, and the lenders named in Schedule 2.01, together with the Exhibits and Schedules thereto. (Application for confidential treatment for a portion of the Schedules to this document has been submitted to the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.) (Included as Exhibit


Exhibit Number		Exhibits

		10.1 to the Company’s Form 8-K filed on August 13, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.39		Executive Employment Agreement dated to be effective as of July 1, 2004, between the Company and Jay B. Shipowitz. (Included as Exhibit 10.1 to the Company’s Form 8-K filed on August 27, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.40		Restricted Stock Agreement dated to be effective as of July 1, 2004, between the Company and Jay B. Shipowitz. (Included as Exhibit 10.2 to the Company’s Form 8-K filed on August 27, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.41		Change-in-Control Executive Severance Agreement dated to be effective as of July 1, 2004, between the Company and Jay B. Shipowitz. (Included as Exhibit 10.3 to the Company’s Form 8-K filed on August 27, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.42		Employment Agreement dated to be effective as of July 1, 2004, between the Company and Donald H. Neustadt. (Included as Exhibit 10.4 to the Company’s Form 8-K filed on August 27, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.43		General Release and Covenant Not to Sue dated to be effective as of June 30, 2004 between the Company and Donald H. Neustadt. (Included as Exhibit 10.5 to the Company’s Form 8-K filed on August 27, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.44		Change-in-Control Executive Severance Agreement executed and effective on November 15, 2004 between the Company and Barry M. Barron and William S. McCalmont. (Included as Exhibits 10.1 and 10.2 to the Company’s Form 8-K filed on November 19, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) #

10.45		Second Amendment to the Marketing and Servicing Agreement dated as of September 30, 2003 between Republic Bank & Trust Company and Ace Cash Express, Inc. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended December 31, 2004 (Commission File No. 0-20774) and incorporated herein by reference.)

10.46		Second Amendment dated as of December 15, 2004, among Ace Funding LLC, ACE Cash Express, Inc., the Company, Autobahn Funding Company LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt am Main, and U.S. Bank National Association, together with the Schedules thereto. (Included as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended December 31, 2004 (Commission File No. 0-20774) and incorporated herein by reference.) †

10.47		Ninth Amendment to Lease Agreement dated October 21, 2003, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.48		Tenth Amendment to Lease Agreement dated July 26, 2004, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.49		Addendum No. 1 to Money Transfer Agreement dated as of October 31, 2003, between the Company and Travelers Express Company, Inc. (Included as Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended March 31, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.50		Third Amendment to the Marketing and Services Agreement dated as of July 26, 2005, between Republic Bank & Trust Company and the Company. (Included as Exhibit 10.50 to the Company’s Form 10-K for the fiscal year ended June 30, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.51		Installment Loan Marketing and Servicing Agreement dated as of July 21, 2005, between First Bank of Delaware and the Company. (Application for confidential treatment for a portion of this document has been submitted to the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.) (Included as Exhibit 10.51 to the Company’s Form 10-K for the fiscal year ended June 30, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)


Exhibit Number		Exhibits

10.52		Employment Separation Agreement dated as of June 30, 2005, between the Company and Donald H. Neustadt. (Included as Exhibit 10.1 to the Company’s Form 8-K filed July 6, 2005 (Commission File No. 020774) and incorporated herein by reference.)

10.53		Consulting Agreement dated to be effective as of July 1, 2005, between the Company and Donald H. Neustadt. (Included as Exhibit 10.2 to the Company’s Form 8-K filed July 6, 2005 (Commission File No. 020774) and incorporated herein by reference.)

10.54		Change-in-Control Executive Severance Agreement dated and effective July 26, 2005, between the Company and Allen J. Klose. (Included as Exhibit 10.1 to the Company’s Form 8-K filed July 27, 2005 (Commission File No. 020774) and incorporated herein by reference.)

10.55		Change-in-Control Executive Severance Agreement dated and effective July 26, 2005, between the Company and Joe B. Edwards. (Included as Exhibit 10.2 to the Company’s Form 8-K filed July 27, 2005 (Commission File No. 020774) and incorporated herein by reference.)

10.56		Change-in-Control Executive Severance Agreement dated and effective July 26, 2005, between the Company and Walter E. Evans. (Included as Exhibit 10.3 to the Company’s Form 8-K filed July 27, 2005 (Commission File No. 020774) and incorporated herein by reference.)

10.57		Form of Restricted Stock Agreement. (Included as Exhibit 10.2 to the Company’s Form 8-K filed October 3, 2005 (Commission File No. 020774) and incorporated herein by reference.)#

10.58		Ace Cash Express, Inc. Non-Employee Directors Stock Incentive Plan, dated August 23, 2005. (Included as Exhibit 10.1 to the Company’s Form 8-K filed November 16, 2005 (Commission File No. 020774) and incorporated herein by reference.)#

10.59		Asset Purchase Agreement dated September 21, 2005, by and between the Company, Popular Cash Express, Inc., Popular Cash Express — California, Inc. and Popular North America, Inc. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended September 30, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.60		Form of Convertible Promissory Note issuable to Popular Cash Express, Inc. (Included as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended September 30, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.61		Second Amendment to Asset Purchase Agreement dated November 22, 2005, by and between the Company, Popular Cash Express, Inc., Popular Cash Express — California, Inc. and Popular North America, Inc. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended December 31, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.62		Third Amendment dated as of December 27, 2005, among the Company, Ace Funding LLC, Autobahn Funding Company, LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank Frankfurt am Main and U.S. Bank National Association. (Included as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended December 31, 2005 (Commission File No. 0-20774) and incorporated herein by reference.)

10.63		Form of Stock Option Agreement. (Included as Exhibit 10.1 to the Company’s Form 8-K filed December 5, 2005 (Commission File No. 020774) and incorporated herein by reference.)#

10.64		Form of Restricted Stock Agreement. (Included as Exhibit 10.2 to the Company’s Form 8-K filed December 5, 2005 (Commission File No. 020774) and incorporated herein by reference.)#

10.65		First Amendment to Credit Agreement dated as of January 19, 2006, among the Company, Wells Fargo Bank, National Association, as administrative agent for the lenders, JPMorgan Chase Bank, J.P. Morgan Securities, Inc., U.S. Bank, National Association, Bank of America, N.A., Union Bank of California, N.A., Keybank National Association, and the lenders named in Schedule 2.01(B). (Included as Exhibit 10.1 to the Company’s Form 8-K filed January 24, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.66		Amended and Restated Executive Employment Agreement dated as of January 23, 2006, between the Company and Jay B. Shipowitz. (Included as Exhibit 10.1 to the Company’s Form 8-K filed January 26, 2006 (Commission File No. 020774) and incorporated herein by reference.)


Exhibit Number		Exhibits

10.67		Change-in-Control Executive Severance Agreement dated and effective January 23, 2006 between the Company and Jay B. Shipowitz. (Included as Exhibit 10.2 to the Company’s Form 8-K filed January 26, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.68		Restricted Stock Agreement dated to be effective as of January 23, 2006 between the Company and Jay B. Shipowitz. (Included as Exhibit 10.3 to the Company’s Form 8-K filed January 26, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.69		Letter Agreement to Installment Loan Marketing and Servicing Agreement dated February 21, 2006 between the Company and First Bank of Delaware. (Included as Exhibit 10.1 to the Company’s Form 8-K filed February 27, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.70		Letter Agreement to Marketing and Servicing Agreement dated February 24, 2006, between the Company and Republic Bank & Trust Company. (Included as Exhibit 10.2 to the Company’s Form 8-K filed February 27, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.71		Second Amendment to Credit Agreement dated as of February 28, 2006, among the Company, Wells Fargo Bank, National Association, as administrative agent for the lenders, JPMorgan Chase Bank, J.P. Morgan Securities, Inc., U.S. Bank, National Association, Bank of America, N.A., Union Bank of California, N.A., Keybank National Association, and the lenders named in Schedule 2.01. (Included as Exhibit 10.1 to the Company’s Form 8-K filed March 2, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.72		Amendment No. 3 to Money Order Agreement dated February 28, 2006, between the Company and MoneyGram Payment Systems, Inc., as successor in interest to Travelers Express Company, Inc. (Included as Exhibit 10.2 to the Company’s Form 8-K filed March 2, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.73		Consulting Agreement dated as of May 10, 2006, between the Company and Raymond C. Hemmig. (Included as Exhibit 10.1 to the Company’s Form 8-K filed May 11, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.74		Agreement and Plan of Merger dated as of June 6, 2006, between the Company, Ace Holdings I, LLC and Ranger Merger Sub, Inc. (Included as Exhibit 10.1 to the Company’s Form 8-K filed June 7, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.75		Lease Agreement dated June 1, 2006, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.1 to the Company’s Form 8-K filed June 9, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.76		Lease Termination Agreement dated June 1, 2006, between the Company and Greenway Tower Joint Venture. (Included as Exhibit 10.2 to the Company’s Form 8-K filed June 9, 2006 (Commission File No. 020774) and incorporated herein by reference.)

10.77		Credit Services Agreement dated February 25, 2006, between the ACE Credit Services, LLC and True Financial Services, LP. (Included as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2006 (Commission File No. 0-20774) and incorporated herein by reference.)

10.78		Parent Guaranty dated March 1, 2006, in favor of True Financial Services, LP by the Company. (Included as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2006 (Commission File No. 0-20774) and incorporated herein by reference.)

10.79		Amendment to Installment Loan Marketing and Servicing Agreement dated as of July 28, 2006 between First Bank of Delaware and Ace Cash Express, Inc.*

21		Subsidiaries of the Company.*

23		Consent of Grant Thornton LLP.*

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.*


Exhibit Number		Exhibits

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.*


*		Filed herewith

#		Management contract or compensatory plan or arrangement

†		Confidential treatment for a portion of this exhibit has been granted by the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		ACE CASH EXPRESS, INC.

		By:		/s/ WILLIAM S. MCCALMONT

				William S. McCalmont
				Executive Vice President and
				Chief Financial Officer

		Date:		August 29, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.


Signature	Title	Date
/s/ RAYMOND C. HEMMIG Raymond C. Hemmig	Chairman of the Board, Director	August 29, 2006

/s/ JAY B. SHIPOWITZ Jay B. Shipowitz	President and Chief Executive Officer Director (Principal Executive Officer)	August 29, 2006

/s/ WILLIAM S. MCCALMONT William S. McCalmont	Executive Vice President and Chief Financial Officer Treasurer (Principal Financial and Accounting Officer)	August 29, 2006

/s/ ROBERT P. ALLYN	Director	August 29, 2006
Robert P. Allyn

/s/ MATRICE ELLIS-KIRK	Director	August 29, 2006
Matrice Ellis-Kirk

/s/ JOSEPH M. HAGGAR, III	Director	August 29, 2006
Joseph M. Haggar, III

/s/ MARSHALL B. PAYNE	Director	August 29, 2006
Marshall B. Payne

/s/ MICHAEL S. RAWLINGS	Director	August 29, 2006
Michael S. Rawlings

/s/ EDWARD W. ROSE III	Director	August 29, 2006
Edward W. Rose III

/s/ CHARLES DANIEL YOST	Director	August 29, 2006
Charles Daniel Yost

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of Ace Cash Express, Inc.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ace Cash Express, Inc. and Subsidiaries’ internal control over financial reporting as of June 30, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29, 2006, expressed an unqualified opinion on both management’s assessment of Ace Cash Express, Inc.’s internal control over financial reporting and on the effectiveness of Ace Cash Express, Inc.’s internal control.

