**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(**MarkOne)

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended September 30, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from            to           **

**COMMISSIONFILE NUMBER 001-32363**

**ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                     |   | **58-2332639**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**135 North Church StreetSpartanburg, South Carolina 29306**

(Address ofprincipal executive offices)(Zip Code)

**864-342-5600**(Registrant’s telephone number, including area code)

**None**(Former name, former address and former fiscal year, ifchanged since last report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act).  Yes o  No x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| Class                                   | ** ** | **Outstanding as of November 4, 2005** |
|-----------------------------------------|------------|---------------------------------------------|
| Common Stock, par  value $.01 per share |       | 82,243,972 shares                           |

 

 

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**ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.Form 10-QFor the three months and nine months ended September 30, 2005**
|                                                     | ** ** | ** **                                                                                                                     | ** ** | **Page** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **FORWARD-LOOKING STATEMENTS**                      |       | 3                                                                                                                              |       |
| **PART I.   FINANCIAL  INFORMATION** |       | 4                                                                                                                              |       |
| Item 1.                                             |       | Financial  Statements                                                                                                          |       | 4        |   |
|                                                |       | Unaudited  Consolidated Balance Sheets December 31, 2004 and  September 30, 2005                                     |       | 4        |   |
|                                                |       | Interim  Unaudited Consolidated Statements of Income Three Months and Nine Months  Ended September 30, 2004 and 2005 |       | 5        |   |
|                                                |       | Interim Unaudited  Consolidated Statement of Stockholders’ Equity Nine Months Ended  September 30, 2005         |       | 6        |   |
|                                                |       | Interim  Unaudited Consolidated Statements of Cash Flows Nine Months Ended  September 30, 2004 and 2005                   |       | 7        |   |
|                                                |       | Notes  to Interim Unaudited Consolidated Financial Statements                                                                  |       | 8        |   |
| Item  2.                                            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |       | 20       |   |
| Item  3.                                            |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                    |       | 66       |   |
| Item  4.                                            |       | Controls  and Procedures                                                                                                       |       | 66       |   |
| **PART II.   OTHER  INFORMATION**    |       | 67                                                                                                                             |       |
| Item 1.                                             |       | Legal  Proceedings                                                                                                             |       | 67       |   |
| Item  2.                                            |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                   |       | 67       |   |
| Item 6.                                             |       | Exhibits                                                                                                                       |       | 67       |   |
| **SIGNATURES**                                      |       |                                                                                                                           |       |
| **INDEX TO  EXHIBITS**                              |       |                                                                                                                           |       |

 

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**FORWARD-LOOKING STATEMENTS**

The matters discussed in this Quarterly Report on Form10-Q that are forward-looking statements are based on current managementexpectations that involve substantial risks and uncertainties, which couldcause actual results to differ materially from the results expressed in, orimplied by these forward-looking statements. These statements can be identifiedby the fact that they do not relate strictly to historical or current facts.They use words such as “expect,” “intend,” “plan,” “believe,” “project,”“anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,”“continue,” and other words and terms of similar meaning in conjunction with adiscussion of future operating or financial performance. You should readstatements that contain these words carefully because they discuss our futureexpectations, contain projections of our future results of operations or of ourfinancial position or state other “forward-looking” information.

The factors listed in “Part I. Financial Information—Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Risk Factors,” as well as any cautionary language in this QuarterlyReport, provide examples of risks, uncertainties and events that may cause ouractual results to differ materially from the expectations we describe in ourforward-looking statements. Although we believe that our expectations are basedon reasonable assumptions, actual results may differ materially from those inthe forward-looking statements as a result of various factors, including, butnot limited to, those described under the heading “Risk Factors” in “Part I.Financial Information—Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this Quarterly Report.

Forward-looking statements speak only as of the dateof this Quarterly Report. Except as required under federal securities laws andthe rules and regulations of the U.S. Securities and Exchange Commission, we donot have any intention, and do not undertake, to update any forward-lookingstatements to reflect events or circumstances arising after the date of thisQuarterly Report, whether as a result of new information, future events orotherwise. As a result of these risks and uncertainties, readers are cautionednot to place undue reliance on the forward-looking statements included in thisQuarterly Report or that may be made elsewhere from time to time by, or onbehalf of, us. All forward-looking statements attributable to us are expresslyqualified by these cautionary statements.

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**PART I.FINANCIAL INFORMATION**

**ITEM1.**                FINANCIALSTATEMENTS.

**AdvanceAmerica, Cash Advance Centers, Inc.Unaudited ConsolidatedBalance SheetsDecember 31, 2004 and September 30, 2005(in thousands, except per share data)**

| ** **                                                                                                                                                                                                                                         | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                                                                                                                                                         |       |                        |       |                         |       |   |   |   |   |
| Current assets                                                                                                                                                                                                                                     |       |                        |       |                         |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                         |       |                        | $          | 18,224                       |       |   |   | $ | 25,714 |   |   |
| Advances and fees  receivable, net                                                                                                                                                                                                                 |       |                        | 155,009    |                         |       |   | 181,800 |   |   |
| Deferred income  taxes                                                                                                                                                                                                                             |       |                        | 3,141      |                         |       |   | 4,688 |   |   |
| Other current  assets                                                                                                                                                                                                                              |       |                        | 9,887      |                         |       |   | 10,254 |   |   |
| Total current  assets                                                                                                                                                                                                                              |       |                        | 186,261    |                         |       |   | 222,456 |   |   |
| Restricted cash                                                                                                                                                                                                                                    |       |                        | 9,110      |                         |       |   | 9,474 |   |   |
| Property and  equipment, net                                                                                                                                                                                                                       |       |                        | 72,247     |                         |       |   | 64,053 |   |   |
| Goodwill                                                                                                                                                                                                                                           |       |                        | 122,324    |                         |       |   | 122,573 |   |   |
| Other assets                                                                                                                                                                                                                                       |       |                        | 7,597      |                         |       |   | 6,877 |   |   |
| Total assets                                                                                                                                                                                                                                       |       |                        | $          | 397,539                      |       |   |   | $ | 425,433 |   |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                     |       |                        |       |                         |       |   |   |   |   |
| Current liabilities                                                                                                                                                                                                                                |       |                        |       |                         |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                   |       |                        | $          | 13,911                       |       |   |   | $ | 7,937 |   |   |
| Accrued  liabilities                                                                                                                                                                                                                               |       |                        | 23,027     |                         |       |   | 24,656 |   |   |
| Income taxes  payable                                                                                                                                                                                                                              |       |                        | 2,169      |                         |       |   | 3,128 |   |   |
| Accrual for excess  bank losses                                                                                                                                                                                                                    |       |                        | 3,219      |                         |       |   | 1,949 |   |   |
| Current portion of  long-term debt                                                                                                                                                                                                                 |       |                        | 471        |                         |       |   | 466 |   |   |
| Total current  liabilities                                                                                                                                                                                                                         |       |                        | 42,797     |                         |       |   | 38,136 |   |   |
| Revolving credit  facility                                                                                                                                                                                                                         |       |                        | 39,506     |                         |       |   | 43,661 |   |   |
| Long-term debt                                                                                                                                                                                                                                     |       |                        | 6,660      |                         |       |   | 6,306 |   |   |
| Deferred income  taxes                                                                                                                                                                                                                             |       |                        | 12,286     |                         |       |   | 14,124 |   |   |
| Other liabilities                                                                                                                                                                                                                                  |       |                        | —     |                         |       |   | 39 |   |   |
| Total liabilities                                                                                                                                                                                                                                  |       |                        | 101,249    |                         |       |   | 102,266 |   |   |
| Non-controlling  interest in variable interest entity                                                                                                                                                                                              |       |                        | —     |                         |       |   | 13,906 |   |   |
| Commitments and  contingencies (Note 7)                                                                                                                                                                                                            |       |                        |       |                         |       |   |   |   |   |
| Stockholders’ equity                                                                                                                                                                                                                          |       |                        |       |                         |       |   |   |   |   |
| Preferred stock,  par value $.01 per share, 25,000 shares authorized; no shares issued and  outstanding                                                                                                                                       |       |                        | —     |                         |       |   | — |   |   |
| Common stock, par  value $.01 per share, 250,000 shares authorized; 96,821 shares issued  and 83,958 outstanding as of December 31, 2004 and 96,821 shares  issued and 83,053 outstanding at September 30, 2005 |       |                        | 968        |                         |       |   | 968 |   |   |
| Paid in capital                                                                                                                                                                                                                                    |       |                        | 284,004    |                         |       |   | 283,858 |   |   |
| Paid in capital—unearned  compensation                                                                                                                                                                                                        |       |                        | (3,451     | )                            |       |   | (2,392 | ) |   |
| Retained earnings                                                                                                                                                                                                                                  |       |                        | 52,492     |                         |       |   | 76,218 |   |   |
| Common stock in  treasury (12,863 and 13,768 shares at cost at December 31, 2004 and  September 30, 2005, respectively)                                                                                                             |       |                        | (37,723    | )                            |       |   | (49,391 | ) |   |
| Total stockholders’  equity                                                                                                                                                                                                                   |       |                        | 296,290    |                         |       |   | 309,261 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                    |       |                        | $          | 397,539                      |       |   |   | $ | 425,433 |   |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim UnauditedConsolidated Statements of IncomeThree Months and Nine Months Ended September 30, 2004 and 2005(in thousands, except per share data)**

| ** **                                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Revenues:**                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Fees and interest charged  to customers                                         |       | $                                                    | 115,656    |                                                | $          | 153,161 |   | $ | 311,408 |   | $ | 373,010 |   |
| Marketing, processing and  servicing fees                                       |       | 36,208                                               |       | 19,476                                              |       | 99,091 |   | 88,327 |   |
| Total revenues                                                                  |       | 151,864                                              |       | 172,637                                             |       | 410,499 |   | 461,337 |   |
| Provision for doubtful  accounts and agency bank losses                         |       | (29,064                                              | )          | (36,340                                             | )          | (59,117 | ) | (76,998 | ) |
| Net revenues                                                                    |       | 122,800                                              |       | 136,297                                             |       | 351,382 |   | 384,339 |   |
| **Center Expenses:**                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and related  payroll costs                                             |       | 39,175                                               |       | 44,359                                              |       | 117,702 |   | 128,948 |   |
| Occupancy costs                                                                 |       | 17,765                                               |       | 20,455                                              |       | 49,145 |   | 58,735 |   |
| Center depreciation  expense                                                    |       | 3,539                                                |       | 3,841                                               |       | 10,150 |   | 10,973 |   |
| Advertising expense                                                             |       | 5,117                                                |       | 7,952                                               |       | 19,318 |   | 20,808 |   |
| Other center expenses                                                           |       | 11,485                                               |       | 13,991                                              |       | 34,150 |   | 39,040 |   |
| Total center expenses                                                           |       | 77,081                                               |       | 90,598                                              |       | 230,465 |   | 258,504 |   |
| Center gross profit                                                             |       | 45,719                                               |       | 45,699                                              |       | 120,917 |   | 125,835 |   |
| **Corporate and Other Expenses (Income):**                                      |       |                                                 |       |                                                |       |   |   |   |   |
| General and  administrative expenses                                            |       | 10,009                                               |       | 13,236                                              |       | 30,534 |   | 38,218 |   |
| General and  administrative expenses with related parties                       |       | 516                                                  |       | 58                                                  |       | 1,646 |   | 222 |   |
| Corporate depreciation  expense                                                 |       | 974                                                  |       | 1,241                                               |       | 2,975 |   | 3,390 |   |
| Interest expense                                                                |       | 2,075                                                |       | 1,356                                               |       | 4,899 |   | 2,914 |   |
| Interest expense with  related parties                                          |       | 2,629                                                |       | —                                              |       | 7,830 |   | — |   |
| Interest income                                                                 |       | (26                                                  | )          | (50                                                 | )          | (116 | ) | (208 | ) |
| Loss on disposal of  property and equipment                                     |       | 197                                                  |       | 325                                                 |       | 466 |   | 448 |   |
| Loss on impairment of  assets                                                   |       | —                                               |       | 1,852                                               |       | — |   | 1,852 |   |
| Transaction related  expense                                                    |       | 1,592                                                |       | —                                              |       | 1,592 |   | — |   |
| Income before  income taxes                                                     |       | 27,753                                               |       | 27,681                                              |       | 71,091 |   | 78,999 |   |
| Income tax expense                                                              |       | 792                                                  |       | 11,352                                              |       | 2,314 |   | 32,187 |   |
| Income before  income of consolidated variable interest entity                  |       | 26,961                                               |       | 16,329                                              |       | 68,777 |   | 46,812 |   |
| Income of consolidated  variable interest entity                                |       | —                                               |       | (476                                                | )          | — |   | (476 | ) |
| Net income                                                                      |       | $                                                    | 26,961     |                                                | $          | 15,853 |   | $ | 68,777 |   | $ | 46,336 |   |
| Net income per common share:                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                           |       | $                                                    | 0.39       |                                                | $          | 0.19 |   | $ | 1.00 |   | $ | 0.55 |   |
| Diluted                                                                         |       | $                                                    | 0.39       |                                                | $          | 0.19 |   | $ | 1.00 |   | $ | 0.55 |   |
| Dividends declared per  common share                                            |       | $                                                    | 0.84       |                                                | $          | 0.09 |   | $ | 1.15 |   | $ | 0.27 |   |
| Weighted average number of shares outstanding:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                           |       | 68,667                                               |       | 83,220                                              |       | 68,667 |   | 83,528 |   |
| Diluted                                                                         |       | 68,667                                               |       | 83,449                                              |       | 68,667 |   | 83,760 |   |
| **Pro Forma Data:**                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Historical income before  taxes                                                 |       | $                                                    | 27,753     |                                                |       |   | $ | 71,091 |   |   |   |
| Pro forma income tax  expense                                                   |       | 11,295                                               |       |                                                |       | 28,934 |   |   |   |
| Net income adjusted for  pro forma income tax expense                           |       | $                                                    | 16,458     |                                                |       |   | $ | 42,157 |   |   |   |
| Pro forma net income per  common share—basic and diluted                   |       | $                                                    | 0.24       |                                                |       |   | $ | 0.61 |   |   |   |
| Weighted average pro forma number of shares  outstanding—basic and diluted |       | 68,667                                               |       |                                                |       | 68,667 |   |   |   |

 