/s/ GRANT THORNTON LLP
Dallas, Texas
August 29, 2006

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

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


	June 30,			June 30,
	2006			2005
ASSETS
Current Assets
Cash and cash equivalents	$	152,652		$	109,430
Accounts receivable, net		7,717			3,969
Loans receivable, net		26,663			20,787
Prepaid expenses, inventories and other current assets		14,047			13,685

Total Current Assets		201,079			147,871


Noncurrent Assets
Property and equipment, net		46,657			37,657
Covenants not to compete, net		2,088			1,668
Goodwill		134,377			98,702
Other assets		8,333			6,723

Total Assets	$	392,534		$	292,621


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Revolving advances	$	77,300		$	43,300
Accounts payable, accrued liabilities and other current liabilities		45,881			36,117
Money orders payable		10,594			4,867

Total Current Liabilities		133,775			84,284


Noncurrent Liabilities
Deferred income tax		5,388			4,302
Deferred revenue		3,202			3,271
Convertible notes payable		19,400			—
Other liabilities		4,972			4,079

Total Liabilities		166,737			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, 14,244,419 and 13,912,045 shares issued and 14,033,019 and 13,700,645 shares outstanding, respectively		140			137
Additional paid-in capital		104,260			103,544
Retained earnings		123,853			98,836
Accumulated comprehensive income (loss)		251			(56	)
Treasury stock, at cost, 211,400 shares		(2,707	)		(2,707	)
Unearned compensation – restricted stock		—			(3,069	)

Total Shareholders’ Equity		225,797			196,685

Total Liabilities and Shareholders’ Equity	$	392,534		$	292,621

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

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

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


	Year Ended June 30,
	2006		2005			2004
Revenues	$	309,909	$	268,649		$	246,659

Store expenses:
Salaries and benefits		77,044		65,293			59,593
Occupancy		42,629		34,768			30,563
Provision for loan losses and doubtful accounts		34,725		27,090			24,235
Depreciation		8,831		7,684			7,563
Hurricane Katrina related expenses		1,154		—			—
Other		43,777		38,398			40,066

Total store expenses		208,160		173,233			162,020

Gross margin		101,749		95,416			84,639

Region expenses		25,807		22,971			19,251
Headquarters expenses		22,441		19,245			18,681
Franchise expenses		1,230		1,227			1,196
Other depreciation and amortization		3,663		3,094			3,893
Interest expense, net		6,872		4,880			10,231
Loss on early extinguishment of debt		668		—			4,858
Other (income) expenses, net		54		(864	)		(1,893	)

Income before income taxes		41,014		44,863			28,422
Provision for income taxes		15,997		17,497			11,370

Net income	$	25,017	$	27,366		$	17,052


Earnings per share:
Basic	$	1.85	$	2.06		$	1.55
Diluted	$	1.76	$	1.98		$	1.49

Weighted average number of common shares outstanding:
Basic		13,521		13,275			11,009
Diluted		14,377		13,821			11,477

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

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands, except shares)


																		Unearned
					Additional					Accumulated								Compensation			Total
	Common Stock				Paid-In			Retained		Comprehensive			Treasury Stock					- Restricted			Shareholders’
	Shares		Amount		Capital			Earnings		Income (Loss)			Shares		Amount			Stock			Equity
Balance as of June 30, 2003		10,183,713		102		24,385			54,418		(1,017	)		211,400		(2,707	)		(23	)		75,158

Net income		—		—		—			17,052		—			—		—			—			17,052
Change in fair value of interest-rate swaps, net of tax		—		—		—			—		847			—		—			—			847

Comprehensive income																						17,899

Stock options exercised		504,827		5		5,856			—		—			—		—			—			5,861
Income tax benefit of stock options exercised		—		—		1,828			—		—			—		—			—			1,828
Restricted stock		207,175		2		2,602			—		—			—		—			(2,040	)		564
Stock offering		2,411,622		24		61,270			—		—			—		—			—			61,294


Balance as of June 30, 2004		13,307,337		133		95,941			71,470		(170	)		211,400		(2,707	)		(2,063	)		162,604

Net income		—		—		—			27,366		—			—		—			—			27,366
Change in fair value of interest-rate swaps, net of tax		—		—		—			—		114			—		—			—			114

Comprehensive income																						27,480

Stock options exercised		310,885		3		3,577			—		—			—		—			—			3,580
Income tax benefit of stock options exercised		—		—		1,778			—		—			—		—			—			1,778
Restricted stock		82,423		1		2,248			—		—			—		—			(1,006	)		1,243


Balance as of June 30, 2005		13,700,645		137		103,544			98,836		(56	)		211,400		(2,707	)		(3,069	)	$	196,685

Net income		—		—		—			25,017		—			—		—			—			25,017
Change in fair value of interest-rate swaps, net of tax		—		—		—			—		307			—		—			—			307

Comprehensive income																						25,324

Stock options exercised		56,695		1		605			—		—			—		—			—			606
Stock option expense		—		—		915			—		—											915
Income tax benefit of stock options exercised		—		—		31			—		—			—		—			—			31
Restricted stock		275,679		2		2,234			—		—			—		—			—			2,236
Reclassify unearned compensation – Restricted Stock		—		—		(3,069	)		—		—								3,069			—


Balance as of June 30, 2006		14,033,019	$	140	$	104,260		$	123,853	$	251			211,400		($2,707	)	$	—		$	225,797

The accompanying notes are an integral part of this consolidated financial statement.

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


	Year Ended June 30,
	2006			2005			2004
Cash flows from operating activities:
Net income	$	25,017		$	27,366		$	17,052
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,494			10,778			11,456
Provision for loan losses		34,545			26,941			24,280
Provision for doubtful accounts		192			161			(21	)
Non-cash expenses related to Hurricane Katrina		91			—			—
Loss on disposal of property and equipment		874			1,451			781
Deferred revenue		(3,084	)		(3,477	)		(2,009	)
Deferred income taxes		1,237			1,792			(305	)
Stock option expense		915			—			—
Compensation on restricted stock grants		2,234			1,243			564
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable		(3,940	)		1,425			3,919
Loans receivable		(29,127	)		(22,001	)		(20,961	)
Prepaid expenses, inventories and other current assets		(351	)		(4,174	)		1,104
Other assets		(1,685	)		(3,757	)		2,258
Accounts payable, accrued liabilities, and other liabilities		2,086			(2,287	)		(12,481	)
Money orders payable		5,727			373			(2,389	)

Net cash provided by operating activities		47,225			35,834			23,248

Cash flows from investing activities:
Purchases of property and equipment, net		(18,134	)		(18,951	)		(7,439	)
Store acquisition purchase price, net of cash received and convertible and acquisition notes issued		(20,249	)		(19,107	)		(6,914	)

Net cash used by investing activities		(38,383	)		(38,058	)		(14,353	)

Cash flows from financing activities:
Net increase (decrease) in revolving advances		34,000			(16,700	)		(23,900	)
Gross repayments of term advances		—			—			(38,269	)
Repayments of acquisition notes payable		(259	)		(42	)		(780	)
Tax benefit from stock options exercised		31			1,778			1,828
Proceeds from stock options exercised and restricted stock granted		608			3,577			5,863
Proceeds from stock offering		—			—			61,294

Net cash provided (used) by financing activities		34,380			(11,387	)		6,036

Net increase (decrease) in cash and cash equivalents		43,222			(13,611	)		14,931
Cash and cash equivalents, beginning of year		109,430			123,041			108,110

Cash and cash equivalents, end of year	$	152,652		$	109,430		$	123,041


Supplemental disclosures of cash flows information:
Interest paid	$	6,283		$	4,319		$	9,943
Income taxes paid	$	14,494		$	14,518		$	7,403

Non-cash investing activities:
Issuance of convertible notes	$	19,400		$	—		$	—
Issuance of acquisition notes payable		554			280			—

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

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations

Ace Cash Express, Inc. (the “Company” or “ACE” or “we” or “us”) was incorporated under the laws of the state of Texas in March 1982. We operate in one line of business with two segments (company-owned and franchised operations) and provide retail financial services, such as check-cashing; small, short-term consumer loans; third-party bill-payments; money orders; wire transfers; and other transactional services to customers for a fee. On June 30, 2006, we owned and operated 1,353 stores and had 220 franchised stores, for a total network of 1,573 stores in 38 states and the District of Columbia.

Principles of Consolidation

The consolidated financial statements include the accounts of ACE and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In applying the accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As might be expected, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Actual results related to the estimates and assumptions made in preparing our consolidated financial statements will emerge over periods of time, such as estimates and assumptions underlying the determination of allowance for loan losses and self-insurance liabilities. These estimates and assumptions are monitored and periodically adjusted as circumstances warrant. For instance, our liability for self-insurance related to workers’ compensation, general liability and medical liability may be adjusted based on higher or lower actual loss experience. Although there is greater risk with respect to the accuracy of these estimates and assumptions because of the period over which actual results may emerge, such risk is mitigated by the ability to make changes to these estimates and assumptions over the same period.

We periodically review the carrying value of goodwill and other intangible assets when events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of goodwill or other intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the goodwill or intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could affect the evaluation.

Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and fair perspective of the Company. We do not suggest that other risk factors, such as those discussed elsewhere in this report as well as changes in growth objectives, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.

Revenue Recognition Policy

All of our store transactions are processed through our point-of-sale system. Approximately 95% of our revenue results from transactions at the point-of-sale with our customers, and approximately 60% 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. On March 1, 2006, we began offering and providing, through our wholly owned subsidiary, ACE Credit Services, LLC, credit services under a credit services organization (“CSO”) program in our Texas stores to customers who apply for short-term loans offered by True Financial Services, LP, an independent third-party lender. In addition to assisting customers with loan applications, if the customer is approved for and accepts the loan, we provide a letter of credit to True Financial to secure the customer’s payment obligations in the event of a default by the customer. The customer is charged a fee under the CSO program (“CSO fees”) for the provision of these credit services. The CSO fees are deferred and amortized over the term of the loan and included in short-term consumer loan fees in the accompanying consolidated statements of earnings. For financial reporting purposes, ACE Credit Services, LLC is our consolidated subsidiary and all fees received by ACE Credit Services, LLC from the CSO loan product are and will be reflected in our consolidated financial statements.

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.

The components of revenues are as follows:


	Year Ended June 30,
	2006		2005		2004
	(in thousands)
Check cashing	$	148,065	$	131,619	$	129,194
Short-term consumer loans		108,667		91,793		77,029
Bill payments		25,151		20,266		16,960
Money transfers		13,985		11,868		11,136
Money orders		6,830		6,875		6,330
Franchising		3,242		3,180		2,774
Other services		3,969		3,048		3,236

Total revenues	$	309,909	$	268,649	$	246,659

Cash and Cash Equivalents

We consider all highly-liquid investment securities purchased with an original maturity of three months or less from the date of purchase to be cash equivalents.

Accounts Receivable, Net

Accounts receivable, net, on the consolidated balance sheets as of June 30, 2006 and 2005 were $7.7 million and $4.0 million, respectively, and include the receivable for fees payable by our the third-party lenders, (Republic Bank, First Bank of Delaware, and True Financial), the receivable for incentive payments under the agreement with MoneyGram Payment Systems, Inc., and other miscellaneous receivables net of an allowance for doubtful accounts. The allowance for doubtful accounts of $0.1 million for both June 30, 2006 and 2005, relates to the collection of miscellaneous receivables only, none of which included our third-party lenders or MoneyGram receivables because historically we have not incurred any losses on these receivables.

Loans Receivable, Net

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 & Trust Company (“Republic Bank loans”), (3) multi-installment loans (20-week loans) made or entered into by First Bank of Delaware (“First Bank of Delaware loans”), or

(4) short-term loans offered under a credit services organization program and made or entered into by True Financial Services, LP (“CSO loans”). As of June 30, 2006, we were offering ACE loans in 794 of our company-owned stores, First Bank of Delaware was offering First Bank of Delaware loans in 63 of our company-owned stores in Pennsylvania and Arkansas, and True Financial was offering CSO loans at 384 of our company-owned stores in Texas. All loans and services, regardless of type, are made in accordance with state regulations, and therefore, the terms of the loans and services may vary from state to state.

Loan fees and interest include our fees and interest received from customers of our ACE loans, fees received from customers of the CSO loans, and marketing and servicing 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.

In general, ACE Loans consist of providing a customer cash in exchange for the customer’s check or an Automated Clearinghouse (“ACH”) authorization to debit the customer’s bank account, along with an agreement to defer the presentment or deposit of that check or the initiation of that ACH debit on the customer’s account, as the case may be, until the deferred presentment date. The amount of the customer’s check or ACH authorization is the amount of the cash provided to the customer plus a fee to us. The term of the deferral of the check presentment or ACH debit is typically two to four weeks. During the year ended June 30, 2006, the average amount of cash provided to a customer in such a transaction was $308, and the average fee to us was $45.30. As of June 30, 2006 and 2005, the gross receivable for our ACE Loans was approximately $39.7 million and $31.8 million, respectively.

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 restore the allowance for loan losses.

Loans receivable, net, on the consolidated balance sheets as of June 30, 2006 and 2005 were $26.7 million and $20.8 million, respectively, which includes receivables for our ACE loans (but excluding any Republic Bank loans, First Bank of Delaware loans, or CSO loans, because we do not own any interest in those loans). The loan loss allowance of $13.1 million and $11.0 million as of June 30, 2006 and 2005, respectively, represented 32.9% and 34.6% of the gross loans receivable as of that date. Net loan charge-offs for the years ended June 30, 2006, 2005 and 2004, were $21.2 million, $17.9 million, and $15.0 million, respectively.

Our third-party lenders, including Republic Bank, First Bank of Delaware and True Financial, approve and own the loans they make, therefore, we do not record the third-party loans as loans receivable on our books. However, under our agreement with our third-party lenders, we are obligated to reimburse them an amount equal to the net amount of loans charged off by each third-party lender. 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 third-party 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 third-party lenders as of June 30, 2006 and 2005 was as follows:


	As of June 30,
	2006		2005
	(in millions)
Republic Bank	$	0.8	$	4.0
First Bank of Delaware		1.6		—
True Financial (CSO loans)		2.7		—

Net loan charge-offs of third-party lender loans for the year ended June 30, 2006, 2005 and 2004 were as follows:


	As of June 30,
	2006		2005		2004
	(in millions)
Republic Bank	$	9.1	$	8.4	$	6.5
First Bank of Delaware		1.2		—		—
True Financial (CSO loans)		—		—		—

Inventories

Inventories consist of postage stamps, bus passes, and other inventory. Postage stamps are stated at purchase price and accounted for using the specific identification method. Other inventories are stated at cost and utilize the first-in, first-out method.

Property and Equipment

Depreciation of property and equipment is based on the lesser of the estimated useful lives of the respective assets or the lease terms. The useful lives of property and equipment by class are as follows: store equipment and furniture and fixtures, five to ten years; leasehold improvements, ten years; signs, eight years; and other property and equipment, five to ten years. Depreciation is calculated on a straight-line basis.

New Store Accounting

Start-up costs for new stores such as training, supplies and travel are expensed as incurred.

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, identifiable intangible assets acquired such as 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.

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.

Software Development Costs

We expense costs incurred in the preliminary project stages, and thereafter capitalize costs incurred in the developing or obtaining of internal use software, including external direct costs of materials and services, as well as payroll and payroll-related costs. We capitalized $0.6 million and $0.4 million for software development costs for the years ended June 30, 2006 and 2005, respectively. The net book value of capitalized software development costs was $0.7 million and $1.0 million at June 30, 2006 and 2005, respectively.

Accounting for Impairment of Long-lived Assets

We evaluate all long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted net cash flows they will generate.

Intangible Assets

Goodwill represents the excess of purchase price over identified net assets acquired on company-owned stores. We review goodwill annually for possible impairment. During the years ended June 30, 2006, 2005, and 2004,we completed our annual reviews and determined that the fair value of the company-owned stores reporting unit exceeded the carrying value, and as a result no impairment loss has been recorded. Covenants not to compete are amortized over the applicable period of the contract, generally ranging from two to five years. Acquired customer relationships are amortized over their expected useful lives.

Deferred Borrowing Costs

Deferred borrowing costs are amortized over the term of the corresponding financing arrangement. Amortization expenses related to deferred borrowing costs for the years ended June 30, 2006, 2005, and 2004 were $1.0 million, $1.1 million, and $2.3 million, respectively. The deferred borrowing cost balances related to our revolving advance for June 30, 2006 and 2005 were both $3.0 million, net of accumulated amortization of $0.2 million and $0.9 million, respectively. Deferred borrowing costs are reflected in other current and other noncurrent assets in the accompanying consolidated balance sheets.

In connection with our decision to discontinue operating self-service machines at H&R Block locations during the 2007 tax season, we recorded $0.7 million of expense during the third quarter of fiscal 2006 associated with the early extinguishment of the DZ bank facility which was used to fund the self-service machine operations and $0.1 million for the termination of the self-service machine lease agreements. In connection with our stock offering in April 2004, we repaid our term advances and wrote off deferred borrowing costs of $4.1 million, which was also recorded as a loss on early extinguishment of debt.

Incentive Program Accounting

We offer a free loyalty and retention program called ACE Plus which rewards customers with free phone cards, discounted transaction fees and cash rebates based on points accumulated for each customer’s check cashing transactions. We record a refund obligation as a reduction of revenue based on the cost of the expected point redemption. The accrued liability reported in current liabilities for ACE Plus incremental costs was $0.3 million and $0.2 million, as of June 30, 2006 and 2005, respectively.

Store Expenses

The direct costs incurred in operating the stores and our self-service machines have been classified as store expenses and are deducted from total revenue to determine contribution attributable to the stores. Store expenses include salary and benefit expense of store employees, rent and other occupancy costs, depreciation of store property, bank charges, armored and security costs, loan losses, net returned checks, cash shortages, and other costs incurred by the stores and for the self-service machines (whether or not located in a store). Although we do not have a contractual indemnification agreement with our security provider for the full amount of store losses, any amounts received from the security provider as compensation for losses (which have historically been minimal) are recorded in store expenses as a reduction of the loss. Any claims recovered under our crime insurance policies also are recorded in store expenses as a reduction of the loss.

Returned Checks

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

Advertising Costs

Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expenses were $5.6 million, $3.5 million, and $2.9 million, in the years ended June 30, 2006, 2005 and 2004, respectively.

Derivative Instruments and Hedging Activities

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

We use the cumulative approach to assess effectiveness of the cash flow hedges. The measurement of hedge ineffectiveness is based on the cumulative dollar offset method. Under this method, we compare the changes in the floating rate component of the cash flow hedge to the floating rate cash flows of the revolving loan facility and the term loan notes. Changes in the fair value of the effective cash flow hedges are recorded in accumulated comprehensive income (loss). The effective portion

that has been deferred in accumulated comprehensive income (loss) will be reclassified to earnings when the hedged transactions impact earnings.

The associated underlying hedged liability has equaled or exceeded the notional amount for each of our interest-rate swaps throughout the existence of the interest-rate swaps, and we anticipate that it will continue to do so with respect to the swaps in effect as of June 30, 2006. The interest-rate swaps are based on the same index as their respective underlying debt. The interest-rate swaps to date have been highly effective in achieving offsetting cash flows attributable to the fluctuations in the cash flows of the hedged risk, and no amount has been required to be reclassified from accumulated comprehensive income (loss) into earnings for hedge ineffectiveness or due to excluding a portion of the value from measuring effectiveness during the years ended June 30, 2006, 2005 or 2004.

We entered into two interest-rate swaps during the fourth quarter of fiscal 2003, corresponding to our revolving-advance indebtedness under our bank credit agreement effective March 31, 2003 and our term notes under our note purchase agreement effective March 31, 2003. One of the interest-rate swaps corresponded to certain term notes which was repaid in the fourth quarter of fiscal 2004, at which time these swaps were terminated.

The interest-rate swaps resulted in a decrease of interest expense of $0.1 million for the year ended June 30, 2006 and an increase of interest expense of $0.2 million, and $0.4 million for the years ended June 30, 2005 and 2004, respectively. The average notional amounts, the related average effective swap interest rates, and the rates effective on June 30 for the years ended June 30, 2006 and 2005 are as follows:

June 30, 2006

June 30, 2005

Average

Ending

Average

Ending

Effective

Average

Swap

Average

Swap

Notional

Interest

Notional

Interest

Corresponding Debt

Amount

Rate

Amount

Rate

(in millions)

Revolving advance

6.177

6.263

5.310

6.175

The fair value of the interest-rate swaps increased by $0.3 million and $0.1 million, net of tax, during the years ended June 30, 2006 and 2005, respectively, which have been recorded in accumulated other comprehensive loss and other current and non-current liabilities. The estimated net amount of existing income expected to be reclassified into earnings during the next fiscal year is $0.3 million.

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


									Change in Accumulated Other
	Accumulated Other Comprehensive								Comprehensive Income (Loss)
	Income (Loss), Net of Tax,								for the
	as of June 30,								Year Ended June 30,
Corresponding Debt	2006		2005			2004			2006		2005
Revolving advance	$	251		($56	)		($170	)	$	307	$	114

The accumulated comprehensive income as of June 30, 2006 is net of tax expense of $0.2 million and the accumulated comprehensive loss as of June 30, 2005 is net of a tax benefit of $37,000.

A summary of comprehensive income for the years ended June 30, 2006, 2005, and 2004 is presented below:


	Year Ended June 30,
	2006			2005			2004
	(in thousands)
Net income	$	25,017		$	27,366		$	17,052
Other comprehensive income:
Unrealized gain on hedging instruments before tax expense		503			189			1,412
Tax expense		(196	)		(75	)		(565	)

Unrealized gain on hedging instruments net of the tax expense		307			114			847

Comprehensive income	$	25,324		$	27,480		$	17,899

Franchise Accounting

Franchise fees are included in revenue. Franchise fees generally include initial fees (“initial fees”) and future optional, exclusive store fees (“optional fees”) as well as continuing franchise fees (“royalty fees”).

Initial fees are recognized when we have provided substantially all of our initial services in accordance with the franchise agreements. Generally, this occurs when the franchise location has been identified, the lease has been obtained, training has occurred, the building has been built or leasehold improvements have been completed, the proprietary point-of-sale system has been installed and the store has been opened. Optional fees for providing exclusive arrangements until the franchisee opens the store are recognized either when the option expires or when the commitments pursuant to the option are completed. Franchise royalty fees, which are the greater of a minimum fee or a percentage of each franchisee’s actual revenues, are recognized and payable monthly.