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

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**Advance America,Cash Advance Centers, Inc.Interim Unaudited Consolidated Statement ofStockholders’ EquityNine Months Ended September 30, 2005(in thousands, except per share data)**

| ** **                             | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Paid-In  Capital—** | ** ** | ** **       | ** ** | **Common Stock** | ** ** | ** **           | ** ** |
|----------------------------------------|------------|-----------------------|------------|------------|------------|----------------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                             | ** ** | ** **            | ** ** | **Par**    | ** ** | **Paid-In**                | ** ** | **Unearned**     | ** ** | **Retained**          | ** ** | **In Treasury** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Shares**            | ** ** | **Value**  | ** ** | **Capital**                | ** ** | **Compensation** | ** ** | **Earnings**          | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Balances, December 31, 2004       |       | 96,821                |       |       | $          | 968                        |       |             | $          | 284,004               |       |                 | $          | (3,451 | ) |   | $ | 52,492 |   | (12,863 | ) | $ | (37,723 | ) | $ | 296,290 |   |
| Amortization of restricted stock  |       | —                |       |       | —     |                       |       | —           |       |                  | 809        |                 |       | — |   | — |   | — |   | 809 |   |
| Forfeitures of restricted stock   |       | —                |       |       | —     |                       |       | —           |       |                  | 250        |                 |       | — |   | (17 | ) | (250 | ) | — |   |
| Stock option expense                   |       | —                |       |       | —     |                       |       | 23               |       |                  | —     |                 |       | — |   | — |   | — |   | 23 |   |
| Dividends paid ($0.27 per share)       |       | —                |       |       | —     |                       |       | —           |       |                  | —     |                 |       | (22,552 | ) | — |   | — |   | (22,552 | ) |
| Dividends payable                      |       | —                |       |       | —     |                       |       | —           |       |                  | —     |                 |       | (58 | ) | — |   | — |   | (58 | ) |
| Common stock issuance costs       |       | —                |       |       | —     |                       |       | (169             | )          |                  | —     |                 |       | — |   | — |   | — |   | (169 | ) |
| Purchases of treasury stock            |       | —                |       |       | —     |                       |       | —           |       |                  | —     |                 |       | — |   | (888 | ) | (11,418 | ) | (11,418 | ) |
| Net Income                             |       | —                |       |       | —     |                       |       | —           |       |                  | —     |                 |       | 46,336 |   | — |   | — |   | 46,336 |   |
| Balances, September 30,  2005     |       | 96,821                |       |       | $          | 968                        |       |             | $          | 283,858               |       |                 | $          | (2,392 | ) |   | $ | 76,218 |   | (13,768 | ) | $ | (49,391 | ) | $ | 309,261 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim UnauditedConsolidated Statements of Cash FlowsNine Months Ended September 30, 2004 and 2005(in thousands)**

| ** **                                                                                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating activities**                                                                      |       |     |       |     |       |
| Net income                                                                                                    |       | $        | 68,777     |     | $          | 46,336 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisition         |       |     |       |     |       |
| Depreciation                                                                                                  |       | 13,125   |       | 14,363   |       |
| Non-cash interest expense                                                                                     |       | 654      |       | 735      |       |
| Provisions for doubtful  accounts and agency bank losses                                                      |       | 59,117   |       | 76,998   |       |
| Deferred income taxes                                                                                         |       | 550      |       | 291      |       |
| Loss on disposal of  property and equipment                                                                   |       | 499      |       | 448      |       |
| Loss on impairment of  assets                                                                                 |       | —   |       | 1,768    |       |
| Amortization of  restricted stock                                                                             |       | —   |       | 809      |       |
| Stock option expense                                                                                          |       | —   |       | 23       |       |
| Changes in operating assets and liabilities                                                                   |       |     |       |     |       |
| Other current assets                                                                                          |       | (311     | )          | 5,940    |       |
| Other assets                                                                                                  |       | (4,379   | )          | —   |       |
| Accounts payable                                                                                              |       | 4,227    |       | (4,911   | )          |
| Accrued liabilities                                                                                           |       | 1,802    |       | (320     | )          |
| Income taxes payable                                                                                          |       | 284      |       | 959      |       |
| Accrual for excess bank  losses                                                                               |       | (14,425  | )          | (13,698  | )          |
| Net cash provided by  operating activities                                                                    |       | 129,920  |       | 129,741  |       |
| **Cash flows from investing activities**                                                                      |       |     |       |     |       |
| Changes in  advances and fees receivable, net                                                                 |       | (58,597  | )          | (80,258  | )          |
| Changes in  restricted cash                                                                                   |       | 1,188    |       | (364     | )          |
| Cash from  consolidated variable interest entity                                                              |       | —   |       | 2,931    |       |
| Acquisition of  business, net of cash acquired                                                                |       | —   |       | (332     | )          |
| Proceeds from sale  of property and equipment                                                                 |       | 18       |       | 230      |       |
| Purchases of  property and equipment                                                                          |       | (22,376  | )          | (13,039  | )          |
| Net cash used in  investing activities                                                                        |       | (79,767  | )          | (90,832  | )          |
| **Cash flows from financing activities**                                                                      |       |     |       |     |       |
| Proceeds from  revolving credit facility, net                                                                 |       | 31,657   |       | 4,156    |       |
| Common stock  issuance costs                                                                                  |       | —   |       | (169     | )          |
| Payments on  mortgage payable                                                                                 |       | (229     | )          | (249     | )          |
| Payments on note  payable                                                                                     |       | —   |       | (110     | )          |
| Payments of  financing costs                                                                                  |       | (3,055   | )          | (15      | )          |
| Purchases of  treasury stock                                                                                  |       | —   |       | (11,418  | )          |
| Payments of  dividends                                                                                        |       | (79,250  | )          | (22,552  | )          |
| Changes in book  overdrafts                                                                                   |       | (1,624   | )          | (1,062   | )          |
| Net cash used in  financing activities                                                                        |       | (52,501  | )          | (31,419  | )          |
| Net (decrease)/increase  in cash and cash equivalents                                                         |       | (2,348   | )          | 7,490    |       |
| Cash and cash  equivalents, beginning of period                                                               |       | 10,484   |       | 18,224   |       |
| Cash and cash  equivalents, end of period                                                                     |       | $        | 8,136      |     | $          | 25,714 |   |
| Supplemental disclosures of cash flow information:                                                            |       |     |       |     |       |
| Cash paid during the period for:                                                                              |       |     |       |     |       |
| Interest, net of amounts  capitalized                                                                         |       | $        | 12,248     |     | $          | 2,089 |   |
| Income taxes                                                                                                  |       | 1,473    |       | 30,992   |       |
| Supplemental schedule of non-cash investing and  financing activity:                                          |       |     |       |     |       |
| Property and equipment  purchases included in accounts payable and accrued expenses                           |       | 1,495    |       | 1,426    |       |
| Restricted stock  dividends payable                                                                           |       | —   |       | 58       |       |
| Reclassification of  property and equipment to other assets held for sale (included in other  current assets) |       | —   |       | 6,300    |       |
| Net assets assumed in  consolidation of variable interest entity                                              |       | —   |       | 13,906   |       |
| Net assets acquired through acquisition of business                                                           |       | —   |       | 229      |       |

 

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

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**Advance America, Cash Advance Centers, Inc.Notes to InterimUnaudited Consolidated Financial Statements**

**1.**   Summaryof Significant Accounting Policies

**Basis of Presentation**

The accompanying interim unaudited consolidatedfinancial statements of Advance America, Cash Advance Centers, Inc. (“AACACI”)and its wholly owned subsidiaries (collectively, the “Company”) have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and the rules andregulations of the U.S. Securities and Exchange Commission (the “SEC”). They donot include all information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements. Althoughmanagement believes that the disclosures are adequate to prevent theinformation from being misleading, the interim unaudited consolidated financialstatements should be read in conjunction with the Company’s audited financialstatements in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004 filed with the SEC. In the opinion of the Company’smanagement, all adjustments, consisting of normal recurring accruals considerednecessary for a fair statement, have been included. The results of operationsfor the three and nine months ended September 30, 2005 are not necessarilyindicative of the results that may be expected for future interim periods orthe entire year ended December 31, 2005.

In January 2003, Financial Accounting StandardsBoard Interpretation No. 46, “Consolidation of Variable Interest Entities”(“FIN 46”), was issued. In December 2003, a revised version of FIN 46 (“FIN 46R”)was issued. FIN 46R addresses reporting and disclosure requirements forVariable Interest Entities (“VIE”). It defines a VIE as an entity that eitherdoes not have equity investors with voting rights or has equity investors thatdo not provide sufficient financial resources for the entity to support itsactivities. FIN 46Rrequires consolidation of a VIE by the enterprise that has the majority of therisks and rewards of ownership, referred to as the primary beneficiary. It alsorequires additional disclosures for an enterprise that holds a significantvariable interest in a VIE, but is not the primary beneficiary. See Note 9 for theimpact of adopting FIN 46R on the Company’s results of operations and financialcondition as well as other disclosures required by FIN 46R.

In May 2005, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standard No. 154, “AccountingChanges and Error Corrections–A Replacement of APB Opinion No. 20 and FASBStatement No. 3’’ (“SFAS No. 154”). SFAS No. 154 applies to allvoluntary changes in accounting principle and changes the requirements foraccounting for and reporting of a change in accounting principle. SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless it isimpracticable. In addition, SFAS No. 154 carries forward without changethe guidance contained in APB Opinion No. 20, “Accounting Changes,” forreporting a correction of an error in previously issued financial statementsand a change in accounting estimate. The Company will adopt SFAS No. 154on January 1, 2006, as required. The Company does not expect the adoptionof SFAS No. 154 to have a material impact on its financial condition orresults of operations.

Certain prior periodbalances have been reclassified to conform to the current period’spresentation.

**Revenue Recognition**

Revenues on payday cashadvances (and as of July 2005, installment loans under the agency businessmodel) can be characterized as fees and/or interest depending upon variousstate laws. Revenue is recognized on payday cash advances made by the Companyunder the standard business model on a 

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constant-yieldbasis ratably over the term of each payday cash advance. Under the agencybusiness model, all charges of fees and/or interest paid by the lending banks’customers are deposited directly to the respective lending bank’s bank account,and the Company’s revenues consist of the marketing, processing and servicingfees payable to the Company by the lending banks. Prior to July 2005,these fees included the losses for which the lending banks were contractuallyobligated in each of the states where the Company operated its agency businessmodel. As of July 2005, these fees include only the losses for which thelending bank operating in Pennsylvania is contractually obligated. The Companyrecognizes revenue under the agency business model on a constant-yieldbasis ratably over the term of each payday cash advance and installment loan.

**Concentration of Risk**

The Company marketed,processed and serviced payday cash advances, and, beginning in July 2005,installment loans under either the standard or agency business model, to abroad base of individuals in 37 states in the United States. For the threemonths ended September 30, 2004 and 2005, total revenues within fivestates accounted for approximately 41.6% and 40.1%, respectively, of theCompany’s total revenues. For the nine months ended September 30, 2004 and2005, total revenues within five states accounted for approximately 42.0% and40.5%, respectively, of the Company’s total revenues.

**Income Taxes**

Effective October 1, 2001, AACACI filed anelection to convert to Subchapter S status. Certain subsidiaries also convertedto Subchapter S status as part of this election. The Company terminated theseelections on December 21, 2004. For thethree and nine months ended September 30, 2004, approximately 93% and 95%,respectively, of total revenues were attributable to companies that had electedSubchapter S status.

Income taxes have beenaccounted for under the asset and liability method since the Company terminatedits S corporation election on December 21, 2004 and prior thereto for thosesubsidiaries that remained C corporations during the period the Companywas an S corporation. Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying value of existing assets and liabilities and theirrespective tax bases and for operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which the related temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date.

**Earnings Per Share**

Basic earnings per share are computed by dividing netincome by the weighted average number of shares outstanding for the periodexcluding unvested restricted stock. Diluted earnings per share are computed bydividing net income by the weighted average number of shares outstanding for theperiod, after adjusting for the dilutive effect of restricted stock and stockoptions. Options to purchase 250,000 shares of common stock that wereoutstanding at September 30, 2005 were not included in the computation ofdiluted earnings per share since the effect of including these options would beanti-dilutive.

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Thefollowing table presents the reconciliation of the denominator used in thecalculation of basic and diluted earnings per share (in thousands):

| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,  2005**     | ** ** | **September 30,  2005**    | ** ** |
| Reconciliation of  denominator:                                                 |       |                             |       |                            |       |   |   |   |   |
| Weighted average number of common shares  outstanding—basic                |       |                             | 83,220     |                            |       |   | 83,528 |   |   |
| Effect of unvested restricted stock                                             |       |                             | 229        |                            |       |   | 232 |   |   |
| Weighted average  number of common and dilutive shares outstanding—diluted |       |                             | 83,449     |                            |       |   | 83,760 |   |   |

 

**2.**   Marketing,Processing and Servicing Arrangements

As part of theagency business model, the Company is party to marketing, processing andservicing agreements (“MP&S Agreements”) with lending banks that offerpayday cash advances and, as of July 2005, installment loans. The Company’smarketing, processing and servicing duties typically include the following:

a)               taking inapplications from prospective customers of the lending bank;

b)              submitting the applicationsfor approval or denial to the lending bank’s independent, third-party creditscoring agent;

c)               depending onwhether the application is approved or denied, providing the customer with alending bank contractual agreement or an adverse action letter;

d)              collectingrepayments from the lending bank’s customers and depositing them in the lendingbank’s bank accounts;

e)               if repayment is notreceived from a customer, commencing collection activities to collect on theamount owed to the lending bank; and

f)                 undertakingvarious marketing efforts on behalf of the lending bank.

In Pennsylvania, North Carolina and Arkansas, theCompany is compensated under these MP&S Agreements by the lending banks formarketing, processing and servicing the payday cash advances and, as of July 2005,installment loans the lending banks make to their customers. The Company waspreviously a party to MP&S Agreements with lending banks offering paydaycash advances in Texas and Michigan, which agreements were terminated in June and/orJuly 2005, and the Company no longer operates in Texas or Michigan underthe agency business model. Although the Company markets, processes and servicespayday cash advances and, now, installment loans made by the lending banksunder the agency business model, each lending bank is responsible forevaluating each of its customers’ applications and determining whether thepayday cash advance or installment loan is approved. The Company is notinvolved in the lending banks’ payday cash advance or installment loan approvalprocess or the determination of their approval procedures or criteria, and theCompany does not fund or acquire any payday cash advances or installment loansfrom the lending banks. The payday cash advances and installment loans are repayablesolely to the lending banks and are assets of the lending banks; accordingly,they are not included in the Company’s balance sheet. On September 15,2005, the lending bank for which the Company markets, processes and servicespayday cash advances and installment loans in its 117 centers in North Carolinatemporarily suspended its payday cash advance and installment loan originations.The Company continues to service all payday cash advances and installment loansthat are currently outstanding in North Carolina.