The following table presents the components of franchise fees recognized in revenues for the years ended June 30, 2006, 2005, and 2004:


	June 30,
	2006			2005		2004
	(in thousands)
Initial fees and option to purchase fees	$	536		$	845	$	567
Royalty fees		2,708			2,335		2,205
Other		(2	)		—		2

Total franchise revenues	$	3,242		$	3,180	$	2,774

Cash payments received under franchise agreements prior to the completion of the earnings process are deferred until the initial and optional fees are recognized in accordance with the preceding paragraph. As of June 30, 2006 and 2005, approximately $0.2 million and $0.3 million, respectively, of deferred franchise fees are recorded in other current and other non-current liabilities in the accompanying consolidated balance sheets.

Income Taxes

We provide deferred taxes for temporary differences between the tax and financial reporting bases of assets and liabilities at the rate expected to be in effect when the taxes become payable.

Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, excluding unvested restricted stock, during the reporting period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding after adjusting for the potential dilutive effect of stock options, restricted stock, unamortized compensation expense, and convertible notes payable. The computations for basic and diluted earnings per share are as follows:


	Year Ended June 30,
	2006		2005		2004
	(in thousands)
Net income	$	25,017	$	27,366	$	17,052
Interest expense on convertible notes payable, net of tax benefit		260		—		—

Net income – diluted	$	25,277	$	27,366	$	17,052


Weighted average number of common shares outstanding:
Basic		13,521		13,275		11,009
Effect of dilutive securities:
Stock options and restricted stock		423		546		468
Convertible notes payable		433		—		—

Diluted		14,377		13,821		11,477


Earnings per share:
Basic	$	1.85	$	2.06	$	1.55
Diluted	$	1.76	$	1.98	$	1.49

For fiscal years ended June 30, 2006, 2005, and 2004, options to purchase 118,750 shares of common stock, 96,250 shares of common stock, and 11,250, shares of common stock, respectively, were not included in the computation of diluted earnings per share because the exercise prices of those options were greater than the average market price of the common stock and, therefore, the effect would be anti-dilutive.

Fair Value of Financial Instruments

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

Stock Incentive Plans

We sponsor an employee stock incentive plan and two non-employee director stock incentive plans, all 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 123(R), “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 on a straight-line basis. We used the modified-prospective-transition method. Under this transition method, stock-based compensation cost recognized in the year ended June 30, 2006 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). As a result of adopting SFAS 123(R) on July 1, 2005, our income before income taxes for the year ended June 30, 2006, was $0.9 million lower than if we had continued to account for share-based compensation under APB 25.

Stock Option Expense 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 123(R) to stock-based employee compensation for the prior periods presented:


	For the Years Ended June 30,
	2005		2004
	(in thousands,
	except per share amounts)
Net income, as reported	$	27,366	$	17,052

Deduct: Total stock-based employee compensation expense determined under fair value based methods for all stock option awards, net of related tax effects		913		855

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		68		40


Pro forma net income	$	26,385	$	16,157


Earnings per share:
Basic – as reported	$	2.06	$	1.55
Basic – pro forma	$	1.99	$	1.47


	For the Years Ended June 30,
	2005		2004
	(in thousands,
	except per share amounts)
Diluted – as reported	$	1.98	$	1.49
Diluted – pro forma	$	1.91	$	1.41

Stock Option Grants

The following table illustrates the stock options granted during the year ended June 30, 2006, and stock option expense reported in net income and recognized in accordance with SFAS 123(R) for the employee stock incentive plan and the non-employee director stock incentive plans for year ended June 30, 2006:


	Year Ended
	June 30, 2006
	(dollars in thousands)
Number of shares of stock options granted:
Employee stock incentive plan		43,105
1995 non-employee director stock incentive plan		—
2005 non-employee director stock incentive plan		11,250

		54,355


Total stock-based compensation expense determined under fair value based methods for all stock option awards:
Employee stock incentive plan	$	793
1995 non-employee director stock incentive plan		84
2005 non-employee director stock incentive plan		38

	$	915


Tax benefit related to stock-based compensation expense for stock option awards	$	357

Restricted Stock Grants

The following table presents restricted stock granted and forfeited under our employee stock incentive plan and both of the non-employee director stock incentive plans, along with the corresponding stock-based compensation cost reflected in our reported net income for the years ended June 30, 2006, 2005 and 2004:


	Year Ended June 30,
	2006			2005			2004
	(dollars in thousands)
Number of shares of restricted stock granted:
- Employee stock incentive plan		268,650			81,650			199,075
- 1995 non-employee director stock incentive plan		—			12,250			8,750
- 2005 non-employee director stock incentive plan		15,030			—			—

		283,680			93,900			207,825


Number of shares of restricted stock forfeited:
- Employee stock incentive plan		(8,001	)		(11,477	)		(650	)
- 1995 non-employee director stock incentive plan		—			—			—
- 2005 non-employee director stock incentive plan		—			—			—

		(8,001	)		(11,477	)		(650	)


Stock-based compensation expense for restricted stock grants:
- Employee stock incentive plan	$	1,992		$	1,121		$	531
- 1995 non-employee director stock incentive plan		169			122			33
- 2005 non-employee director stock incentive plan		73			—			—

	$	2,234		$	1,243		$	564

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. The accounting policies of the segments are those described in the summary of significant accounting policies above.

Segment information for the years ended June 30, 2006, 2005, and 2004 was as follows:


	Company-owned			Franchised			Other			Total
	(in thousands, except for number of stores)
Year ended June 30, 2006:
Revenues	$	306,667		$	3,242		$	—		$	309,909

Gross margin		98,507			3,242			—			101,749
Region, headquarters, franchise expenses		(48,248	)		(1,230	)		—			(49,478	)
Other depreciation and amortization		(3,642	)		(21	)		—			(3,663	)
Loss on early extinguishment of debt		(668	)		—			—			(668	)
Interest expense		—			—			(6,872	)		(6,872	)
Other expenses		(54	)		—			—			(54	)

Income (loss) before taxes	$	45,895		$	1,991			($6,872	)	$	41,014


Total assets	$	391,156		$	1,378			—		$	392,534

Number of stores at June 30, 2006		1,353			220			—			1,573

Year ended June 30, 2005:
Revenues	$	265,469		$	3,180		$	—		$	268,649

Gross margin		92,236			3,180			—			95,416
Region, headquarters, franchise expenses		(42,216	)		(1,227	)		—			(43,443	)
Other depreciation and amortization		(3,075	)		(19	)		—			(3,094	)
Interest expense		—			—			(4,880	)		(4,880	)
Other expenses		864			—			—			864

Income (loss) before taxes	$	47,809		$	1,934			($4,880	)	$	44,863


Total assets	$	291,296		$	1,325			—		$	292,621

Number of stores at June 30, 2005		1,142			229			—			1,371

Year ended June 30, 2004:
Revenues	$	243,885		$	2,774		$	—		$	246,659

Gross margin		81,865			2,774			—			84,639
Region, headquarters, franchise expenses		(37,932	)		(1,196	)		—			(39,128	)
Other depreciation and amortization		(3,881	)		(12	)		—			(3,893	)
Interest expense		—			—			(10,231	)		(10,231	)
Other expenses		(2,965	)		—			—			(2,965	)

Income (loss) before taxes	$	37,087		$	1,566			($10,231	)	$	28,422


Total assets	$	269,182		$	1,080		$	—		$	270,262

Number of stores at June 30, 2004		1,026			204			—			1,230

3. FINANCING ARRANGEMENTS AND MONEYGRAM AGREEMENT

As of June 30, 2006 and 2005, we had borrowed $77.3 million and $43.3 million under our revolving line-of-credit facility under our credit agreement, respectively. The average amount borrowed on our revolving line-of-credit facility was $63.3 million and $54.8 million for the years ended June 30, 2006 and 2005, respectively. The prime rate effective on June 30, 2006 was 8.25% and LIBOR effective on that date was 5.375%. The prime rate effective on June 30, 2005 was 6.25% and LIBOR effective on that date was 3.375%.

Existing Credit Facilities

On February 28, 2006, we entered into a Second Amendment to amend our existing First Amended and Restated Credit

Agreement with a syndicate of bank lenders led by Wells Fargo Bank, National Association, as administrative agent for itself and the other lenders thereunder.

The existing credit agreement provides two revolving line-of-credit facilities that expire December 31, 2010:

	•		a $200 million primary revolving credit facility that is available throughout the term of the credit agreement, with the ability to request an increase in this facility of up to $25 million during the term of the credit agreement; and

	•		a $75 million seasonal revolving credit facility that is available during each calendar-year-end holiday and tax season (i.e., January 1 through March 15) during the term of the credit agreement.

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

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 0.75% to 1.75% per annum based on our debt-to-EBITDA ratio. (For this ratio, “EBITDA” is our earnings before interest, taxes, depreciation, and amortization.) This interest rate 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 1.75% to 2.75% 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 1.75% to 2.75% per annum based on our debt-to-EBITDA ratio. This interest rate adjusts on a daily basis.

business, assets, liabilities, condition (financial or otherwise), or prospects.

	•		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 $175.5 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.

Previous Credit Facilities

From July 30, 2004 until February 28, 2006, we were a party to the First Amended and Restated credit agreement with a syndicate of banks led by Wells Fargo Bank Texas, National Association as administrative agent for itself and other lenders. This credit agreement, which amended and restated the credit agreement that we originally entered into on March 31, 2003 and that was effective (as amended) throughout fiscal 2004, provided for the following two revolving line-of-credit facilities that were to expire on June 30, 2008:

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

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

The revolving line-of-credit facilities included, 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.

Swap Agreements

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 30, 2006. The fixed rate effective on June 30, 2006, prior to adding the applicable margin, was 4.263%.

The fair value of the interest-rate swaps is $0.4 million as of June 30, 2006, and is included in other current and noncurrent assets. The fair value of the interest-rate swaps is ($0.1) million as of June 30, 2005, and is included in other current liabilities.

The following table provides summarized data related to the revolving advances (“Revolving Advances”) under our credit agreements effective during the fiscal years ended June 30, 2006 and 2005:


	As of and for the Years
	Ended June 30,
	2006			2005
	(in thousands, except interest rates)
Revolving advance ending balance	$	77,300		$	43,300

Average revolving advance balance	$	63,306		$	54,806

Interest expense	$	4,365		$	2,639
Swap (income) expense		(89	)		224

Total interest expense	$	4,276		$	2,863


Accrued interest expense on revolving advance	$	16		$	7

Weighted average interest rate:
Excluding swap expense		7.50	%		5.87	%
Including swap (income) expense		7.40	%		6.36	%

Commitment fees on unused revolving advance	$	421		$	418
Accrued interest expense on unused revolving advance	$	—		$	14

The following table provides the information regarding the individual swap agreement:


												Fixed
								Interest Rate Applies				Interest
		Notional						to:				Rate
	Debt	Amount		Swap Agreement Term				Specific Term				Before
Bank Name	Type	(in millions)		Beginning		Ending		From		To		Margin
JP Morgan Chase Bank	Revolving Advances	$	60		4/23/2003		9/29/2006		4/23/2003		6/30/2003		1.320	%
		$	60						7/1/2003		5/30/2004		1.715	%
		$	30						5/31/2004		6/30/2004		1.715	%
		$	30						7/1/2004		12/31/2004		2.965	%
		$	45						1/1/2005		4/29/2005		2.965	%
		$	35						4/30/2005		6/29/2005		2.965	%
		$	35						6/30/2005		3/30/2006		3.925	%
		$	35						3/31/2006		9/29/2006		4.263	%

Wells Fargo Bank	Revolving Advances	$	30		9/29/2006		9/28/2007		9/29/2006		9/28/2007		4.46	%

Self-Service Machine Funding Arrangements

Notes Payable

As of June 30, 2006, there were two acquisition-related notes payable outstanding. Notes payable were approximately $0.6 million and $0.3 million as of June 30, 2006 and 2005, respectively. For the years ended June 30, 2006, 2005, and 2004, there was $34,000, $10,000, and $11,000, respectively, included in interest expense related to the acquisition notes payable.