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Prior to July 2005,each lending bank was contractually obligated for the losses on payday cashadvances in an amount established as a percentage of the interest and/or feescharged by the banks to their customers. The Company’s marketing, processingand servicing fee increased by the lending bank’s contractual obligation forlosses. If the amount of the lending bank’s uncollected payday cash advancesand installment loans exceeded the lending bank’s contractual obligations, theCompany was potentially obligated to pay the lending bank the outstandingamount of the advances and loans plus the lending bank’s fees and/or interestreceivable on the advances, less the lending bank’s contractually obligatedportion of the losses. The outstanding balances of the lending banks’ advances,installment loans and fees receivable serviced by the Company wereapproximately $61.8 million and $30.2 million at December 31, 2004 and September 30,2005, respectively. Beginning in July 2005, the lending bank offeringpayday cash advances and installment loans in North Carolina and Arkansas isresponsible for any and all losses associated with its payday cash advances andinstallment loans, while the lending bank offering payday cash advances andinstallment loans in Pennsylvania continues to be contractually obligated onlyfor losses in an amount established as a percentage of the interest and/or feescharged by the bank to its customers.

**3.**   Advances and FeesReceivable, Net

Advancesand fees receivable, net, consisted of (in thousands):

| ** **                                                                                    | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Payday advances  receivable                                                                   |       |                        | $          | 137,309                      |       |   |   | $ | 149,515 |   |   |
| Fees and interest  receivable                                                                 |       |                        | 21,942     |                         |       |   | 25,144 |   |   |
| Returned items  receivable                                                                    |       |                        | 25,705     |                         |       |   | 42,597 |   |   |
| Loans and fees  receivable of consolidated variable interest entity, net of unearned revenues |       |                        | —     |                         |       |   | 13,411 |   |   |
| Lending bank  receivable                                                                      |       |                        | 10,762     |                         |       |   | 4,196 |   |   |
| Other                                                                                         |       |                        | 1,833      |                         |       |   | 2,512 |   |   |
| Allowance for  doubtful accounts                                                              |       |                        | (29,221    | )                            |       |   | (41,811 | ) |   |
| Unearned revenues                                                                             |       |                        | (13,321    | )                            |       |   | (13,764 | ) |   |
| Advances and fees  receivable, net                                                            |       |                        | $          | 155,009                      |       |   |   | $ | 181,800 |   |   |

 

**4.**   Allowancefor Doubtful Accounts and Accrual for Excess Bank Losses

Changesin the allowance for doubtful accounts for the three and nine months ended September 30,2004 and 2005 were as follows (in thousands):

| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Beginning balance                |       | $                                                    | 24,910     |                                                | $          | 33,875 |   | $ | 23,021 |   | $ | 29,221 |   |
| Provision for  doubtful accounts |       | 22,915                                               |       | 34,704                                              |       | 45,408 |   | 64,570 |   |
| Charge-offs                      |       | (21,779                                              | )          | (30,097                                             | )          | (50,008 | ) | (65,618 | ) |
| Recoveries                       |       | 2,131                                                |       | 3,329                                               |       | 9,756 |   | 13,638 |   |
| Ending balance                   |       | $                                                    | 28,177     |                                                | $          | 41,811 |   | $ | 28,177 |   | $ | 41,811 |   |

 

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Changesin the accrual for excess bank losses for the three and nine months endedSeptember 30, 2004 and 2005 were as follows (in thousands):

| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Beginning balance                 |       | $                                                    | 3,977      |                                                | $          | 5,337 |   | $ | 3,623 |   | $ | 3,219 |   |
| Provision for  agency bank losses |       | 6,149                                                |       | 1,636                                               |       | 13,709 |   | 12,428 |   |
| Charge-offs                       |       | (8,416                                               | )          | (5,785                                              | )          | (19,697 | ) | (19,158 | ) |
| Recoveries                        |       | 1,197                                                |       | 761                                                 |       | 5,272 |   | 5,460 |   |
| Ending balance                    |       | $                                                    | 2,907      |                                                | $          | 1,949 |   | $ | 2,907 |   | $ | 1,949 |   |

 

The provision for agencybank losses consists of those losses for which the lending banks under theagency business model are contractually obligated and an estimate by whichactual losses will differ from the lending banks’ contractual obligation (whichis referred to as provision for excess bank losses).

**5.**   AccruedLiabilities

Accruedliabilities were as follows (in thousands):

| ** **                        | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Employee  compensation            |       |                        | $          | 9,678                        |       |   |   | $ | 7,484 |   |   |
| Workers’  compensation       |       |                        | 3,521      |                         |       |   | 4,571 |   |   |
| Health and dental  insurance      |       |                        | 3,364      |                         |       |   | 3,455 |   |   |
| Accrued  construction in progress |       |                        | 1,818      |                         |       |   | 1,426 |   |   |
| Accrued branch  closing costs     |       |                        | 55         |                         |       |   | 1,344 |   |   |
| Accrued property  tax             |       |                        | 447        |                         |       |   | 1,211 |   |   |
| Legal                             |       |                        | 827        |                         |       |   | 778 |   |   |
| Other                             |       |                        | 3,317      |                         |       |   | 4,387 |   |   |
| Total                             |       |                        | $          | 23,027                       |       |   |   | $ | 24,656 |   |   |

 

**6.**   IncomeTaxes

Incometax expense for the three and nine months ended September 30, 2004 and2005 consisted of the following (in thousands):

| ** ** | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **  2004  **                     | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Current    |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| Federal    |       |                                                 | $          | —                                              |       |   | $ | 11,021 |   | $ | — |   | $ | 26,610 |   |
| State      |       |                                                 | 517        |                                                |       | 2,189 |   | 1,763 |   | 5,286 |   |
|       |       |                                                 | 517        |                                                |       | 13,210 |   | 1,763 |   | 31,896 |   |
| Deferred   |       |                                                 | 275        |                                                |       | (1,858 | ) | 551 |   | 291 |   |
| Total      |       |                                                 | $          | 792                                                 |       |   | $ | 11,352 |   | $ | 2,314 |   | $ | 32,187 |   |

 

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Areconciliation of the statutory federal income tax rate and the Company’seffective income tax rate for the three and nine months endedSeptember 30, 2004 and 2005 follows:

| ** **                               | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** |   |
| Statutory income  tax rate               |       |                                                     | 35.0       | %                                                        |       |   | 35.0 | % |   |   | 35.0 | % |   |   | 35.0 | % |   |   |
| S corporation  income not subject to tax |       |                                                     | (31.6      | )                                                        |       |   | — |   |   |   | (33.0 | ) |   |   | — |   |   |   |
| State income  taxes, net                 |       |                                                     | 2.0        |                                                     |       |   | 4.4 |   |   |   | 2.0 |   |   |   | 4.4 |   |   |   |
| Other                                    |       |                                                     | (2.5       | )                                                        |       |   | 1.6 |   |   |   | (0.7 | ) |   |   | 1.3 |   |   |   |
| Effective income  tax rate               |       |                                                     | 2.9        | %                                                        |       |   | 41.0 | % |   |   | 3.3 | % |   |   | 40.7 | % |   |   |

 

Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and deferred tax liabilities are (in thousands):

| ** **                                    | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Deferred tax  assets                          |       |                        |       |                         |       |   |   |   |   |
| Accrued expenses                              |       |                        | $          | 2,762                        |       |   |   | $ | 4,400 |   |   |
| Bad debts                                     |       |                        | 1,819      |                         |       |   | 2,363 |   |   |
| Net operating loss carryforwards              |       |                        | 845        |                         |       |   | 40 |   |   |
| Other                                         |       |                        | 35         |                         |       |   | — |   |   |
| Total deferred tax assets                     |       |                        | 5,461      |                         |       |   | 6,803 |   |   |
| Deferred tax  liabilities                     |       |                        |       |                         |       |   |   |   |   |
| Goodwill                                      |       |                        | (7,877     | )                            |       |   | (10,027 | ) |   |
| Depreciation                                  |       |                        | (1,882     | )                            |       |   | (1,780 | ) |   |
| Prepaid expenses                              |       |                        | (1,590     | )                            |       |   | (1,732 | ) |   |
| Book versus tax basis difference for aircraft |       |                        | (3,257     | )                            |       |   | (2,700 | ) |   |
| Total deferred tax liabilities                |       |                        | (14,606    | )                            |       |   | (16,239 | ) |   |
| Net deferred tax  liability                   |       |                        | $          | (9,145                       | )          |   |   | $ | (9,436 | ) |   |

 

From October 1, 2001 through December 20,2004, AACACI and substantially all of its subsidiaries (the “Subchapter SCompanies”) were treated for federal and most state income tax purposes as an S Corporationunder the Internal Revenue Code and comparable state laws. As a result, theSubchapter S Companies’ earnings were taxed for federal and most stateincome tax purposes directly to AACACI’s stockholders rather than to theSubchapter S Companies. On December 21, 2004, the Subchapter S Companiesterminated their status as S Corporations and are now taxed as C corporations.As a result of the termination of the Subchapter S Companies’ S corporationstatus, the Company recorded a net deferred tax liability and correspondingincome tax expense on the termination date of $8.4 million.

As of December 31,2004 and September 30, 2005, the Company had net operating losscarryforwards for federal and state income tax purposes totaling approximately$3.4 million and $0.7 million, respectively, which will begin toexpire in 2014.

**7.   Commitments and Contingencies**

The Company is involved in several active lawsuits,including lawsuits arising out of actions taken by state regulatory authorities,and is involved in various other legal proceedings with state and federalregulators.

In July 2002, the Industrial Loan Commissionerfor Georgia issued an examination certificate to the Company seeking toinvestigate whether the Company had complied with the Georgia Industrial LoanAct. 

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On August 2, 2002,the Company and BankWest, Inc. (“BankWest”), the lending bank for whom theCompany acted as marketing, processing and servicing agent in Georgia, filedsuit against the Commissioner in the Superior Court for Fulton County, Georgiaseeking to enjoin him from enforcing the examination certificate and proceedingwith an examination. In October 2005, the parties submitted a proposedorder to seal certain documents and dismiss all of the actions, and areawaiting the court’s approval.

In the Spring of 2004, Georgia adopted a statute,which became effective in May 2004, that effectively prohibits payday cashadvance services in that state and effectively restricts the Company’s abilityto act as a marketing, processing and servicing agent for a lending bank inthat state. In April 2004, the Company, along with a lending bank,BankWest, and other banks and agents involved in providing payday cash advancesin Georgia, filed an action in the U.S. District Court for the Northern Districtof Georgia against the Attorney General of Georgia and the Georgia Secretary ofState (BankWest, et al. vs. Baker, et al. or “*BankWest vs.Baker*”), seeking a declaration that the recently passed Georgiaanti-payday cash advance law is unconstitutional and is preempted by federallaw and should not be enforced. The District Court denied BankWest and theCompany’s request, and BankWest and the Company subsequently suspendedoperations at the Company’s centers in Georgia. BankWest and the Companyappealed the District Court’s order to the U.S. Court of Appeals for theEleventh Circuit, which affirmed the District Court’s order in June 2005. BankWestand the Company and other parties filed a petition for rehearing en banc withthe Eleventh Circuit in July 2005, and are awaiting a response to thispetition. Net revenues from the Company’s Georgia operations were approximately$5.1 million, or 1.4% of the Company’s net revenues, for the nine monthsended September 30, 2004. The Georgia centers have not generated revenuesince operations were ceased in May 2004. During the three months endedSeptember 30, 2005, the Company permanently closed all 86 remainingcenters in Georgia. The lease cancellation and other closing costs wereapproximately $0.4 million.

Currently, theCompany and certain of its officers, directors, owners and “stakeholders” aredefending two putative class action lawsuits, one in North Carolina (filed in July 2004)and one in Georgia (filed August 2004), where the plaintiffs are alleging,among other things, that the Company, and not the lending bank, is the “truelender” and is therefore offering usurious payday cash advances in violation ofnumerous consumer protection statutes. 

·       OnJuly 27, 2004, John Kucan, Welsie Torrence and Terry Coates, each of whomwas a customer of Republic Bank & Trust Company (“Republic”), thelending bank for whom the Company marketed, processed and serviced payday cashadvances in North Carolina, filed a putative class action lawsuit in theGeneral Court of Justice for the Superior Court Division for New HanoverCounty, North Carolina against the Company, its subsidiary that operates inNorth Carolina and William M. Webster, IV, the Company’s former Chief ExecutiveOfficer, alleging, among other things, that the relationship between theCompany’s subsidiary that operates in North Carolina and Republic was a “rent acharter” relationship and therefore the bank was not the “true lender” on thepayday cash advances. The lawsuit also claims that the payday cash advanceswere made, administered and collected in violation of numerous North Carolinaconsumer protection laws. The lawsuit seeks an injunction barring the Companyfrom continuing to do business in North Carolina, the return of the principalamount of the payday cash advances made to the plaintiff class since August 2001,the return of any interest or fees associated with those advances, trebledamages, attorneys’ fees and other unspecified costs. Thus far the onlysubstantive motions the Company has filed are motions to (1) have the casedesignated as a complex business case, (2) dismiss or stay proceedings and (3) compelarbitration. In November 2004, plaintiffs filed a motion seeking classcertification. Also in November 2004, the North Carolina Superior Courtdenied the Company’s motion to have the case designated as a complex businesscase and assigned to the North Carolina Business Court and instead granted theplaintiffs’ motion to designate the case as exceptional and 

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assigned to a specialSuperior Court judge. That ruling did not express any opinion on the merits ofthe case. Plaintiffs’ counsel indicated at the hearing held prior to thatruling, and in papers filed in support of their motion for class certification,that the distributions to the Company’s stockholders of substantially all ofthe net income earned by the Company in the form of cash dividends may be thesubject of a fraudulent conveyance claim. At that hearing, plaintiffs’ counselindicated that they might seek injunctive relief to return such payments or tohold them in escrow pending a judgment in this lawsuit. Plaintiffs’ complaintalso contains a fraudulent conveyance claim but seeks no specific relief withrespect to that claim. In May 2005, the judge assigned to the case issueda ruling allowing limited discovery on the issues of arbitration, personaljurisdiction and class certification. Arguments on defendants’ motions todismiss and/or compel arbitration and plaintiff’s motion for class certificationwere held in October and November 2005, and the parties are waiting for aruling on these motions. An adverse ruling in this case could have a materialadverse effect on the Company’s results of operations and financial condition,including possibly forcing the Company to cease its operations in NorthCarolina. In addition, in September 2004, Republic filed an action infederal court in North Carolina against the three plaintiffs who have sued theCompany, seeking a declaratory judgment that all disputes their customers haveshould be submitted to arbitration and an injunction preventing the plaintiffsfrom pursuing disputes in a non-arbitral forum. A motion to dismissRepublic’s lawsuit was granted in February 2005, on the grounds thatRepublic lacks standing. Republic subsequently filed a motion to alter or amendthat decision and for reconsideration, which was denied. Republic has filed anappeal of these decisions to the U.S. Court of Appeals for the Fourth Circuit.