Debt Maturity Schedule

Our revolving credit facility is payable on December 31, 2010. The revolving advance balance as of June 30, 2006 and 2005, was $77.3 million and $43.3 million, respectively.

Scheduled maturities of acquisition notes payable, including the $19.4 million convertible note payable to PCE related to the acquisition of 107 stores (see Note 7 to our Consolidated Financial Statements), for the years following June 30, 2006 are as follows (in thousands):


Year Ending June 30:
2007	$	338
2008		272
2009		13
Remaining years		19,400

	$	20,023

MoneyGram Agreement

We are an agent for the receipt and transmission of wire transfers of money through the MoneyGram network. In June 2000, we signed a Money Transfer Agreement with MoneyGram Payment Systems, Inc. (“MoneyGram”), that became effective on January 1, 2001 (the “MoneyGram Agreement”). The MoneyGram Agreement provides for a revenue guarantee on acquired stores for the conversion of wire transfer services to MoneyGram from another supplier. The amount of the guarantee is equivalent to the annual aggregate wire transfer revenue for the acquired stores derived from another supplier. The amount of guarantee revenue, which represents the difference between the guarantee and our actual wire transfer service revenue from the acquired stores, under the MoneyGram Agreement and a similar preceding agreement with MoneyGram for the fiscal years ended June 30, 2006, 2005, and 2004, was approximately $1.5 million, $1.3, and $1.3 million, respectively. Accounts receivable from MoneyGram related to these guarantees as of June 30, 2006 and 2005 was $1.0 million and $0.7 million, respectively.

We agreed to offer and sell only MoneyGram wire transfer services during the term of the MoneyGram Agreement ending December 31, 2007. We earn commissions for each transmission and receipt of money through the MoneyGram network effected at a Company location. Those commissions equal varying percentages of the fees charged by MoneyGram to consumers for the MoneyGram services. If MoneyGram has paid us a bonus after January 1, 2001, the agreement will extend according to a formula which, as currently calculated, would provide for an extension through April 2009.

Under the MoneyGram Agreement, we will receive a total of approximately $12.5 million in bonuses, payable in equal monthly installments (without interest) over the seven-year term. The amount of those monthly installments will be subject to reduction if we close or sell a significant number of those locations at which MoneyGram services are offered at the beginning of the MoneyGram Agreement. In addition, we will be entitled to receive certain incentive bonuses regarding new MoneyGram service locations that it opens or acquires during the term of the MoneyGram Agreement.

During the fiscal years ended June 30, 2006, 2005, and 2004, $3.1 million, $2.9 million, and $2.6 million, respectively, of revenue was recognized related to bonuses and incentive bonuses under the MoneyGram Agreement and a similar preceding agreement with MoneyGram. The total deferred revenue related to these bonuses and incentive bonuses as of June 30, 2006 and 2005, were $4.2 million and $3.3 million and are included in other current and noncurrent liabilities in the accompanying consolidated balance sheets.

4. OTHER EXPENSES

Other store expenses consisted of the following:


	Year Ended June 30,
	2006		2005		2004
	(in thousands)
Armored and security	$	9,745	$	8,750	$	7,954
Returns and cash shorts		7,876		7,288		9,350
Information services		3,868		3,884		5,860
Bank charges		6,218		5,839		5,093
Store supplies		4,056		4,423		4,219
Telecommunications		1,917		1,977		2,211
Advertising and marketing		5,449		2,863		2,072
Miscellaneous		4,648		3,374		3,307

	$	43,777	$	38,398	$	40,066

Other (income) expenses, net, consisted of the following:


	Year Ended June 30,
	2006			2005			2004
	(in thousands)
Gain on sale of stores to franchisees	($	515	)	($	1,802	)	($	649	)
Store closing expense		394			495			410
Gain on sale of warrants issued by NetSpend		—			(132	)		(1,049	)
Settlements (1)		—			—			(138	)
Store lease buyout (2)		—			—			(450	)
Gain on sale of land in North Carolina		—			—			(95	)
Other		175			575			78

	$	54		($	864	)	($	1,893	)


(1)		Fiscal 2004 consists of $106,000 for additional administrative costs related to the settlement of substantially all claims in the Goleta loan-related lawsuits, $190,000 for a state regulatory settlement and the recovery of $434,000 resulting from the settlement of the Silverman lawsuit.

(2)		We received payment to terminate a store lease in Arizona to allow another retailer to occupy the location.

5. PREPAID EXPENSES, INVENTORIES, AND OTHER CURRENT ASSETS

Prepaid expenses, inventories, and other current assets consisted of the following:


	June 30,
	2006		2005
	(in thousands)
Deferred tax asset	$	6,105	$	6,257
Inventories		1,728		1,836
Deposits		1,597		1,774
Deferred finance costs		724		1,287
Interest rate swap		334		—
Other prepaid invoices		3,559		2,531

	$	14,047	$	13,685

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	June 30,
	2006		2005
	(in thousands)
Property and equipment, at cost:
Store equipment, furniture, and fixtures	$	61,341	$	54,493
Land, buildings and leasehold improvements		43,118		34,215
Signs		11,484		9,433
Other property and equipment		1,596		1,484

		117,539		99,625
Less – accumulated depreciation		70,882		61,968

	$	46,657	$	37,657

Depreciation expense was $10.4 million, $9.1 million, and $8.8 million in fiscal 2006, 2005, and 2004, respectively.

7. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS

We have two reporting units: (1) company-owned stores and (2) franchised stores. The franchised stores reporting unit has no intangible assets. We obtained an independent third-party appraisal of the fair value of the company-owned stores reporting unit as of July 1, 2001, which indicated that the fair value of the company-owned stores reporting unit exceeded the carrying value, and as a result, no impairment loss was recorded. Subsequent annual impairment tests continue to indicate that no impairment exists.

Acquisitions

On September 21, 2005, we entered into an Asset Purchase Agreement with Popular Cash Express, Inc. (“PCE”), Popular Cash Express – California, Inc. (“PCEC”) and Popular North America, Inc. (“PNA”) to purchase substantially all of PCE’s and PCEC’s assets relating to their check-cashing and related business operations, which included 111 check-cashing stores. PCE and PCEC stores offered check cashing, money order, wire transfer and bill pay services in Arizona, California, Florida and Texas. As a result of the acquisition, we have expanded our business operations into these states.

The purchase agreement provided that we pay to PCE and PCEC up to $36.0 million for the assets, of which up to $19.4 million would be evidenced by a series of convertible promissory subordinated notes, with the remaining balance to be paid in cash. The notes bear interest at 3.625% per annum which is payable quarterly, and mature on December 31, 2025 unless converted earlier by the holder, redeemed at our option on or after December 31, 2010, or required to be repurchased at the option of the holder upon a change of control of the Company. The notes are convertible into 724,692 shares of our common stock at a conversion price of $26.77. Interest expense for the year ended June 30, 2006, related to the convertible notes was $0.4 million.

On November 22, 2005, we entered into an amendment to the Asset Purchase Agreement which provided for, among other things, a reduction of the purchase price we paid from $36 million to approximately $33.6 million, a reduction of the maximum number of stores to be acquired from 111 to 107, and an option to convey stores back to PCE and PCEC if certain consents related to such stores from the sellers’ existing landlords were not received by March 31, 2006.

On October 30, 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 and on November 29, we acquired the remaining stores covered under the Asset Purchase Agreement, for a total of 107 stores. We have closed one store in the normal course of business, and as of June 30, 2006, are operating 106 PCE and PCEC stores.

The results of the operations for the acquired stores have been included in the consolidated financial statements since the dates of their respective acquisitions. PCE and PCEC have agreed not to 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 following table presents the unaudited pro forma results of operations for the Company for the years ended June 30, 2006 and 2005 as if this acquisition had been consummated at the beginning of each of the periods presented. The unaudited pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the periods presented or the results which may occur in the future.


	Unaudited Pro Forma Results of
	Operations
	for the Year Ended June 30,
	2006		2005
	(in millions, except per share amounts)
Revenues	$	319.0	$	294.9

Net income	$	24.7	$	29.1

Basic earnings per share	$	1.83	$	2.19
Diluted earnings per share	$	1.75	$	2.00

Acquisitions

The following table provides information concerning the acquisitions made during the years ended June 30, 2006, 2005, and 2004, including the PCE and PCEC acquisition:


	Year Ended June 30,
	2006		2005		2004
	(in thousands, except number of stores
	and number of transactions)
Number of stores acquired		135		74			34
Number of transactions		10		11			4
Amounts allocated to:
Goodwill	$	35,675	$	16,983		$	6,133
Covenants not to compete		981		750			270
Acquired customer relationships		1,369		686			0

Total intangibles costs	$	38,025		18,419			6,403
Property and equipment		2,150		958			511
Other assets		28		3			1,023

Total purchase price	$	40,203	$	19,380		$	7,937

The full amount of goodwill related to acquisitions is expected to be tax deductible.

Amortizable Intangible Assets

Total intangible amortization expense for fiscal 2006, 2005, and 2004 was $1.1 million, $0.7 million, and $0.4 million, respectively.

Covenants not to compete are as follows:


	June 30,
	2006		2005
	(in thousands)
Covenants not to compete, at cost	$	3,289	$	2,678
Less – accumulated amortization		1,201		1,010

	$	2,088	$	1,668

Covenants not to compete are amortized over the applicable period of the contract. The weighted-average amortization period is 3.7 years.

Amortization expense related to the covenants not to compete for the year ended June 30, 2006 and estimated for the five succeeding fiscal years assuming current balances and no new acquisitions are as follows:


Amortization Expense for Covenants Not to Compete
For the Year Ended
June 30,	Actual	Estimated
	(in thousands)
2006	$561
2007		$	606
2008			567
2009			488
2010			322
2011			105

Acquired customer relationships (which is included in other noncurrent assets on the consolidated balance sheet) are as follows:


	June 30,
	2006		2005
	(in thousands)
Acquired customer relationships, at cost	$	2,064	$	695
Less – accumulated amortization		725		196

	$	1,339	$	499

Acquired customer relationships are amortized based on anticipated turnover and are amortized over the appropriate period. The weighted-average amortization period is 4.6 years.

Amortization expense related to the acquired customer relationships for the year ended June 30, 2006 and estimated for the five succeeding fiscal years assuming current balances and no new acquisitions are as follows:


Amortization Expense for
Acquired Customer Relationships
For the Year
Ended June
30,	Actual	Estimated
	(in thousands)
2006	$529
2006		$	571
2007			400
2008			248
2009			101
2010			14

Intangible Assets Not Subject to Amortization

Changes in the carrying value of goodwill for the years ended June 30, 2006 and 2005 are as follows:


	Year Ended June 30,
	2006		2005
	(in thousands)
Balance, beginning of the year	$	98,702	$	81,719
Goodwill from acquisitions		35,675		16,983

Balance, end of the year	$	134,377	$	98,702

There were no impairment losses for the years ended June 30, 2006, 2005 and 2004.