·       OnAugust 6, 2004, Tahisha King and James E. Strong, who were customers ofBankWest, the lending bank for whom the Company marketed, processed andserviced payday cash advances in Georgia, filed a putative class action lawsuitin the State Court of Cobb County, Georgia against the Company, its subsidiaryin Georgia, William M. Webster, IV and several of the Company’s unnamedofficers, directors, owners and “stakeholders,” alleging many different causesof action, most notably that the Company made illegal payday loans in Georgiain violation of Georgia’s usury law, the Georgia Industrial Loan Act andGeorgia’s Racketeer Influenced and Corrupt Organizations Act. The complaintalleges that BankWest was not the “true lender” on the loans that the Companymarketed, processed and serviced for BankWest in Georgia and that the Companywas the “de facto” lender. The complaint seeks compensatory damages, attorneys’fees, punitive damages and the trebling of any compensatory damages. TheCompany has removed the case to the U.S. District Court for the NorthernDistrict of Georgia, and filed an answer denying the allegations and assertingthe defense of arbitration as well as other defenses. The plaintiffs filed amotion in September 2004 to remand the case to Georgia state court towhich the Company responded. Also in September 2004, the Company filed anaction in the U.S. District Court for the Northern District of Georgia againstthe Georgia class action plaintiffs seeking a declaratory judgment that alldisputes relating to the loans by BankWest should be submitted to arbitrationand that plaintiffs should be prohibited from pursuing loan related disputes ina non-arbitral forum. In December 2004, the court indicated itsintention to place the Georgia cases on hold until the Eleventh Circuit issuedits ruling in *BankWest vs. Baker*, whichchallenged the constitutionality of Georgia’s payday cash advance law, and *Jenkins vs. First American*, which involved theenforceability of an arbitration clause similar to the one at issue in theCompany’s Georgia case. In February 2005, the Eleventh Circuit held in theJenkins case that the arbitration clause was enforceable and binding on theplaintiffs. In March 2005, the court in the King and Strong case issued aformal opinion indicating that it was staying that case until the EleventhCircuit issued its decision in *BankWest vs. Baker*.After the Eleventh Circuit issued its ruling upholding the District Court’sorder in *BankWest vs. Baker*, the court in theKing and Strong case issued a scheduling order and the 

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parties filed briefsregarding the Eleventh Circuit’s opinion. The Court has yet to schedule ahearing with respect to those briefs or issue a subsequent order.

The Company is involved in another case in Georgiathat, although not a class action lawsuit, contains essentially the sameallegations as the Tahisha King and James Strong case. On March 10, 2003,Angela Glasscock, a customer of BankWest, filed an adversary proceeding in theU.S. Bankruptcy Court for the Southern District of Georgia alleging that theCompany’s subsidiary in Georgia was making payday cash advances in Georgia inviolation of the Georgia Industrial Loan Act. The Company and BankWest filed amotion for summary judgment, which was granted in September 2005. In itsholding, the court ruled that BankWest, not the Company, was the “true lender.”Plaintiffs have filed a notice of appeal of this ruling. Although the amount incontroversy in the case is only $350, the underlying claims of Ms. Glasscock,if validated by the appellate court, could serve as a basis for future claimsagainst the Company in Georgia. 

The Company and certain of its officers, directors andemployees are also defendants in two putative class-action lawsuitscommenced by three of the Company’s former customers, Gerald and Wendy Bettsand Donna Reuter, in Florida. The first putative class action was filed by Ms. Bettsand Ms. Reuter in February 2001 in the Circuit Court of Palm BeachCounty against the Company’s subsidiary, McKenzie Check Advance of Florida, LLCand certain other parties. This lawsuit alleges that the Company engaged inunfair and deceptive trade practices and violated the Florida criminal usurystatute, the Florida Consumer Finance Act, and Florida’s Racketeer Influencedand Corrupt Organizations Act. The suit seeks unspecified damages, and theCompany could be required to refund fees and/or interest collected, refund theprincipal amount of payday cash advances, pay multiple damages and pay othermonetary penalties. The Company successfully moved to have Ms. Reuter’scase sent to arbitration and was awarded summary judgment as to Ms. Betts’sclaims. The arbitration order in Ms. Reuter’s case is currently on appealto the Florida Supreme Court and the summary judgment order in Ms. Betts’scase was reversed in August 2004 by Florida’s Fourth District Court ofAppeals. The Company is appealing to the Florida Supreme Court the FourthDistrict Court of Appeals’ ruling, and the parties are awaiting a ruling fromthe Florida Supreme Court. In May 2005, the Florida Supreme Court issuedan order requesting briefing as to whether the Florida Supreme Court shouldsummarily quash the decision ordering arbitration in light of another FloridaSupreme Court decision on arbitration entitled *Cardegna v.Buckeye Check Cashing, Inc.*, which held that a substantiallysimilar arbitration agreement was unenforceable. In June 2005, the U.S. SupremeCourt granted a writ of certiorari in the Cardegna case, and will review thecase in its 2005-06 term. Consequently, this case against the Company has beenstayed pending the U.S. Supreme Court review of the Florida Supreme Court’sdecision in the Cardegna case. 

A second Florida lawsuit was filed in August 2004in the Circuit Court of Palm Beach County by Mr. Betts and Ms. Reuteragainst the Company, its subsidiary in Florida and officers and directors ofthe subsidiary. The allegations are nearly identical to those alleged in thelawsuit discussed in the preceding paragraph. The Company has filed motions todismiss, to stay the proceedings pending determination of dispositive actionsby the Florida Supreme Court in the original Betts and Reuter case, and tocompel arbitration. Proceedings in this case have been stayed pending thedisposition of the original Betts and Reuter case. 

In August 2004, the North Carolina AttorneyGeneral’s Office in conjunction with the Commissioner of Banks for NorthCarolina issued a subpoena to the Company to produce documents, respond towritten questions and have a corporate representative appear for a depositionregarding the relationship between the Company’s North Carolina subsidiary andRepublic. The Company believes the primary purpose of the investigation is todetermine whether the Company’s operations in North Carolina are in compliancewith North Carolina law. The Company has cooperated with the investigation. TheAttorney General for North Carolina as well as the class action plaintiffsin the North Carolina class action case have moved to intervene and participatein this matter. The Attorney General was granted the right to intervene andparticipate, and the class action plaintiffs were granted the right to submitan amicus brief. The parties 

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have submitted theirbriefs and evidence and are awaiting the Commissioner’s findings. During thecourse of the proceeding, the Commissioner issued several pre-hearing ordersthat clarified the scope of discovery and eliminated the possibility ofretrospective relief. However, it is possible that the North Carolina AttorneyGeneral or the Commissioner of Banks for North Carolina may make adetermination or finding that is adverse to the Company’s business operationsin the state. Specifically, the North Carolina Attorney General andCommissioner of Banks potentially could issue an injunction or issue a ceaseand desist order based on the Consumer Finance Act. This could result in theimposition of fines and the alteration or cessation of the Company’s use of theagency business model in North Carolina. All North Carolina centers currentlyoperate under the agency business model. On September 15, 2005, thelending bank for which the Company markets, processes and services payday cashadvances and installment loans in its 117 centers in North Carolinatemporarily suspended its payday cash advance and installment loan originations.Net revenues from the Company’s North Carolina operations were $6.5 million,or 5.3% of the Company’s net revenues, and $4.1 million, or 3.0% of theCompany’s net revenues, for the three months ended September 30, 2004 and2005, respectively. Net revenues from the Company’s North Carolina operationswere $19.2 million, or 5.5% of the Company’s net revenues, and $17.4 million,or 4.5% of the Company’s net revenues, for the nine months ended September 30,2004 and 2005, respectively. The Company estimates that it would cost, as of September 30,2005, approximately $3.1 million (including lease cancellation costs of approximately$0.6 million, the charge-off of undepreciated cost of assets ofapproximately $1.2 million and other shut-down costs ofapproximately $1.3 million) if the Company is required to shut down itsNorth Carolina operations completely. 

In addition to the casesdiscussed above, the Company is also involved in other litigation andadministrative proceedings. This litigation includes employee claims forworkers’ compensation, wrongful termination, harassment, discrimination,payment of wages due and customer claims relating to collection practices andviolations of state and/or federal consumer protection laws. The consequencesof an adverse ruling in any current or future litigation or proceeding couldhave a material adverse effect on the Company’s results of operations and financialcondition. The amount of loss, if any, cannot be reasonably estimated. 

**8.   Capital Stock**

On May 4, 2005, the Company announced that itsBoard of Directors had approved a program authorizing the repurchase by theCompany of up to $50 million of its currently outstanding common stock. Duringthe three and nine months ended September 30, 2005, the Companyrepurchased, pursuant to its stock repurchase program, 520,958 and 888,158shares of its common stock, respectively, at a cost of approximately $7.0 millionand $11.4 million, respectively.

During the three and nine months ended September 30,2005, the Company cancelled 13,333 and 16,666 shares, respectively, of unvestedrestricted stock.

In 2004, the Companyadopted Statement of Financial Accounting Standards No. 123 (Revised),Share-Based Payment (“SFAS 123(R)”). Accordingly, the Company measures thecost of its share-based employee compensation at fair value and recognizes suchcost in the financial statements over the requisite service period.

In August 2005, the Company granted to its newPresident and Chief Executive Officer options to purchase 250,000 shares ofcommon stock in the Company. The stock options granted vest ratably over afive-year period and expire ten years from the date of grant. The stock optionswere granted with an exercise price equal to the market value of the Company’scommon stock on the date of grant. 

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Asummary of the Company’s stock option activity and weighted average exerciseprices follows:

| ** **                        | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
|-----------------------------------|------------|-------------|------------|-------------------------|------------|
| Outstanding,  beginning of period |       | —      |       |                    | —     |   |   |
| Granted                           |       | 250,000     |       |                    | $          | 13.83 |   |   |
| Purchased                         |       | —      |       |                    | —     |   |   |
| Forfeited                         |       | —      |       |                    | —     |   |   |
| Outstanding, end  of period       |       | 250,000     |       |                    | $          | 13.83 |   |   |
| Options exercisable               |       | —      |       |                    | —     |   |   |
| Shares of stock  outstanding      |       | 83,053,446  |       |                    |       |   |   |

 

The weighted-average fairvalue of the options granted was $5.53 per option and was estimated on the dateof grant using the Black-Scholes option pricing model using the followingassumptions: dividend yield of 2.6%, risk free interest rate of 3.94%, expectedvolatility of 51% and an expected life of 5.41 years. Compensation expense forthe three months and nine months ended September 30, 2005 for these stockoptions was approximately $23,000.

**9.   Transactionswith Variable Interest Entity**

Beginning in July 2005, the Company ceasedconducting business under the agency business model in its 208 centers inTexas, and began conducting business in those centers through a wholly ownedsubsidiary registered as a Credit Services Organization (“CSO”) under Texaslaw. As a CSO, the Company offers a fee-based credit services package to assistcustomers in trying to improve their credit and in obtaining an extension ofconsumer credit through an unaffiliated third-party lender. In connection withcommencing operations as a CSO in Texas, the Company has entered into a creditservices agreement (“CSO Agreement”) with an unaffiliated third-party lender.The CSO Agreement governs the terms by which the Company refers customers inTexas to that lender, on a non-exclusive basis, for a possible extension ofcredit, processes loan applications and commits to reimburse the lender for anyloans or related fees that are not collected from such customers.

Under the CSO model, the third-party lender determineswhether to approve the loan and establishes all of the loan underwritingcriteria. All of the terms, conditions and features of the loan agreementsbetween the lender and the customers are determined by the lender. The customerwrites a personal check payable to the lender in the amount of the loan,including interest for the anticipated duration of the loan and the CSO fee,which the Company holds on behalf of the lender pending repayment of the loan.Under the CSO Agreement, the Company agrees to reimburse the lender for thefull amount of the loan and all related fees that are not paid by thecustomers.

When the loan becomes due, the customer returns to theCSO center to repay the loan, the Company returns the customer’s check, and theCompany deposits the loan payment in the lender’s account. If the customer doesnot return to the CSO center to repay the loan, the Company may then begincollection efforts to obtain from the customer payment of the loan and any applicablelate and non-sufficient funds (“NSF”) fees. If the Company is unsuccessful incollecting any payments for the lender, the Company will reimburse the lender,and then may continue its collection efforts with respect to all amounts due bythe customer. Under the CSO Agreement, the Company is contractually obligatedfor all losses incurred by the lender with respect to loans it makes tocustomers referred by the Company.

The Company has determined that the third-partylender’s subsidiary is a variable interest entity (“VIE”) under FIN 46R.The Company has neither an equity interest nor voting rights in the lender’ssubsidiary and has no input into the management of the lender’s subsidiary.However, the Company was determined to be the primary beneficiary of the VIE,due primarily to the fact that the third-party lender 

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was created for theexclusive purpose of offering loans to qualified customers referred by theCompany, and the Company has committed to reimburse the lender for the fullamount of the loans and all related fees that are not paid by the customers. Asa result, the Company has consolidated the lender’s subsidiary as of September30, 2005.