8. ACCOUNTS PAYABLE, ACCRUED LIABILITIES, AND OTHER LIABILITIES

Accounts payable, accrued liabilities and other current liabilities consisted of the following:


	2006		2005
	(in thousands)
Accrued salaries and benefits	$	12,627	$	9,745
Accounts payable		11,738		9,691
Payable to NetSpend		5,396		2,471
Money transfer payable		5,170		2,596
Deferred revenue		2,347		2,207
Accrued workers’ compensation		879		1,000
Income taxes payable		876		766
Payable to third-party lenders		542		2,348
Accrued bank charges		476		464
Notes payable – current		337		120
Deferred gain on sale of stores		103		161
Other accrued liabilities		5,390		4,548

	$	45,881	$	36,117

9. MONEY ORDER AGREEMENT

We have a money order agreement with MoneyGram, which expires on December 31, 2007. Under this agreement, we exclusively sell MoneyGram money orders that bear the ACE logo. On October 29, 2003, we entered into an amendment to the money order agreement that extended the term until December 31, 2007.

If the money order agreement is terminated under certain circumstances before the expiration of its extended term, we will be obligated to repay a portion of the bonus amounts received from MoneyGram. Our payments and other obligations to MoneyGram under the agreement are secured by a subordinated lien on our assets. Deferred revenue as of June 30, 2006 and 2005 was $0.9 million and $1.3 million, respectively, and is included in other current and noncurrent liabilities in the

accompanying consolidated balance sheets. Bonus revenue of $0.8 million, $0.8 million, and $0.9 million were recognized for the years ended June 30, 2006, 2005 and 2004, respectively. Total money order revenue including commissions and fees was $6.8 million, $6.9 million, and $6.3 million for the years ended June 30 2006, 2005, and 2004, respectively.

10. NETSPEND AGREEMENT

We are a party to a written agreement with NetSpend Corporation, a prepaid payments company, whereby we offer prepaid debit cards in our stores. The Visa and MasterCard prepaid debit cards offered through NetSpend allow our customers to “load” cash onto these cards and use them wherever Visa or MasterCard debit cards are accepted. Pursuant to our agreement, we receive from the customer a portion of the purchase price of the cards and a convenience fee for loads on the cards. In addition, we receive from NetSpend an additional portion of the purchase price of the card and commissions based on the aggregate amount loaded or direct deposited on the cards, the number of purchases or ATM withdrawal transactions made with the cards and account maintenance and subscription fees paid by the customer. Our agreement with NetSpend expires on March 31, 2009, and will automatically renew for one year periods thereafter absent 365 days’ prior notice by either of the parties.

In January 2004, in conjunction with an agreement with NetSpend Corporation to distribute stored-value or debit cards at our stores, we received a warrant to purchase 1,167,264 shares of the common stock of NetSpend Corporation. In May 2004, we exercised that warrant and sold the acquired shares for a net gain of approximately $1.2 million.

11. SHAREHOLDERS’ EQUITY

Preferred Stock

Under our Articles of Incorporation, our board of directors has the power to authorize the issuance of one or more classes or series of preferred stock and to fix the designations, powers, preferences and relative, participating, optional or other rights, if any, and the qualifications, limitations, or restrictions thereof, if any. At June 30, 2006, 2005 and 2004, one million shares of preferred stock were authorized with a par value of $1.00, none of which were issued and outstanding.

Stock Incentive Plans

We sponsor the 1997 Stock Incentive Plan, which permits the grant of stock options and restricted stock to eligible employees. Employee options and restricted stock are granted at the sole discretion of the board of directors or its Compensation Committee to selected ACE employees.

We also sponsored the 1995 Non-employee Director Stock Incentive Plan which permitted the grant of stock options and restricted stock to our outside directors as part of their compensation. This plan expired in March 2005, though options granted thereunder continue to be effective, in accordance with their terms, through January 2010. The Board of Directors adopted the 2005 Non-employee Directors Stock Incentive Plan on August 23, 2005, subject to shareholder approval. At the annual shareholders’ meeting held on November 11, 2005, shareholders approved the new plan.

Outstanding options under these plans 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. Restricted stock for all of our incentive plans 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. The following table provides comparable plan information:

1997 Stock

Non-employee Director Stock

Incentive

Incentive Plans:

Plan

1995

2005

Total plan shares that may be issued upon exercise of options or grant of restricted stock:

2,115,000

229,500

200,000

Number of shares reserved for grants of options or restricted stock as of June 30, 2006

1,194,926

78,590

200,000

Types of grants:

Stock options

and restricted stock

1997 Stock

Non-employee Director Stock

Incentive

Incentive Plans:

Plan

1995

2005

Available to:

Employees

Non-employee

directors

Vesting period (generally):

- Options exercisable at an exercise price not less than the fair market value at the grant date

3 – 4 years annually

3 years annually

- Restricted stock

3 – 5 years annually

3 years annually

Expiration (years after option grant date):

Determining Restricted Stock Fair Value

Restricted stock is expensed based on the fair market value on the grant date. Prior to the adoption of SFAS 123(R), unearned compensation for grants of restricted stock equivalent to the fair value of the shares at the date of grant was recorded as a separate component of shareholders’ equity and subsequently amortized to compensation expense over the awards’ vesting period. In accordance with of SFAS 123(R), shareholders’ equity is credited commensurate with the recognition of compensation expense. All unamortized unearned compensation at June 30, 2006 was reclassified to additional paid-in capital.

Determining Stock Option Fair Value

Valuation and Amortization Method— We estimate 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 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— We base 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, we consider voluntary termination behavior as well as analysis of actual option forfeitures.

Fair Value—

The weighted average fair value of each 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 years ended June 30, 2006, 2005, and 2004:


										Non-employee Director Stock
	Employee Stock Incentive Plan									Incentive Plans
	For the Year Ended June 30,									For the Year Ended June 30,
	2006			2005			2004			2006			2005			2004
Expected volatility		42	%		44	%		46	%		42	%		44	%		46	%
Expected life (years)		4.0			4.0			4.5			4.7			4.8			4.7	%
Risk-free interest rate		4.4	%		3.8	%		3.9	%		4.4	%		3.8	%		3.9	%
Expected forfeitures		7.2	%		7.2	%		3.0	%		—	%		—	%		—	%
Expected dividends	None			None			None			None			None			None

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in our 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. For the year ended June 30, 2006, we recorded $31,000 of excess tax benefits as a financing cash inflow.

Employee Stock Incentive Plan.

Exercise prices for employee options outstanding as of June 30, 2006, ranged from $8.87 to $28.12 (fair market value on dates of grant). The following table provides certain information with respect to stock options outstanding and exercisable at June 30, 2006, under the 1997 Stock Incentive Plan:


			Outstanding						Exercisable
					Weighted-		Weighted-				Weighted-
					average		average		Stock		average
			Stock options		exercise		remaining		options		exercise
Range of exercise prices			outstanding		price		contractual life		exercisable		price
	Under $10.00			175,921	$	9.35		5.6		140,982	$	9.39
	$	10.01 – $15.00		218,273		13.04		5.0		164,085		12.82
	$	15.01 – $20.00		108,088		17.08		3.7		104,338		17.00
	$	20.01 – $25.00		46,250		22.92		9.2		3,437		21.10
	$	25.01 – $30.00		85,000		26.70		8.5		21,248		26.70

				633,532	$	15.26		5.7		434,090	$	13.45

The following table summarizes stock option and restricted stock activity under the 1997 Stock Incentive Plan:


				Outstanding
				Stock			Restricted			Available for
	Reserved			Options			Stock			Grant
Shares at June 30, 2003		1,675,715			1,330,216			2,500			342,999

Increase in shares reserved		400,000			—			—			400,000
Granted		—			138,750			199,075			(337,825	)
Exercised		(469,828	)		(469,828	)		—			—
Restrictions lapsed		—			—			—			—
Canceled		—			(91,812	)		(650	)		92,462

Shares at June 30, 2004		1,605,887			907,326			200,925			497,636

Granted		—			113,000			81,650			(194,650	)
Exercised		(295,885	)		(295,885	)		—			—
Restrictions lapsed		(24,018	)		—			(24,018	)		—
Canceled		—			(96,871	)		(11,477	)		108,348

Shares at June 30, 2005		1,285,984			627,570			247,080			411,334

Granted		—			43,105			268,650			(311,755	)
Exercised		(35,445	)		(35,445	)		—			—
Restrictions lapsed		(55,610	)		—			(55,610	)		—
Canceled		—			(1,698	)		(8,001	)		9,699

Shares at June 30, 2006		1,194,929			633,532			452,119			109,278

The following table provides additional stock option information under the 1997 Stock Incentive Plan:


				Weighted Average
						Remaining	Grant
				Option		Contractual	Date		Aggregate
				Exercise		Term	Fair		Intrinsic
Stock Options	Shares			Price		(Years)	Value		Value ($000)
Outstanding at June 30, 2003		1,330,216		$	11.55

Granted		138,750		$	15.27		$	6.56
Exercised		(469,828	)	$	11.58				$	6,807


				Weighted Average
						Remaining		Grant
				Option		Contractual		Date		Aggregate
				Exercise		Term		Fair		Intrinsic
Stock Options	Shares			Price		(Years)		Value		Value ($000)
Forfeited or expired		(91,812	)	$	11.23

Outstanding at June 30, 2004		907,326		$	12.14		5.10			$	12,326


Exercisable at June 30, 2004		458,399		$	12.95		4.16			$	5,823

Outstanding at June 30, 2004		907,326		$	12.14
Granted		113,000		$	25.78			$	10.08
Exercised		(295,885	)	$	11.33					$	4,727
Forfeited or expired		(96,871	)	$	14.68

Outstanding at June 30, 2005		627,570		$	14.52		6.15			$	7,118


Exercisable at June 30, 2005		342,441		$	13.06		4.56			$	4,365

Outstanding at June 30, 2005		627,570		$	14.52
Granted		43,105		$	23.38			$	9.02
Exercised		(35,445	)	$	10.20					$	400
Forfeited or expired		(1,698	)	$	9.47

Outstanding at June 30, 2006		633,532		$	15.26		5.72			$	8,875


Exercisable at June 30, 2006		434,090			13.45		4.73			$	6,865

The following table provides additional restricted stock information under the 1997 Stock Incentive Plan:


				Weighted Average
						Remaining		Grant
						Contractual		Date		Aggregate
				Restricted		Term		Fair		Intrinsic
Restricted Stock	Shares			Stock Price		(Years)		Value		Value ($000)
Outstanding at June 30, 2003		2,500		$	0.01

Granted		199,075		$	0.01			$	12.31
Exercised		—			—						—
Forfeited or expired		650		$	0.01

Outstanding at June 30, 2004		200,925		$	0.01		8.2			$	5,160

Granted		81,650		$	0.01			$	25.95
Exercised		(24,018	)	$	0.01					$	597
Forfeited or expired		(11,477	)

Outstanding at June 30, 2005		247,080		$	0.01		8.07			$	6,313

Granted		268,650		$	0.01			$	23.45
Exercised		(55,610	)	$	0.01					$	1,394
Forfeited or expired		(8,001	)	$	0.01

Outstanding at June 30, 2006		452,119		$	0.01		7.24			$	13,229

The following is the nonvested share activity for the 1997 Stock Incentive Plan for the year ended June 30, 2006:


	Number of Shares									Weighted Average Grant Date Fair Value
	Stock			Restricted						Stock		Restricted
	Options			Stock			Total			Options		Stock		Total
Nonvested June 30, 2005		285,129			247,080			532,009		$	6.74	$	15.93	$	10.98
Granted		43,105			268,650			311,755		$	9.02	$	23.63	$	21.61
Vested		(127,294	)		(55,610	)		(182,704	)	$	6.22	$	18.52	$	9.90
Forfeited		(1,498	)		(8,001	)		(9,499	)	$	4.60	$	23.57	$	20.58

Nonvested June 30, 2006		199,442			452,119			651,561		$	7.58	$	20.05	$	16.23

1995 Non-employee Directors Stock Incentive Plan.

Exercise prices for options outstanding as of June 30, 2006, ranged from $8.01 to $28.24 (fair market value on dates of grant). The following table provides certain information with respect to stock options outstanding and exercisable at June 30, 2006 under the 1995 Non-employee Directors Stock Incentive Plan:


	Outstanding						Exercisable
			Weighted-		Weighted-				Weighted-
			average		average		Stock		average
Range of exercise	Stock options		exercise		remaining		options		exercise
prices	outstanding		price		contractual life		exercisable		price
Under $10.00		45,001	$	8.53		0.9		45,001	$	8.53
$10.01 – $15.00		—		—		—		—		—
$15.01 – $20.00		—		—		—		—		—
$20.01 – $25.00		11,250		24.45		3.2		3,750		24.45
$25.01 – $30.00		11,250		28.24		3.4		3,750		28.24

		67,501	$	14.47		1.7		52,501	$	11.08

The following table summarizes stock option and restricted stock activity under the 1995 Non-employee Directors Stock Incentive Plan:


				Outstanding
				Stock			Restricted			Available for
	Reserved			Options			Stock			Grant
Shares at June 30, 2003		190,250			126,250			—			64,000

Granted		—			—			8,750			(8,750	)
Exercised		(34,999	)		(34,999	)		—			—
Canceled		—			(5,000	)		—			5,000

Shares at June 30, 2004		155,251			86,251			8,750			60,250

Granted		—			22,500			12,250			(34,750	)
Exercised		(15,000	)		(15,000	)		—			—
Restrictions lapsed		(2,915	)		—			(2,915	)		—
Canceled		—			—			—			—
Expiration of plan		(25,500	)		—			—			(25,500	)

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

Granted		—			—			—			—
Exercised		(21,250	)		(21,250	)		—			—
Restrictions lapsed		(6,996	)		—			(6,996	)		—
Canceled		—			(5,000	)		—			—
Expiration of plan		(5,000	)		—			—			—

Shares at June 30, 2005		78,590			67,501			11,089			—

The following table provides additional stock option information under the 1995 Non-employee Directors Stock Incentive Plan:


				Weighted Average
						Remaining		Grant
				Option		Contractual		Date		Aggregate
				Exercise		Term		Fair		Intrinsic
Stock Options	Shares			Price		(Years)		Value		Value ($000)
Outstanding at June 30, 2003		126,250		$	11.33

Granted		—			—			$	—
Exercised		(34,999	)	$	13.18					$	402
Forfeited or expired		(5,000	)	$	13.25

Outstanding at June 30, 2004		86,251		$	11.32		2.09			$	1,313


Exercisable at June 30, 2004		61,246		$	11.32		1.69			$	880


				Weighted Average
						Remaining		Grant
				Option		Contractual		Date		Aggregate
				Exercise		Term		Fair		Intrinsic
Stock Options	Shares			Price		(Years)		Value		Value ($000)
Outstanding at June 30, 2004		86,251		$	11.32
Granted		22,500		$	26.35			$	11.18
Exercised		(15,000	)	$	14.58					$	166
Forfeited or expired		—			—

Outstanding at June 30, 2005		93,751		$	13.62		2.07			$	1,150


Exercisable at June 30, 2005		62,916		$	9.81		1.24			$	991

Outstanding at June 30, 2005		93,751		$	13.62
Granted		—			—			$	9.02
Exercised		(21,250	)	$	11.53					$	400
Forfeited or expired		(5,000	)	$	11.00

Outstanding at June 30, 2006		67,501		$	14.47		1.72			$	8,875


Exercisable at June 30, 2006		52,501		$	11.07		1.27			$	6,865

The following table provides additional restricted stock information under the 1995 Non-employee Directors Stock Incentive Plan:


				Weighted Average
						Remaining		Grant
						Contractual		Date		Aggregate
				Restricted		Term		Fair		Intrinsic
Restricted Stock	Shares			Stock Price		(Years)		Value		Value ($000)
Outstanding at June 30, 2003		—			—		—		—		—

Granted		8,750		$	0.01			$	27.94
Exercised		—
Forfeited or expired		—

Outstanding at June 30, 2004		8,750		$	0.01		4.6			$	225

Granted		12,250		$	0.01			$	29.66
Exercised		(2,915	)	$	0.01					$	81
Forfeited or expired		—

Outstanding at June 30, 2005		18,085		$	0.01		4.14			$	462

Granted		—			—			$	—
Exercised		(6,996	)	$	0.01					$	170
Forfeited or expired		—			—

Outstanding at June 30, 2006		11,089		$	0.01		3.20			$	324

The following is the nonvested share activity for the 1995 Non-employee Stock Incentive Plan for the year ended June 30, 2006:


	Number of Shares									Weighted Average Grant Date Fair Value
	Stock			Restricted						Stock		Restricted
	Options			Stock			Total			Options		Stock		Total
Nonvested June 30, 2005		30,835			18,085			48,920		$	8.22	$	29.10	$	15.94
Granted		—			—						—		—
Vested		(15,835	)		(6,996	)		(22,831	)		6.71		28.94		13.53
Forfeited		—			—			—			—		—

Nonvested June 30, 2006		15,000			11,089			26,089		$	9.81	$	29.21	$	18.05

2005 Non-employee Directors Stock Incentive Plan.

Exercise prices for options outstanding as of June 30, 2006, were $24.35 (fair market value on dates of grant). The following table provides certain information with respect to stock options outstanding and exercisable at June 30, 2006 under the 2005 Non-employee Directors Stock Incentive Plan:

Outstanding

Exercisable

Weighted-

average

Stock

average

Range of exercise

Stock options

exercise

remaining

options

exercise

prices

outstanding

price

contractual life

exercisable

price

$20.01 – $25.00

11,250

24.35

9.42

—

The following table summarizes stock option and restricted stock activity under the 2005 Non-employee Directors Stock Incentive Plan:


			Outstanding
			Stock		Restricted		Available
	Reserved		Options		Stock		for Grant
Shares reserved August 2005		200,000		—		—		200,000
Granted		—		11,250		15,030		(26,280	)
Exercised		—		—		—		—
Restrictions lapsed		—		—		—		—
Canceled		—		—		—		—

Shares at June 30, 2006		200,000		11,250		15,030		173,720

The following table provides additional stock option information under the 2005 Non-employee Directors Stock Incentive Plan:


			Weighted Average
					Remaining		Grant
			Option		Contractual		Date		Aggregate
			Exercise		Term		Fair		Intrinsic
Stock Options	Shares		Price		(Years)		Value		Value ($000)
Outstanding at June 30, 2005		—		—
Granted		11,250	$	24.35			$	10.21
Exercised		—		—					$	—
Forfeited or expired		—		—

Outstanding at June 30, 2006		11,250	$	24.35		1.72			$	55


Exercisable at June 30, 2006		—	$	—		1.27			$	—

The following table provides additional restricted stock information under the 2005 Non-employee Directors Stock Incentive Plan:


			Weighted Average
					Remaining		Grant
					Contractual		Date		Aggregate
			Restricted		Term		Fair		Intrinsic
Restricted Stock	Shares		Stock Price		(Years)		Value		Value ($000)
Outstanding at June 30, 2005		—	$	—		—			$	—

Granted		15,030	$	0.01			$	24.88
Exercised		—		—
Forfeited or expired		—		—

Outstanding at June 30, 2006		15,030	$	0.01		9.5			$	440

The following is the nonvested share activity for the 2005 Non-employee Stock Incentive Plan for the year ended June 30, 2006:


	Number of Shares						Weighted Average Grant Date Fair Value
	Stock		Restricted				Stock		Restricted
	Options		Stock		Total		Options		Stock		Total
Nonvested June 30, 2005		—		—		—	$	—	$	—	$	—
Granted		11,250		15,030		26,280		10.21		24.88		18.60
Vested		—		—		—		—		—		—
Forfeited		—		—		—		—		—		—

Nonvested June 30, 2006		11,250		15,030		26,280	$	10.21	$	24.88	$	18.60

Summary Information

We issue new shares of common stock upon exercise of stock options and issuance of restricted stock grants. As of June 30, 2006, there was $0.9 million of total unrecognized stock option compensation cost related to nonvested share-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of shares vested during the year ended June 30, 2006 was $0.9 million. Cash received from stock options exercised under all three plans for the year ended June 30, 2006, 2005 and 2004 was $0.6 million, $3.6 million, and $5.9 million, respectively.

As of June 30, 2006 there was $4.9 million of total unrecognized compensation cost related to nonvested restricted share-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted average period of 4.2 years. The total fair value of shares vested during the year ended June 30, 2006 was $2.2 million.

Grants of Restricted Stock to Certain Senior Executives

On December 16, 2005, 102,000 shares of restricted stock were granted to certain senior executives under our employee stock incentive plan. These grants are intended to encourage focus on long-term performance, and as such, these shares vest only upon the achievement of specified performance goals within corresponding multi-year performance periods and in significant part, the officer’s continued service to the Company for up to two additional years after any of the performance goals has been achieved. The performance goals are amounts of 12 consecutive months trailing diluted earnings per share of ACE Common Stock within corresponding performance periods ranging from two years to five years. Of the total number of shares granted to each senior executive:

	•		10% may vest if the first performance goal is achieved by the end of our fiscal year ending June 30, 2007;

	•		15% may vest if the second performance goal, which is higher than the first performance goal, is achieved by the end of our fiscal year ending June 30, 2008;

	•		25% may vest if the third performance goal, which is higher than the second performance goal, is achieved by the end of our fiscal year ending June 30, 2009; and

	•		50% may vest if the fourth performance goal, which is higher than the third performance goal, is achieved by the end of our fiscal year ending June 30, 2010.

If any of the first three performance goals is achieved within the corresponding performance period, then one-third of the shares that may vest upon the achievement of that goal will be deemed vested immediately, one-third will vest on the first anniversary of that date, and the remaining shares will vest on the second anniversary of that date. If the fourth performance goal is achieved within the fourth performance period, then one-half of the shares that may vest upon the achievement of that goal will vest immediately, and the remaining shares will vest on the first anniversary of that date. The vesting of each group of shares is separate, and not cumulative. If the first performance goal is not achieved within the first performance period, but the second performance goal is achieved within the second performance period, then only the shares subject to the second performance goal would vest, and those subject to the first performance goal would be forfeited. Of each group of shares, all unvested shares (if any) held by each of the senior executives will be forfeited and returned to us upon the expiration of the corresponding performance period or upon cessation of employment with the Company (whether before or after the corresponding performance goal has been achieved).

100

The grant date fair value of this grant is $2.5 million. Since the attainment of these goals does not look probable at this time, no expense associated with this grant has been reported.

On January 23, 2006, the previous Executive Employment Agreement with our chief executive officer was amended and restated to revise the provision under which we agreed to grant 198,000 shares of common stock as restricted stock under the 1997 Stock Incentive Plan. These shares vest based on the future market price of our common stock and are excluded from the restricted stock activity reported and based on an independent fair value assessment, we recorded expense of $29,000 during fiscal 2006 related to the grant and will record expense as these stock grants vest.