The impact of the consolidation of this VIE on theCompany’s September 30, 2005 consolidated balance sheet was to increase cashand cash equivalents by approximately $2.9 million, increase advances andfees receivable, net by approximately $11.0 million, increase accruedliabilities by approximately $15,000 and increase non-controlling interest in variableinterest entity by $13.9 million. The impact of the consolidation of thisVIE on the Company’s consolidated statements of income for the three months andnine months ended September 30, 2005 was to increase net revenues byapproximately $0.6 million and increase other center expenses byapproximately $0.1 million, the net effect of which was an increase inincome of consolidated variable interest entity of approximately $0.5 million.

**10.   Subsequent Events**

Subsequent to September 30, 2005, the Companyrepurchased 1,039,475 shares of its common stock pursuant to its stockrepurchase program at a cost of approximately $13.8 million.

On October 27, 2005, the Company’s Board ofDirectors declared a cash dividend of $0.11 per share of common stock, payableon December 9, 2005 to shareholders of record on November 28, 2005.

On October 27, 2005, the Company granted to itsnew President and Chief Executive Officer, a nonqualified stock option topurchase 700,000 shares of the Company’s common stock at an exercise price of$12.11 per share, and granted him 250,000 shares of restricted commonstock. The options and the restricted shares vest in eight equal annualinstallments beginning on the first anniversary of the grant and are subject tovarious terms and restrictions as specified in the related Nonqualified StockOption Agreement and Restricted Stock Agreement. These stock options andrestricted shares are outside the terms of the Company’s existing 2004 OmnibusStock Plan (“Stock Plan”).

Additionally, on October 27, 2005, the Companygranted to its Executive Vice President and Chief Financial Officer, anonqualified stock option to purchase 250,000 shares of the Company’s commonstock at an exercise price of $12.11 per share. The options vest in eight equalannual installments beginning on the first anniversary of the grant and arewithin the Company’s Stock Plan.

The weighted-average fair value of the 950,000 optionsgranted on October 27, 2005 was $4.73 per option. The fair value wasestimated on the date of grant using the Black-Scholes option pricing modelusing the following assumptions: dividend yield of 3.6%, risk-free interestrate of 4.48%, expected volatility of 50% and an expected life of 6.86 years.These options expire ten years from the date of grant.

On October 31, 2005, the Company completed thesale of one of its aircraft. As a result of this transaction, the Companyrecorded an impairment of the carrying value of the aircraft for approximately$1.5 million during the quarter ended September 30, 2005. For taxpurposes, the Company will recognize a gain of approximately $5.8 millionin the fourth quarter of 2005.

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**ITEM 2.**                MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our consolidated financial statements andthe related notes in “Item 1. Financial Statements.” This discussioncontains forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated by theseforward-looking statements. Please see “—Risk Factors” and “—Forward-LookingStatements” for discussions of the uncertainties, risks and assumptionsassociated with these statements.*

**Overview**

Headquartered in Spartanburg, South Carolina, we arethe largest provider of payday cash advance services in the United States asmeasured by the number of centers operated. Our centers provide, directly or onbehalf of a lending bank, small-denomination, short-term, unsecured cashadvances that are typically due on the customers’ next payday. As of September 30,2005, we operated 2,598 centers in 37 states.

In most states in which we conduct business, we makepayday cash advances directly to our customers (which we refer to as thestandard business model). In other states in which we conduct business, we actas a marketing, processing and servicing agent through our centers for FDICinsured, state-chartered banks that make payday cash advances andinstallment loans to their customers pursuant to the authority of the laws ofthe states in which they are located and federal interstate banking laws,regulations and guidelines (which we refer to as the agency business model). Inthe agency business model, we refer to the banks for which we act as agent asthe lending banks.

We ceased conducting business under the agencybusiness model in our 208 centers in Texas in the beginning of July 2005and our 86 centers in Michigan at the end of June 2005, and beganconducting business in our Texas centers as a Credit Services Organization (“CSO”),and in our Michigan centers as a provider of check-cashing and deferredpresentment services. As a CSO, we offer a fee-based credit services package toassist customers in trying to improve their credit and in obtaining anextension of consumer credit through an unaffiliated third-party lender. Ouroperations in Michigan of check-cashing services are similar to our operationsunder our standard business model. The amount of the fee charged by us variesbased on whether the check cashed is a government check, a payroll check or apersonal check, and for a personal check we charge interest for the period oftime that we agree with the customer to hold the check before presenting it tothe bank. Beginning in late June 2005, we have included our Michigancenters, in which we now offer check-cashing services, in our standard businessmodel. As of July 2005, we have also included our Texas centers, in which wenow operate as a CSO, in our standard business model.

As of September 30, 2005, we were making paydaycash advances directly to customers under the standard business model in 2,350of our 2,598 centers in 34 states, including our now 87 centers in Michigan,and serving as agent for the lending banks under the agency business model inour 248 centers located in Arkansas, North Carolina and Pennsylvania. On September 15, 2005, the lending bank forwhich we market, process and service payday cash advances and installment loansin our 117 centers in North Carolina temporarily suspended its payday cashadvance and installment loan originations. We continue to service all paydaycash advances and installment loans that are currently outstanding in NorthCarolina.

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We have historicallyderived our revenues from (1) fees and/or interest paid to us directly byour customers under the standard business model, including, beginning in July 2005,in our capacity as a CSO, and (2) marketing, processing and servicing feespaid to us by the lending banks under the agency business model. For the paydaycash advances and installment loans made and funded by the lending banks fromtheir own bank accounts and marketed, processed and serviced by us under theagency business model, all payments of principal and fees and/or interest paidby customers are deposited directly to the account of the respective lendingbank. We in turn are paid a marketing, processing and servicing fee by thelending bank after we send it an invoice. Our total revenues for the three andnine month periods ended September 30, 2004 and 2005 consisted of (inmillions):

| ** **                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                                 | ** ** | **2005**                                                | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **Dollars**                                              | ** ** | **%**                                                   | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest charged to customers   |       | $                                                        | 115.7      |                                                    | 76.2       |   | $ | 153.1 |   | 88.7 |   | $ | 311.4 |   | 75.9 |   | $ | 373.0 |   | 80.9 |   |
| Marketing, processing and servicing fees |       | 36.2                                                     |       | 23.8                                                    |       | 19.5 |   | 11.3 |   | 99.1 |   | 24.1 |   | 88.3 |   | 19.1 |   |
| Total revenues                           |       | $                                                        | 151.9      |                                                    | 100.0      |   | $ | 172.6 |   | 100.0 |   | $ | 410.5 |   | 100.0 |   | $ | 461.3 |   | 100.0 |   |

 

Our expenses relate primarily to the operation of ourcenters. These expenses include salaries and related payroll costs, occupancyexpense related to our leased centers, center depreciation expense, advertisingexpense and other center expenses that consist principally of costs related tocenter openings and closings, communications, delivery, supplies, travel, bankcharges, various compliance and collection costs and costs associated withtheft.

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*Centers.  *The following table liststhe number of centers by state at December 31, 2004 and September 30,2005:

| **State**             | ** ** | ** ** | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|
| Alabama               |       |       | 127        |                        |       |                         | 139        |   |   |
| Arizona               |       |       | 49         |                        |       |                         | 51         |   |   |
| Arkansas(1)           |       |       | 30         |                        |       |                         | 30         |   |   |
| California            |       |       | 290        |                        |       |                         | 293        |   |   |
| Colorado              |       |       | 56         |                        |       |                         | 60         |   |   |
| Delaware              |       |       | 10         |                        |       |                         | 13         |   |   |
| Florida               |       |       | 173        |                        |       |                         | 187        |   |   |
| Idaho                 |       |       | 8          |                        |       |                         | 12         |   |   |
| Illinois              |       |       | 61         |                        |       |                         | 61         |   |   |
| Indiana               |       |       | 91         |                        |       |                         | 111        |   |   |
| Iowa                  |       |       | 21         |                        |       |                         | 30         |   |   |
| Kansas                |       |       | —     |                        |       |                         | 31         |   |   |
| Kentucky              |       |       | 33         |                        |       |                         | 38         |   |   |
| Louisiana             |       |       | 64         |                        |       |                         | 71         |   |   |
| Michigan(1)           |       |       | 87         |                        |       |                         | 87         |   |   |
| Mississippi           |       |       | 51         |                        |       |                         | 53         |   |   |
| Missouri              |       |       | 62         |                        |       |                         | 67         |   |   |
| Montana               |       |       | 8          |                        |       |                         | 8          |   |   |
| Nebraska              |       |       | 25         |                        |       |                         | 27         |   |   |
| Nevada                |       |       | 10         |                        |       |                         | 10         |   |   |
| New Hampshire         |       |       | 15         |                        |       |                         | 16         |   |   |
| New Mexico            |       |       | 12         |                        |       |                         | 12         |   |   |
| North  Carolina(1)(2) |       |       | 118        |                        |       |                         | 117        |   |   |
| North Dakota          |       |       | —     |                        |       |                         | 4          |   |   |
| Ohio                  |       |       | 178        |                        |       |                         | 196        |   |   |
| Oklahoma              |       |       | 68         |                        |       |                         | 67         |   |   |
| Oregon                |       |       | 42         |                        |       |                         | 50         |   |   |
| Pennsylvania(1)       |       |       | 101        |                        |       |                         | 101        |   |   |
| Rhode Island          |       |       | —     |                        |       |                         | 3          |   |   |
| South Carolina        |       |       | 105        |                        |       |                         | 109        |   |   |
| South Dakota          |       |       | 10         |                        |       |                         | 10         |   |   |
| Tennessee             |       |       | 59         |                        |       |                         | 58         |   |   |
| Texas(1)              |       |       | 204        |                        |       |                         | 208        |   |   |
| Virginia              |       |       | 109        |                        |       |                         | 115        |   |   |
| Washington            |       |       | 90         |                        |       |                         | 106        |   |   |
| Wisconsin             |       |       | 37         |                        |       |                         | 43         |   |   |
| Wyoming               |       |       | 4          |                        |       |                         | 4          |   |   |
| Total                 |       |       | 2,408      |                        |       |                         | 2,598      |   |   |

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(1)          Wehave operated under the agency business model in Arkansas and North Carolinasince April 14, 2001 and September 12, 2001, respectively. Prior tothese dates, we operated in Arkansas and North Carolina under the standardbusiness model. We have operated in Pennsylvania only under the agency businessmodel. We operated in Texas under the agency business model until July 2005,when we started operating as a CSO. We have operated in Michigan under thestandard business model since June 27, 2005. Prior to this date, weoperated in Michigan under the agency business model.

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(2)          Weare currently facing certain litigation and regulatory proceedings in NorthCarolina that may ultimately cause us to stop acting as marketing, processingand servicing agent for a lending bank in that state. On September 15,2005, the lending bank for which we market, process and service payday cashadvances and installment loans in our 117 centers in North Carolina temporarilysuspended its payday cash advance and installment loan originations. Wecontinue to service all payday cash advances and installment loans that arecurrently outstanding in North Carolina.

*New               centers.  *Weopened 87 and 82 new centers during the three months ended September 30,2004 and 2005, respectively. We opened 346 and 208 new centers during the ninemonths ended September 30, 2004 and 2005, respectively.

*Closed centers.  *Weclosed 7 (including 2 in Georgia) and 93 (including 86 in Georgia) centersduring the three months ended September 30, 2004 and 2005, respectively. Weclosed 8 (including 2 in Georgia) and 107 (including 86 in Georgia) centersduring the nine months ended September 30, 2004 and 2005, respectively. Theexpenses related to closing centers typically include the undepreciated costsof fixtures and signage that cannot be moved and reused at another center,moving costs, severance payments and any lease cancellation costs. We recordedexpenses related to closed centers of approximately $0.1 million and $0.7 millionin the three months ended September 30, 2004 and 2005, respectively, andapproximately $0.1 million and $1.0 million in the nine months ended September 30,2004 and 2005, respectively.

In May 2004, a Georgia law became effective thatprohibits payday cash advance services in the state and restricts our abilityto act as marketing, processing and servicing agent for a lending bank in thestate. See “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 7. Commitments and Contingencies.”Accordingly, we suspended operations at our 89 (all of which were subsequentlyclosed) centers in Georgia. Net revenues from our Georgia operations were approximately$5.1 million, or 1.4% of the Company’s net revenues, for the nine monthsended September 30, 2004. Our Georgia operations have not generatedrevenue since operations were ceased in May 2004. During the three monthsended September 30, 2005, we permanently closed 86 centers in Georgia. Thelease cancellation and other closing costs were approximately $0.4 million.

Thefollowing is a summary of the financial information for our operations inGeorgia for the three and nine months ended September 30, 2004 and 2005(in thousands):

| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Georgia  Revenues:**                   |       |                                                 |       |                                                |       |   |   |   |   |
| Marketing, processing and servicing fees |       | $                                                    | —     |                                                | $          | — |   | $ | 7,102 |   | $ | — |   |
| Provision for agency bank losses         |       | (545                                                 | )          | —                                              |       | (2,008 | ) | — |   |
| Net revenues                             |       | (545                                                 | )          | —                                              |       | 5,094 |   | — |   |
| **Georgia  Center Expenses:**            |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and related payroll costs       |       | 763                                                  |       | 43                                                  |       | 3,855 |   | 216 |   |
| Occupancy costs                          |       | 603                                                  |       | 470                                                 |       | 1,802 |   | 1,543 |   |
| Center depreciation expense              |       | 159                                                  |       | —                                              |       | 483 |   | — |   |
| Advertising expense                      |       | —                                               |       | —                                              |       | 523 |   | — |   |
| Other center expenses                    |       | 233                                                  |       | 652                                                 |       | 1,028 |   | 871 |   |
| Total center expenses                    |       | 1,758                                                |       | 1,165                                               |       | 7,691 |   | 2,630 |   |
| **Georgia Center Gross  Profit/(Loss)**  |       | $                                                    | (2,303     | )                                                   | $          | (1,165 | ) | $ | (2,597 | ) | $ | (2,630 | ) |

 

On August 26, 2004, the North Carolina AttorneyGeneral’s office, in conjunction with the Commissioner of Banks for NorthCarolina, issued us a subpoena to produce documents, respond to writtenquestions and have a corporate representative appear for testimony regardingthe relationship 

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between our North Carolinasubsidiary and Republic, the lending bank for whom we acted as marketing,processing and servicing agent in North Carolina, and has since commenced aNotice of Hearing to determine if our activities in North Carolina are incontravention to North Carolina law. See “Item 1. Financial Statements—Notesto Interim Unaudited Consolidated Financial Statements—Note 7. Commitmentsand Contingencies.” All North Carolina centers currently operate under theagency business model. However, on September 15, 2005, the lending bankfor which we market, process and service payday cash advances and installmentloans in our 117 centers in North Carolina temporarily suspended itspayday cash advance and installment loan originations. We continue to serviceall payday cash advances and installment loans that are currently outstandingin North Carolina.

Net revenues from our North Carolina operations were$6.5 million, or 5.3% of our net revenues, and $4.1 million, or 3.0%of our net revenues, for the three months ended September 30, 2004 and2005, respectively. Net revenues from our North Carolina operations were $19.2 million,or 5.5% of our net revenues, and $17.4 million, or 4.5% of our netrevenues, for the nine months ended September 30, 2004 and 2005,respectively. We estimate that it would cost, as of September 30, 2005,approximately $3.1 million (including lease cancellation costs of approximately$0.6 million, the charge-off of undepreciated cost of assets ofapproximately $1.2 million and other shut-down costs ofapproximately $1.3 million) if we are required to shut down our NorthCarolina operations completely as a result of this investigation.

Thefollowing is a summary of financial information for our operations in NorthCarolina for the three and nine months ended September 30, 2004 and 2005(in thousands):

| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| **North  Carolina Revenues:**            |       |                                                 |       |                                                |       |   |   |   |   |
| Marketing, processing and servicing fees |       | $                                                    | 8,176      |                                                | $          | 6,096 |   | $ | 22,305 |   | $ | 20,976 |   |
| Provision for agency bank losses         |       | (1,694                                               | )          | (2,036                                              | )          | (3,146 | ) | (3,548 | ) |
| Net revenues                             |       | 6,482                                                |       | 4,060                                               |       | 19,159 |   | 17,428 |   |
| **North  Carolina Center Expenses:**     |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and related payroll costs       |       | 2,042                                                |       | 2,615                                               |       | 6,529 |   | 7,084 |   |
| Occupancy costs                          |       | 865                                                  |       | 851                                                 |       | 2,558 |   | 2,531 |   |
| Center depreciation expense              |       | 115                                                  |       | 125                                                 |       | 364 |   | 359 |   |
| Advertising expense                      |       | 312                                                  |       | 344                                                 |       | 898 |   | 917 |   |
| Other center expenses                    |       | 476                                                  |       | 530                                                 |       | 1,390 |   | 1,378 |   |
| Total center expenses                    |       | 3,810                                                |       | 4,465                                               |       | 11,739 |   | 12,269 |   |
| **North Carolina Center Gross  Profit**  |       | $                                                    | 2,672      |                                                | $          | (405 | ) | $ | 7,420 |   | $ | 5,159 |   |

 

**Revised FDIC Guidance**

On March 1, 2005, the FDIC issued RevisedGuidance (“Revised Guidance”) to FDIC insured institutions that offer paydaycash advances, including the lending banks for which we then acted as an agent.The Revised Guidance limits the frequency of customer usage of payday cashadvances and limits the period that a customer may have payday cash advancesoutstanding from any lender to an aggregate of three months during the previous12-month period. Based on an average term of approximately 15 days,this effectively limits the number of payday cash advances that may be made toany customer to six advances during any 12-month period. All payday cashadvances made from any lender would count against this limit. In response tothe Revised Guidance, lending banks are offering alternative longer-term creditproducts, which have generally taken the form of installment loans.

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In late June and early July 2005, weunderwent several operational changes in the five states where we conductedbusiness under the agency business model as a result of the Revised Guidance.These changes affected our operations in Arkansas, Michigan, North Carolina,Pennsylvania and Texas.

We historically operated in Pennsylvania as amarketing, processing and servicing agent for BankWest, Inc., a SouthDakota bank (“BankWest”), in Arkansas as a marketing, processing and servicingagent for Venture Bank, a Washington bank (“Venture”), and in North Carolina asa marketing, processing, and servicing agent for Republic Bank &Trust, a Kentucky bank (“Republic”). Effective July 1, 2005, we amendedour marketing, processing and servicing agreement (‘MP&S Agreement”) withBankWest with respect to Pennsylvania, primarily to allow us to also act as amarketing, processing and servicing agent for a new installment loan productoffered by BankWest in our 101 centers in Pennsylvania. On June 30, 2005,we terminated our MP&S Agreement with Venture and we entered into a newMP&S Agreement with First Fidelity Bank, a South Dakota bank (“FirstFidelity Bank”), to operate as a marketing, processing and servicing agent forpayday cash advances and installment loans made by First Fidelity Bank in our30 centers in Arkansas. Effective July 6, 2005, we terminated our MP&SAgreement with Republic and entered into a new MP&S Agreement with FirstFidelity Bank to operate as a marketing, processing and servicing agent forpayday cash advances and installment loans made by First Fidelity Bank in our117 centers in North Carolina. On September 15,2005, First Fidelity Bank temporarily suspended its payday cash advance andinstallment loan originations in North Carolina. We continue to service allpayday cash advances and installment loans that are currently outstanding inNorth Carolina.

Pursuant to our MP&S Agreements with FirstFidelity Bank, First Fidelity Bank is contractually obligated for all losses onpayday cash advances and installment loans to its customers in Arkansas andNorth Carolina. Under our terminated MP&S Agreements with Venture andRepublic, those lending banks were contractually obligated for the losses ontheir payday cash advances in an amount established as a percentage of the feesand interest charged by the lending banks to their customers. Therefore, underthe terminated agreements with Venture and Republic, we were obligated ifactual payday cash advance losses exceeded the respective lending bank’scontractual obligations. We remain obligated in North Carolina and Arkansas forthe existing advances and fees receivable in excess of the prior lending bank’scontractual obligations.

Under the terms of the new MP&S Agreements withBankWest and First Fidelity Bank, payday cash advances are offered inPennsylvania, Arkansas and North Carolina (prior to the suspension) by thelending banks within the limits of the Revised Guidance. In response to theRevised Guidance, the lending banks also offer installment loans to theircustomers for which we also act as marketing, processing and servicing agent.The installment loans generally have bi-weekly payments amortized over a three-or four-month period. The lending banks establish all of the underwritingcriteria and utilize third-party credit scores to determine whether to approvean installment loan for a customer. All of the terms, conditions and featuresof the installment loan agreements between the lending banks and theircustomers are determined by the lending banks. The lending banks fund allloans, and we do not expect to purchase or participate in the loans. Wedeposit, on behalf of the lending banks, all repayments of installment loans,interest and fees in the lending banks’ accounts, and the lending banks pay tous our marketing, processing and servicing fees for the installment loans.

Depending on the lending bank, fees charged to thecustomer for the installment loan product range from $55 to $65 per $100advance plus an additional origination fee of $25 to $30 per transaction.Although the total fee is higher than for a payday cash advance, total revenuesare reduced because of the longer duration of the installment product. The RevisedGuidance limits the number of payday cash advances that may be made andrequires more stringent underwriting standards to qualify for the installmentloan. Accordingly, we generally expect our marketing, processing and servicingfee to decrease by approximately 20% to 40% in the states where we continue tooperate under the agency business model. It is difficult for us to predict,however, what those revenues may be given the numerous uncertainties 

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associated with predictingconsumer demand for a new product; with anticipating the effect of newunderwriting standards for that product by the lending banks; and withmarketing, processing and servicing a new product. Arkansas, North Carolina and Pennsylvania,the states in which we operated under the agency business model during thequarter ended September 30, 2005, represented an aggregate ofapproximately 11% and 13% of our total revenues for the three and nine-monthperiods ended September 30, 2005, respectively. Going forward, we expectthat less than 10% of our revenues will be derived from the agency businessmodel in these three states.

Informationfor our centers operating under the agency business model for the three andnine months ended, and as of, September 30, 2004 and 2005 was as follows(in thousands, except centers):

| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2004(1)(2)**                                       | ** ** | **2005(2)**                                         | ** ** | **2004(1)(2)** | ** ** | **2005(2)** | ** ** |
| **Agency Business Model Revenues:**         |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| Marketing, processing and servicing fees    |       |                                                 | $          | 36,208                                              |       |   | $ | 19,476 |   | $ | 99,091 |   | $ | 88,327 |   |
| Provision for agency bank losses            |       |                                                 | (6,149     | )                                                   |       | (1,636 | ) | (13,709 | ) | (10,732 | ) |
| Net revenues                                |       |                                                 | 30,059     |                                                |       | 17,840 |   | 85,382 |   | 77,595 |   |
| **Agency Business Model Center  Expenses:** |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| Salaries and related payroll costs          |       |                                                 | 9,871      |                                                |       | 5,114 |   | 31,427 |   | 24,803 |   |
| Occupancy costs                             |       |                                                 | 4,812      |                                                |       | 2,326 |   | 13,722 |   | 11,928 |   |
| Center depreciation expense                 |       |                                                 | 974        |                                                |       | 290 |   | 2,882 |   | 2,050 |   |
| Advertising expense                         |       |                                                 | 1,142      |                                                |       | 938 |   | 4,681 |   | 3,764 |   |
| Other center expenses                       |       |                                                 | 2,262      |                                                |       | 2,129 |   | 7,254 |   | 6,687 |   |
| Total center expenses                       |       |                                                 | 19,061     |                                                |       | 10,797 |   | 59,966 |   | 49,232 |   |
| **Agency Business Model Gross  Profit**     |       |                                                 | $          | 10,998                                              |       |   | $ | 7,043 |   | $ | 25,416 |   | $ | 28,363 |   |

 

| ** **                                 | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2004(1)(2)**         | ** ** | **2005(3)** | ** ** |
| **Centers**                                |       |                   | 619        |   |   | 248 |   |
| **Assets:**                                |       |                   |       |   |   |   |   |
| Cash                                       |       |                   | $          | 343 |   |   | $ | 5 |   |
| Accounts receivable from lending banks     |       |                   | 6,417      |   |   | 3,333 |   |
| Restricted cash                            |       |                   | 5,029      |   |   | — |   |
| Property and equipment, net                |       |                   | 11,657     |   |   | 2,537 |   |
| Goodwill                                   |       |                   | 29,773     |   |   | 13,006 |   |
| All other                                  |       |                   | 1,451      |   |   | 305 |   |
| **Total assets**                           |       |                   | $          | 54,670 |   |   | $19,186 |   |
| **Contingent  liability to lending banks** |       |                   | $          | 57,085 |   |   | $ | 17,176 |   |

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(1)          Includesthe 89 Georgia centers.

(2)          IncludesMichigan payday advance centers until they were converted to the standardbusiness model on June 27, 2005 and Texas payday advance centers untilthey were converted to the standard business model on July 7, 2005.

(3)          ExcludesMichigan payday advance centers that were converted to the standard businessmodel on June 27, 2005, and excludes Texas payday centers that wereconverted to the standard business model on July 7, 2005.

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We have historically operated in Michigan asmarketing, processing and servicing agent for First Fidelity Bank. Effective June 26,2005, we terminated our MP&S Agreement with First Fidelity Bank regardingMichigan. Under the terminated agreement, First Fidelity Bank was the lenderand recorded advances and fees receivable on its balance sheet, and FirstFidelity Bank was contractually obligated for uncollectible accounts in amountsdetermined as a percentage of fees and interest charged by First Fidelity Bankto its customers. The amount by which losses exceeded First Fidelity Bank’scontractual obligation was included on our balance sheet as an accrual forexcess bank losses. In connection with terminating the MP&S Agreement withFirst Fidelity Bank, we purchased from First Fidelity Bank its payday cashadvance accounts receivable for Michigan, for approximately $7.7 million,and First Fidelity Bank no longer has any obligations for losses with respectto those accounts.

In late June 2005, we began offering check-cashingand deferred presentment services directly to customers in our centers inMichigan. The approval process for us to provide customers with check-cashingservices in Michigan is similar to the process we use to provide payday cashadvances under our standard business model. The amount of the fee charged by usvaries based on whether the check cashed is a government check, a payroll checkor a personal check, and for a personal check we charge interest for the periodof time that we agree with the customer to hold the check before presenting itto the bank. Customers also have the opportunity to repurchase the check fromus. We expect that the profitability of our check-cashing business and averagefees, check amounts and duration for which we hold checks will be similar tothe corresponding amounts under our standard business model. Following thischange in operations, we include our Michigan centers and our check-cashingbusiness under our standard business model.

Beginning in July 2005, we ceased conductingbusiness under the agency business model in our 208 centers in Texas, and beganconducting business in those centers through a wholly owned subsidiary that hasregistered as a Credit Services Organization (“CSO”) under Texas law. As a CSO,we offer a fee-based credit services package to assist customers in trying toimprove their credit and in obtaining an extension of consumer credit through athird-party lender. In connection with commencing operations as a CSO in Texas,we have entered into a credit services agreement (“CSO Agreement”) with anunaffiliated third-party lender. The CSO Agreement governs the terms by whichwe refer customers in Texas to that lender, on a non-exclusive basis, for apossible extension of credit, process loan applications and commit to reimbursethe lender for any loans or related fees that are not collected from suchcustomers.

Under the CSO model, the third-party lender determineswhether to approve the loan and establishes all of the loan underwritingcriteria. All of the terms, conditions and features of the loan agreementsbetween the lender and the customers are determined by the lender. The customerwrites a personal check payable to the lender in the amount of the loan,including interest for the anticipated duration of the loan and the creditservices fee owed to us, which we hold on behalf of the lender pendingrepayment of the loan. We also assist customers by agreeing to reimburse thelender for the full amount of the loan and all related fees that are notcollected from the customers. If the customer has chosen the consumer-reportingoption, we report the repayment information from the lender to PaymentReporting Builds Credit, Inc. (“PRBC”), a consumer credit reporting agency.Reporting to PRBC may assist the customer in improving his or her credit if thecustomer repays the loan in accordance with its terms and if that positiverepayment is viewed favorably by users of the PRBC report. In addition, weprovide access to free financial tools, services, and information to helpcustomers with their personal finances, budgets and credit ratings.

When the loan becomes due, the customer returns to theCSO center to repay the loan and we return to the customer his or her check. Ifthe customer does not return to the CSO center to repay the loan, we may thenbegin collection efforts to obtain from the customer payment of the loan andany applicable late and non-sufficient funds (“NSF”) fees due. If we areunsuccessful in collecting the payments, we will reimburse the lender and wethen may continue our collection efforts.