Stock Repurchase Program

In fiscal 2000, our board of directors had authorized up to $5 million for the repurchase of shares of our Common Stock on the open market or in negotiated transactions. During Fiscal 2000 and 2001, we repurchased 211,400 shares at an average price of $12.81 per share. No additional shares have been repurchased since fiscal 2001.

In May 2005, our board of directors terminated the previous repurchase program and established a new program authorizing up to $20 million for the repurchase of our Common Stock in the open market or negotiated transactions. Since then, 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.

12. INCOME TAXES

The provision for income taxes consists of the following:


	Year Ended June 30,
	2006		2005		2004
	(in thousands)
Current -
Federal income tax	$	12,374	$	13,215	$	9,617
State income tax		2,385		2,490		2,058

		14,759		15,705		11,675

Deferred -
Federal income tax		975		1,420		(234	)
State income tax		263		372		(71	)

		1,238		1,792		(305	)

	$	15,997	$	17,497	$	11,370

The net deferred tax asset consists of the following:


	June 30,
	2006			2005
	(in thousands)
Gross assets	$	6,105		$	12,981
Gross liabilities		(5,388	)		(11,026	)

Net deferred tax asset	$	717		$	1,955

The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:


	June 30,
	2006			2005
	(in thousands)
Loan loss provision	$	4,700		$	4,542
Accrued liabilities and other		4,318			2,299
Deferred revenue		2,189			2,229
Depreciation and amortization		(10,490	)		(7,115	)

	$	717		$	1,955

101

The provisions for taxes on income as reported differ from the tax provision computed by applying the statutory federal income tax rate of 35% in each of 2006, 2005 and 2004, as follows:


	Year Ended June 30,
	2006			2005		2004
	(in thousands)
Federal income tax provision on income at statutory rate	$	14,354		$	15,702	$	9,948
State taxes, net of federal benefit		1,722			1,795		1,421
Other		(79	)		—		1

Income tax provision	$	15,997		$	17,497	$	11,370

13. COMMITMENTS AND CONTINGENCIES

Lease Commitments

We lease our facilities and certain equipment under non-cancelable operating leases. Most of our facility leases contain options that allow us to renew leases for periods that generally range from three to nine years. At June 30, 2006, future minimum rental payments under existing leases were as follows (in thousands):


Year Ending June 30:
2007	$	30,315
2008		23,444
2009		16,841
2010		11,620
2011		6,418
Remaining years		9,932

	$	98,570

Lease expense was approximately $28.3 million, $23.0 million, and $19.8 million, for the years ended June 30, 2006, 2005, and 2004, respectively. We periodically lease space to sub-tenants under non-cancelable operating leases. The minimum future rental payments due under existing subleases is approximately $3.2 million.

14. EMPLOYEE BENEFITS PLANS

We maintain a 401(k) savings plan (the “Benefit Plan”) on behalf of our employees. Employees may contribute up to 50% of their annual compensation to the Benefit Plan, subject to statutory maximums. The Benefit Plan provides a matching of 25% of employee contributions made to the Benefit Plan. Matching contributions for the Benefit Plan were approximately $0.3 million for each of the years ended June 30, 2006, 2005, and 2004.

We also maintain an executive non-qualified deferred compensation plan (the “Executive Benefit Plan”). Our executives may contribute up to 50% of their annual compensation and 100% of their bonus to the Executive Benefit Plan. The Executive Benefit Plan provides a match of 25% of employee contributions up to the current 401(k) savings plan deferral limit. Matching contributions for the Executive Benefit Plan were approximately $35,000, $54,000, and $23,000, for the years ended June 30, 2006, 2005 and 2004, respectively.

15. HURRICANE KATRINA

During the first quarter of fiscal 2006, we recorded a pre-tax charge of $1.7 million related to losses from Hurricane Katrina. This charge included the write-off of fixed assets and loans receivable. We have reversed $0.3 million of the original charge related to better than expected collection of outstanding loans and we received an initial insurance reimbursement payment of $0.5 million. As of June 30, 2006, six of our 22 company-owned stores in the greater New Orleans market remain closed.

16. MERGER AGREEMENT

102

Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of ACE will be converted into the right to receive $30.00 in cash (the “Merger Consideration”).

A special committee of the Company’s board of directors was established to evaluate and negotiate the merger on behalf of the Company’s board of directors and subsequently recommended that the board of directors approve and adopt the merger agreement. The special committee was comprised of all directors except Jay Shipowitz, our President and Chief Executive Officer, who may be deemed to be an affiliate of Ace Holdings as a result of arrangements with Ace Holdings or its affiliates relating to employment and an equity ownership in Ace Holdings or its affiliates. At a special meeting held on June 5, 2006, the Company’s board of directors approved and adopted the merger agreement and approved the merger.

Completion of the Merger is subject to the satisfaction of closing conditions set forth in the Merger Agreement, including the approval by the affirmative vote of a majority of the outstanding shares of Company common stock and the receipt of certain regulatory and other approvals. We currently anticipate that the merger will close in the second quarter of fiscal 2007.

17. PENDING LAWSUITS AND SETTLEMENTS

Pending Putative Class Actions

103

Other Incidental Proceedings

18. COMMON STOCK OFFERING

On April 26, 2004, we completed a registered public offering of 2,041,622 shares of our common stock at an offering price of $27.00 per share. We used the net proceeds from our sale of shares in the offering, totaling approximately $51.9 million, to repay in full the outstanding amount (approximately $30.4 million of principal and interest) of our senior subordinated secured promissory notes issued to American Capital Strategies, Ltd. With that repayment, we also paid a cash prepayment fee of approximately $0.7 million. There was no income or expense resulting from the termination of the interest-rate swap agreement associated with the notes. We also incurred non-cash charges in the fourth quarter of fiscal 2004 of approximately $4.1 million related to the write-off of deferred financing fees associated with the notes. After repayment of the notes, we used the remaining estimated net proceeds to pay down our revolving credit facilities.

On April 29, 2004, upon the underwriters’ exercise of their over-allotment option, we sold an additional 370,000 shares of our common stock at $27.00 per share. We also used the net proceeds from the sale of these additional shares, approximately $9.5 million, to pay down our revolving credit facility.

19. LEASE ACCOUNTING RESTATEMENT

During the third quarter of fiscal 2005, we performed a review of our accounting practices surrounding leases and lease-related items in light of the views that the Office of the Chief Accountant of the Securities and Exchange Commission, expressed in a letter dated February 7, 2005 to the American Institute of Certified Public Accountants, regarding the application of generally accepted accounting principles to operating lease accounting matters.

Historically, we recorded rent expense on a straight-line basis over the initial non-cancelable term of a lease commencing upon store opening. We concluded that the calculation for straight-line rent should be based on the reasonably assured lease term as defined in SFAS 98, “Accounting for Leases”, which in most cases exceeds the initial non-cancelable lease term. In addition, we reassessed the depreciable lives of leasehold improvements to be the shorter of their estimated useful life or the reasonably assured lease term at the inception of the lease. Further, we concluded that landlord allowances which had previously been recorded as a reduction to related leasehold improvements should be reflected as deferred rent and amortized over the reasonably assured lease term as a reduction to rent expense rather than depreciation.

We restated our June 30, 2002 balance sheet to record a cumulative adjustment to retained earnings of $3.8 million related to periods prior to and including fiscal 2002. For periods subsequent to the end of fiscal 2002, we recorded a one-time non-cash after-tax adjustment of $0.6 million in the third quarter of fiscal 2005 to reflect the cumulative impact of correcting our accounting practices related to our leases. This adjustment resulted in a $0.04 reduction in diluted earnings per share in the third quarter of fiscal 2005.

We evaluated the materiality of these corrections on our financial statements and concluded that the incremental impact of these corrections is not material to any quarterly or annual period in fiscal 2003 or fiscal 2004. Other than the cumulative adjustment discussed above, prior years’ financial results will not be restated. The adjustments required to correct these practices does not affect historical or future net cash flows or the timing of the payments under the related leases.

104

20. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for the fiscal years ended June 30, 2006, 2005, and 2004, are as follows:


	Unaudited
	Three Months Ended								Year Ended
	Sept 30		Dec 31		Mar 31		June 30		June 30
	(in thousands, except per share amounts)
2006:
Revenues	$	66,193	$	72,264	$	91,161	$	80,291	$	309,909
Gross margin		17,287		22,419		35,596		26,447		101,749
Net income		2,865		5,004		9,851		7,297		25,017
Basic earnings per share		0.21		0.37		0.73		0.54		1.85
Diluted earnings per share		0.21		0.36		0.68		0.50		1.76

2005:
Revenues	$	62,026	$	64,747	$	78,464	$	63,412	$	268,649
Gross margin		20,094		22,272		32,113		20,937		95,416
Net income		5,073		5,828		9,868		6,597		27,366
Basic earnings per share		0.38		0.43		0.72		0.49		2.06
Diluted earnings per share		0.37		0.42		0.71		0.48		1.98

2004:
Revenues	$	55,701	$	59,186	$	73,674	$	58,098	$	246,659
Gross margin		17,332		19,368		29,808		18,131		84,639
Net income		3,007		3,718		8,174		2,153		17,052
Basic earnings per share		0.29		0.36		0.77		0.17		1.55
Diluted earnings per share		0.28		0.34		0.72		0.16		1.49

105

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE

Board of Directors and Shareholders of Ace Cash Express, Inc.

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Ace Cash Express, Inc. and Subsidiaries referred to in our report dated August 29, 2006, which is included in this Annual Report on Form 10-K. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for the purpose of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ GRANT THORNTON LLP
Dallas, Texas
August 29, 2006

106

ACE CASH EXPRESS, INC. AND SUBSIDIARIES(a)

Schedule II – Valuation and Qualifying Accounts
(in millions)


			Additions
			Charged							Balance
	Balance at		to costs		Charged					at
	beginning		and		to other					end of
Description	of period		expenses		accounts		Deductions			period
June 30, 2006:

Loan loss allowance	$	11.0	$	24.0	$	0.7	$	(21.2	)	$	13.1

Loan loss liability to Republic Bank	$	4.0	$	5.8	$	—	$	(9.1	)	$	0.8

Loan loss liability to First Bank of Delaware	$	—		2.8	$	—	$	(1.2	)	$	1.6

Loan loss liability to True Financial	$	—		2.7	$	—		—		$	2.7

June 30, 2005:

Loan loss allowance	$	10.6	$	18.3	$	—	$	(17.9	)	$	11.0

Loan loss liability to Republic Bank	$	3.7	$	8.7	$	—	$	(8.4	)	$	4.0

June 30, 2004:

Loan loss allowance	$	8.7	$	16.9	$	—	$	(15.0	)	$	10.6

Loan loss liability to Republic Bank	$	2.9	$	7.4	$	—	$	(6.6	)	$	3.7

Restructure reserve	$	0.2	$	—	$	—	$	(0.2	)	$	0.0


(a)		This schedule should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto.

107

INDEX TO EXHIBITS


Exhibit Number		Exhibit

10.79		Amendment to Installment Loan Marketing and Servicing Agreement dated as of July 28, 2006 between First Bank of Delaware and Ace Cash Express, Inc.

21		Subsidiaries of the Company.

23		Consent of Grant Thornton LLP.

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

108

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Good

Ace Cash Express Inactive 10-K2006 FY Annual report

Content analysis