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Under our prior MP&S Agreement with the lendingbank in Texas for payday cash advances, the lending bank was contractuallyobligated for uncollectible payday cash advance accounts in amounts determinedas a percentage of fees and interest charged by the lending bank to itscustomers, which historically have been sufficient to cover all lossesincurred. Under the CSO Agreement, we are contractually obligated for all lossesincurred by the lender with respect to loans it makes to customers referred byus.

Although we have notpreviously conducted business as a CSO, we expect operating results similar tothose historically generated under the agency business model. However, giventhe numerous uncertainties associated with conducting a new business,anticipating consumer demand for credit services and possible regulatorychanges that may affect credit services, it is impossible to know if the creditservices business will be successful. Following this change in operations inTexas, we include our Texas centers and our CSO services under our standardbusiness model.

**Prior S Corporation Status**

From October 1, 2001 through December 20,2004, Advance America, Cash Advance Centers, Inc. (“AACACI”) andsubstantially all of its subsidiaries (the “Subchapter S Companies”) weretreated for federal and most state income tax purposes as an S corporationunder the Internal Revenue Code and comparable state laws. As a result, the SubchapterS Companies’ earnings were taxed for federal and most state income tax purposesdirectly to AACACI’s stockholders rather than to the Subchapter S Companies. OnDecember 21, 2004, the Subchapter S Companies terminated their status as SCorporations and are now taxed as C corporations. As a result of thetermination of the Subchapter S Companies’ S corporation status, we recorded anet deferred tax liability and corresponding income tax expense on thetermination date of $8.4 million.

The termination of our Scorporation election will have an impact on our results of operations,financial condition and cash flows. Our effective income tax rate will increaseand our net income will decrease because we will once again be subject to taxeson our earnings. From a cash flow standpoint, our income tax payments willincrease, but our distributions to stockholders for the purpose of payingincome tax on our earnings will cease. We believe the combination of these twoitems will increase our cash flow because the corporate tax payments should beless than the distributions historically made to enable our stockholders to paytheir income tax on our earnings.

**CriticalAccounting Policies and Use of Estimates**

In the ordinary course of business, we have made anumber of estimates and assumptions relating to the reporting of our results ofoperations and financial condition in the preparation of our financialstatements in conformity with generally accepted accounting principles in theUnited States (“GAAP”). We evaluate these estimates on an ongoing basis,including those related to provision for doubtful accounts and agency banklosses, allowance for doubtful accounts, accrual for excess bank losses andintangible assets. We base these estimates on the information currentlyavailable to us and on various other assumptions that we believe are reasonableunder the circumstances. Actual results could vary from these estimates underdifferent assumptions or conditions.

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Webelieve that the following critical accounting policies affect the moresignificant estimates and assumptions used in the preparation of our financialstatements:

***Provision forDoubtful Accounts and Agency Bank Losses, Allowance for Doubtful Accounts andAccrual for Excess Bank Losses***

We believe the mostsignificant estimates made in the preparation of our accompanying consolidatedfinancial statements relate to the determination of:

·       anallowance for doubtful accounts for estimated probable losses for payday cashadvances under the standard business model (which is shown as a reduction inour advances and fees receivable, net, on our balance sheet), and

·       theamount we accrue for probable excess bank losses, as described below, for ourshare of the losses on payday cash advances and installment loans we market,process and service for the lending banks under the agency business model(which is reported as a current liability on our balance sheet in our accrualfor excess bank losses).

The provision for doubtful accounts and agency banklosses, allowance for doubtful accounts and accrual for excess bank losses areprimarily based upon models that analyze specific portfolio statistics and alsoreflect, to a lesser extent, management’s judgment regarding overall accuracy.The analytic models take into account several factors, including the number oftransactions customers complete, historical charge-off and recoveryrates, and economic conditions (plant closings, changes in state laws impactingadvance amounts and fees, weather related tragedies, etc.) within our markets.

The payday cashadvances and installment loans made and funded by the lending banks under theagency business model are not reflected on our balance sheet within ouradvances and fees receivable, net, because these advances are repayable solelyto the lending banks and are assets of the lending banks. Historically, all thelending banks for which we acted as an agent were contractually obligated forthe losses on payday cash advances in an amount established as a percentage ofthe fees and/or interest charged by the banks to their customers on theirpayday cash advances. Prior to July 2005, depending upon the lending bank,this percentage ranged from 8.0% to 20.0%. In aggregate, this percentage was16.7% and 7.0% for the three months ended September 30, 2004 and 2005,respectively, and 14.4% and 12.0% for the nine months ended September 30,2004 and 2005, respectively. Under the agency business model, estimated lossesconsist of:

·       thoselosses for which the lending banks are contractually obligated, and

·       anestimate of the amount by which actual losses will differ from the lendingbanks’ contractual obligations (which we refer to as provision for excess banklosses). For the three months ended September 30, 2004 and 2005, theprovision for excess bank losses was an increase in expense of approximately$0.7 million and a reduction of expense of approximately $0.2 million,respectively. For the nine months ended September 30, 2004 and 2005, theprovision for excess bank losses was a reduction of expense of approximately$1.1 million and $0.1 million, respectively.

We expect this will continue to be our policy goingforward with respect to our estimate of excess losses under our marketing,processing and servicing agreement (“MP&S Agreement”) with BankWest forPennsylvania. However, under the new MP&S Agreements with the lending bankoffering payday cash advances and installment loans in North Carolina andArkansas the lending bank is responsible for any and all losses associated withits payday cash advances and installment loans and therefore no such estimateof excess losses should be necessary with respect to our future operations inNorth Carolina and Arkansas.

The portion of payday cash advances, installment loansand fees deemed to be uncollectible is charged against the allowance fordoubtful accounts or the accrual for excess bank losses, as appropriate, and 

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subsequent recoveries, ifany, are credited to the allowance for doubtful accounts or the accrual forexcess bank losses, as appropriate.

The allowance for doubtful accounts and the accrualfor excess bank losses are determined based upon a review of historical andrecent losses on our payday cash advances and the lending banks’ payday cashadvance and installment loan portfolios. We periodically review the allowancefor doubtful accounts and the accrual for excess bank losses, with any changesreflected in current operations. The allowance for doubtful accounts andaccrual for excess bank losses are adjusted from time to time when future conditionsdiffer substantially from our assumptions used in assessing their adequacy. Actuallosses may be materially different from the recorded allowance.

Under the standard business model, unpaid payday cashadvances and the related fees and/or interest are generally charged off if acustomer does not make a payment of at least 15% of his or her outstandingbalance within 60 days of the date the check was returned by the bank fornon-sufficient funds or other reasons. Under the agency business model, unpaidpayday cash advances and the related fees and/or interest are generally chargedoff 60 days from the due date. Under the agency business model, unpaidinstallment loans and the related fees and/or interest are generally chargedoff 60 days from the deposit date if the check is returned by the bank fornon-sufficient funds or other reasons.

To estimate theallowance for doubtful accounts and accrual for excess bank losses, we use thefollowing method to determine the allowance for doubtful accounts under thestandard business model:

·       ona state-by-state basis, we apply our historical charge-off rate applicable in aparticular state for a trailing 24-month period to that state’s currentlyoutstanding payday cash advances and fees and/or interest receivable;

·       weevaluate the need for additional reserves on receivables for deposited customerchecks that are returned because of non-sufficient funds using historicalcollection patterns; and

·       weconsider the potential impact of (i) new centers within the state and (ii) specificeconomic and regulatory conditions on collections at the state and local level.

Our estimate of the accrual for excess bank lossesunder the agency business model is determined using the same method and thenreducing the result by the amount of losses for which lending banks arecontractually obligated.

To the extent historicalcredit experience is not indicative of future performance or other assumptionsused by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts and agency bank losses. As of September 30, 2005, ifaverage default rates were 5% higher or lower, the allowance for doubtfulaccounts and accrual for excess bank losses would change by approximately$2.2 million.

***Intangible Assets***

As a result of ouracquisition of the National Cash Advance group of affiliated companies in October 1999,we created approximately $143.0 million of goodwill. Due to thesignificance of goodwill and the reduction of net income that would occur ifgoodwill were impaired, we assess the impairment of our long-lived andintangible assets annually or whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors consideredimportant that could trigger an impairment review include significantunderperformance relative to historical or projected future cash flows,significant changes in the manner of use of the acquired assets or the strategyof the overall business and significant negative industry trends. To identifypotential impairment, we compare the fair value of a reporting unit with itscarrying amount, including goodwill. If the fair value of a reporting unit doesnot exceed its carrying amount, we measure the amount of impairment loss bycomparing the implied fair value of the 

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reportingunit’s goodwill with the carrying amount of that goodwill. The amount of anyimpairment would lower our net income.

***Accrued Healthcare and Workers’ Compensation Expenses***

Accrued liabilities in ourDecember 31, 2004 and September 30, 2005 financial statements includeaccruals of approximately $3.4 million and $3.5 million,respectively, for the self-insured portion of our health and dentalinsurance and approximately $3.5 million and $4.6 million,respectively, for workers’ compensation. We recognize our obligationsassociated with those benefits in the period the claim is incurred. The costsof both reported claims and claims incurred but not reported, up to specifieddeductible limits, are estimated based on historical data, current enrollment,employee statistics and other information. Our estimates and the resultingreserves are reviewed and updated periodically and any necessary adjustmentsare reflected in earnings currently. To the extent historical claims are notindicative of future claims, there are changes in enrollment or employeehistory, workers’ compensation loss development factors change or otherassumptions used by management do not prevail, our expense and related accruedliabilities could increase or decrease.

***Consolidation of Variable Interest Entity***

In January 2003,Financial Accounting Standards Board Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”), was issued. In December 2003, arevised version of Fin 46 (“FIN 46R’’)was issued. FIN 46R addresses reporting and disclosure requirements forVariable Interest Entities (“VIE”). It defines a VIE as an entity that either doesnot have equity investors with voting rights or has equity investors that donot provide sufficient financial resources for the entity to support itsactivities. FIN 46R requires consolidation of a VIE by the enterprise thathas the majority of the risks and rewards of ownership, referred to as theprimary beneficiary. It also requires additional disclosures for an enterprisethat holds a significant variable interest in a VIE, but is not the primarybeneficiary. See “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 9. Transactions with VariableInterest Entity” for the impact of adopting FIN 46R on our results ofoperations and financial condition.

***Accounting for Share-Based Employee Compensation***

In 2004, we adopted Statement of Financial AccountingStandards No. 123 (Revised), Share-Based Payment (“SFAS 123(R)”).Accordingly, we measure the cost of our share-based employee compensation atfair value and recognize such cost in the financial statements over the requisiteservice period. See “Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 8. Capital Stock.”

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**Results of Operations**

***Three Months Ended September 30, 2004 Compared toThree Months Ended September 30, 2005***

Thefollowing table sets forth our results of operations for the three months endedSeptember 30, 2004 compared to the three months ended September 30,2005 (dollars in thousands, except center information):

| ** **                                                          | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                                 | ** ** | **2005** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | ** **                                               | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | **Variance** | ** ** |
| ** **                                                          | ** ** | **Dollars**                                              | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                        | 115,656    |   |   | 94.2 | % |   | $ | 153,161 |   |   | 112.4 | % |   | $ | 37,505 |   | 32.4 | % |
| Marketing, processing  and servicing fees                 |       | 36,208                                                   |       |   | 29.5 | % |   | 19,476 |   |   | 14.3 | % |   | (16,732 | ) | (46.2 | )% |
| Total revenues                                                      |       | 151,864                                                  |       |   | 123.7 | % |   | 172,637 |   |   | 126.7 | % |   | 20,773 |   | 13.7 | % |
| Provision for doubtful  accounts and agency bank losses        |       | (29,064                                                  | )          |   | (23.7 | )% |   | (36,340 | ) |   | (26.7 | )% |   | 7,276 |   | 25.0 | % |
| Net revenues                                                        |       | 122,800                                                  |       |   | 100.0 | % |   | 136,297 |   |   | 100.0 | % |   | 13,497 |   | 11.0 | % |
| **Center Expenses:**                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                                 |       | 39,175                                                   |       |   | 31.9 | % |   | 44,359 |   |   | 32.6 | % |   | 5,184 |   | 13.2 | % |
| Occupancy costs                                                     |       | 17,765                                                   |       |   | 14.5 | % |   | 20,455 |   |   | 15.0 | % |   | 2,690 |   | 15.1 | % |
| Center depreciation  expense                                        |       | 3,539                                                    |       |   | 2.9 | % |   | 3,841 |   |   | 2.8 | % |   | 302 |   | 8.5 | % |
| Advertising expense                                                 |       | 5,117                                                    |       |   | 4.2 | % |   | 7,952 |   |   | 5.8 | % |   | 2,835 |   | 55.4 | % |
| Other center expenses                                               |       | 11,485                                                   |       |   | 9.3 | % |   | 13,991 |   |   | 10.3 | % |   | 2,506 |   | 21.8 | % |
| Total center expenses                                               |       | 77,081                                                   |       |   | 62.8 | % |   | 90,598 |   |   | 66.5 | % |   | 13,517 |   | 17.5 | % |
| Center gross profit                                                 |       | 45,719                                                   |       |   | 37.2 | % |   | 45,699 |   |   | 33.5 | % |   | (20 | ) | — |   |
| **Corporate and Other Expenses (Income):**                          |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses                           |       | 10,525                                                   |       |   | 8.5 | % |   | 13,294 |   |   | 9.7 | % |   | 2,769 |   | 26.3 | % |
| Corporate depreciation  expense                                     |       | 974                                                      |       |   | 0.8 | % |   | 1,241 |   |   | 0.9 | % |   | 267 |   | 27.4 | % |
| Interest expense                                                    |       | 4,704                                                    |       |   | 3.8 | % |   | 1,356 |   |   | 1.0 | % |   | (3,348 | ) | (71.2 | )% |
| Interest income                                                     |       | (26                                                      | )          |   | — |   |   | (50 | ) |   | — |   |   | (24 | ) | (92.3 | )% |
| Loss on disposal of  property and equipment                         |       | 197                                                      |       |   | 0.2 | % |   | 325 |   |   | 0.2 | % |   | 128 |   | 65.0 | % |
| Loss on impairment of  assets                                       |       | —                                                   |       |   | — |   |   | 1,852 |   |   | 1.4 | % |   | 1,852 |   | 100.0 | % |
| Transaction related  expenses.                                      |       | 1,592                                                    |       |   | 1.3 | % |   | — |   |   | — |   |   | (1,592 | ) | (100.0 | )% |
| Total corporate and  other expenses                            |       | 17,966                                                   |       |   | 14.6 | % |   | 18,018 |   |   | 13.2 | % |   | 52 |   | 0.3 | % |
| Income before income  taxes                                         |       | 27,753                                                   |       |   | 22.6 | % |   | 27,681 |   |   | 20.3 | % |   | (72 | ) | (0.3 | )% |
| Income tax expense                                                  |       | 792                                                      |       |   | 0.6 | % |   | 11,352 |   |   | 8.3 | % |   | 10,560 |   | 1,333.3 | % |
| Income before income of consolidated  variable interest entity |       | 26,961                                                   |       |   | 22.0 | % |   | 16,329 |   |   | 12.0 | % |   | (10,632 | ) | (39.4 | )% |
| Income of consolidated  variable interest entity                    |       | —                                                   |       |   | — |   |   | (476 | ) |   | (0.4 | )% |   | (476 | ) | 100.0 | % |
| Net income                                                          |       | $                                                        | 26,961     |   |   | 22.0 | % |   | $ | 15,853 |   |   | 11.6 | % |   | $ | (11,108 | ) | (41.2 | )% |

 

32

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| ** **                                                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                             | ** ** | **2005** | ** ** |
| **Center  Information****(excluding Georgia  centers):**              |       |                                                 |       |   |   |
| Number of centers  open at beginning of period                        |       | 2,208                                                |       | 2,520 |   |
| Opened                                                                |       | 87                                                   |       | 82 |   |
| Acquired                                                              |       | —                                               |       | 3 |   |
| Closed                                                                |       | (5                                                   | )          | (7 | ) |
| Number of centers open at end of period                               |       | 2,290                                                |       | 2,598 |   |
| Weighted average  number of centers open during the period            |       | 2,225                                                |       | 2,565 |   |
| Number of payday  cash advances provided and processed (in thousands) |       | 3,074                                                |       | 3,072 |   |
| Amount of average  payday cash advance provided and processed         |       | $                                                    | 329        |   | $ | 340 |   |
| Number of  installment loans provided and processed (in thousands)    |       | —                                               |       | 45 |   |
| Amount of average  installment loan provided and processed            |       | —                                               |       | $ | 494 |   |
|                                                                       |            |                                                      |            |  |  |  |  |

 

| ** **                                                                            | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                                 | ** ** | **2005** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | ** **                                               | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                              | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                     | ** ** |
| **Per  Center (based on weighted average number of centers open during the period):** |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       |                                                     | $          | 55.2 |   |   |   | 100.0 | % |   |   | $ | 53.1 |   |   |   | 100.0 | % |   |   | $ | (2.1 | ) |   |   | (3.8 | )% |   |
| Center expenses:                                                                      |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       |                                                     | 17.6       |   |   |   | 31.9 | % |   |   | 17.3 |   |   |   | 32.6 | % |   |   | (0.3 | ) |   |   | (1.7 | )% |   |
| Occupancy costs                                                                       |       |                                                     | 8.0        |   |   |   | 14.5 | % |   |   | 8.0 |   |   |   | 15.0 | % |   |   | — |   |   |   | — |   |   |
| Center depreciation expense                                                           |       |                                                     | 1.6        |   |   |   | 2.9 | % |   |   | 1.5 |   |   |   | 2.8 | % |   |   | (0.1 | ) |   |   | (6.3 | )% |   |
| Advertising expense                                                                   |       |                                                     | 2.3        |   |   |   | 4.2 | % |   |   | 3.1 |   |   |   | 5.8 | % |   |   | 0.8 |   |   |   | 34.8 | % |   |
| Other center expenses                                                                 |       |                                                     | 5.2        |   |   |   | 9.3 | % |   |   | 5.4 |   |   |   | 10.3 | % |   |   | 0.2 |   |   |   | 3.8 | % |   |
| Total center expenses                                                                 |       |                                                     | 34.7       |   |   |   | 62.8 | % |   |   | 35.3 |   |   |   | 66.5 | % |   |   | 0.6 |   |   |   | 1.7 | % |   |
| Center gross profit                                                                   |       |                                                     | $          | 20.5 |   |   |   | 37.2 | % |   |   | $ | 17.8 |   |   |   | 33.5 | % |   |   | $ | (2.7 | ) |   |   | (13.2 | )% |   |

 

***Revenue Analysis***

Total revenuesincreased $20.8 million, or 13.7%, during the three months ended September 30,2005 to $172.6 million compared to $151.8 million for the same period in 2004. Theincrease was primarily due to an increase in the amount of the averagepayday cash advance closed. The average fee per payday cash advance closed wasapproximately $52 and $55 during the three months ended September 30, 2004and 2005, respectively.

Excluding centers closed in 2004 and 2005, totalrevenues for the three months ended September 30, 2005 increased $21.7million, or 14.4%, to $172.4 million compared to $150.7 million for the sameperiod in 2004.

Total revenues for the 2,074 centers opened prior to July 1,2004 (excluding centers closed  in 2004and 2005) increased $13.2 million, or 8.8%, to $163.9 million for the threemonths ended September 30, 2005 compared to $150.7 million for the sameperiod in 2004. Centers opened prior to July 1, 2004 were at least threemonths and fifteen months old at the end of the three-month periods ended September 30,2004 and 2005, respectively. Total revenues for the 414 centers opened after July 1,2004 (excluding centers closed in 2004 and 2005) increased to $8.5 million forthe three months ended September 30, 2005 compared to approximately$28,000 for the same period in 2004. Total revenues for the remaining 

33

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120 centers closedrepresented a decrease of approximately $0.9 million for the three months endedSeptember 30, 2005 compared to the same period in 2004.

Of our 2,408 centers open at December 31, 2004,we operated 540 centers under the agency business model in the states ofArkansas, Michigan, North Carolina, Pennsylvania and Texas. At September 30,2005, of our 2,598 centers, we operated 248 centers under the agency businessmodel in the states of Arkansas, North Carolina and Pennsylvania. The 292center decrease in the number of centers operated under the agency businessmodel at September 30, 2005 compared to December 31, 2004 primarilyresulted from our conversion of our Michigan centers to the standard businessmodel effective June 27, 2005 and our conversion of our Texas centers tothe standard business model effective July 7, 2005. On September 15,2005, the lending bank for which we market, process and service payday cashadvances and installment loans in our 117 centers in North Carolina temporarilysuspended its payday cash advance and installment loan originations. Wecontinue to service all payday cash advances and installment loans that arecurrently outstanding in North Carolina.

The provision for doubtfulaccounts and agency bank losses increased $7.3 million, or 25.0%, to $36.3million for the three months ended September 30, 2005 compared to $29.0million for the same period in 2004. The provision increased due primarily toincreased loss rates. As a percentage of total revenues, the provisionincreased to 21.0% in 2005 from 19.1% in 2004.

***Center Expense Analysis***

*Salariesand related payroll costs.**  *2005 salaries and related payroll costs increased$5.2 million, or 13.2%, to $44.4 million compared to $39.2 million in 2004. Theincrease was due primarily to the new centers opened in 2004 and 2005. 2005salaries and related payroll costs as a percentage of net revenues increased to32.6% compared to 31.9% in 2004. Salaries and related payroll costs per centerdecreased to approximately $17,300 compared to $17,600 in 2004 due to lowerbonus expense and lower health insurance expense. We averaged approximately2.15 full-time equivalent field employees, including district directors, foreach center in both 2005 and 2004.

*Occupancycosts.**  *2005occupancy costs increased $2.7 million, or 15.1%, to $20.5 millioncompared to $17.8 million in 2004. The increase was due primarily to a fullquarter of occupancy costs for centers opened in 2004 and occupancy costsrelated to 2005 center openings. 2005 occupancy costs as a percentage of netrevenues increased to 15.0% compared to 14.5% in 2004. Occupancy costs percenter were approximately $8,000 for both periods.

*Centerdepreciation expense.**  *2005center depreciation expense increased $0.3 million, or 8.5%, to $3.8million compared to $3.5 million in 2004. The increase was due primarily to thenew centers opened in 2004 and 2005. 2005 center depreciation expense percenter decreased approximately $100 to $1,500, compared to $1,600 in 2004.

*Advertisingexpense.**  *2005advertising expense increased $2.8 million, or 55.4%, to $7.9 million comparedto $5.1 million in 2004. 2005 advertising expense as a percentage of netrevenues increased to 5.8% compared to 4.2% in 2004. 2005 advertising expenseper center was approximately $3,100 compared to approximately $2,300 in 2004. Theincrease was due primarily to an increase in expenditures for direct mail andbroadcast in 2005.

*Othercenter expenses.**  *2005other center expenses increased $2.5 million, or 21.8%, to $14.0 millioncompared to $11.5 million in 2004. This increase was due primarily to theaddition of new centers in 2004 and 2005. Other center expenses as a percentageof net revenues increased from 9.3% in 2004 to 10.3% in 2005. Other centerexpenses per center increased to approximately $5,400 in 2005 compared toapproximately $5,200 in 2004.

34

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*Total center expenses.**  *Total center expenses increased$13.5 million, or 17.5%, to $90.6 million compared to $77.1 million in 2004. Totalcenter expenses as a percent of net revenues increased to 66.5% for the threemonths ended September 30, 2005 compared to 62.8% in the same period in2004. The increase in total center expenses compared to 2004 was due primarilyto (dollars in millions):

| New centers  opened in 2004 and 2005 |   | $    | 11.0   |   |
|--------------------------------------|--------|------|--------|--------|
| Higher advertising expense           |   | 2.8  |   |
| All other                            |   | (0.3 | )      |
| Total center  expenses increase      |   | $    | 13.5   |   |

 

***Corporate and Other Expense (Income) Analysis***

*General and administrativeexpenses.**  *2005general and administrative expenses increased $2.8 million, or 26.3% to$13.3 million compared to $10.5 million in 2004. This increase was dueprimarily to (dollars in millions):

| Higher expense  due to being a public company, including audit fees, legal fees and filing  fees—$0.7, and insurance expense—$0.1                                                      |   | $   | 0.8    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----|--------|--------|
| Higher  compensation expense related to annual compensation increases and additional  staff due primarily to center growth—$0.5, and restricted stock grant  amortization expense—$0.2 |   | 0.7 |   |
| Higher legal fees  (other than described above)                                                                                                                                                  |   | 0.7 |   |
| Other                                                                                                                                                                                            |   | 0.6 |   |
| Total general and  administrative expenses increase                                                                                                                                              |   | $   | 2.8    |   |

 

2005 general and administrative expenses as apercentage of net revenues increased to 9.7% compared to 8.5% in 2004.

*Corporatedepreciation expense.**  *2005corporate depreciation expense increased $0.3 million, or 27.4%, to$1.2 million compared to $0.9 million in 2004. Corporate depreciationexpense was 0.8% of net revenues in 2004 and 0.9% of net revenues in 2005.

*Interestexpense.**  *2005interest expense decreased $3.3 million, or 71.2%, to $1.4 million compared to$4.7 million in 2004 due to the repayment in the fourth quarter of 2004 of alllong-term debt with related parties and the reduction of advances under ourrevolving credit facility.

*Incometax expense.*   2005 income tax expense increased$10.6 million to $11.4 million compared to $0.8 million in 2004. The increaseis due primarily to our conversion to a C corporation for income tax purposes. See“—Prior S Corporation Status.”

*Losson impairment of assets.*   2005 loss on impairmentof assets of $1.9 million represents a writedown of approximately $1.5 million tomarket value of an aircraft sold subsequent to September 30, 2005, as well as awritedown of approximately $0.4 million of the undepreciated costs of certainfixed assets in centers identified for closure as of September 30, 2005.

*Transactionrelated expenses.*   Transaction related expense of$1.6 million in 2004 represents the cost associated with our initial publicoffering.

35

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**Results of Operations**

***Nine Months Ended September 30, 2004 Compared toNine Months Ended September 30, 2005***

Thefollowing table sets forth our results of operations for the nine months ended September 30,2004 compared to the nine months ended September 30, 2005 (dollars inthousands, except center information):

| ** **                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                                | ** ** | **2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                                              | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | **Variance** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                             | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                                  |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers              |       | $                                                       | 311,408    |   |   | 88.6 | % |   | $ | 373,010 |   |   | 97.0 | % |   | $ | 61,602 |   | 19.8 | % |
| Marketing,  processing and servicing fees                 |       | 99,091                                                  |       |   | 28.2 | % |   | 88,327 |   |   | 23.0 | % |   | (10,764 | ) | (10.9 | )% |
| Total revenues                                                 |       | 410,499                                                 |       |   | 116.8 | % |   | 461,337 |   |   | 120.0 | % |   | 50,838 |   | 12.4 | % |
| Provision for  doubtful accounts and agency bank losses        |       | (59,117                                                 | )          |   | (16.8 | )% |   | (76,998 | ) |   | (20.0 | )% |   | 17,881 |   | 30.2 | % |
| Net revenues                                                   |       | 351,382                                                 |       |   | 100.0 | % |   | 384,339 |   |   | 100.0 | % |   | 32,957 |   | 9.4 | % |
| **Center Expenses:**                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and  related payroll costs                            |       | 117,702                                                 |       |   | 33.5 | % |   | 128,948 |   |   | 33.5 | % |   | 11,246 |   | 9.6 | % |
| Occupancy costs                                                |       | 49,145                                                  |       |   | 14.0 | % |   | 58,735 |   |   | 15.3 | % |   | 9,590 |   | 19.5 | % |
| Center  depreciation expense                                   |       | 10,150                                                  |       |   | 2.9 | % |   | 10,973 |   |   | 2.9 | % |   | 823 |   | 8.1 | % |
| Advertising  expense                                           |       | 19,318                                                  |       |   | 5.5 | % |   | 20,808 |   |   | 5.4 | % |   | 1,490 |   | 7.7 | % |
| Other center expenses                                          |       | 34,150                                                  |       |   | 9.7 | % |   | 39,040 |   |   | 10.2 | % |   | 4,890 |   | 14.3 | % |
| Total center expenses                                          |       | 230,465                                                 |       |   | 65.6 | % |   | 258,504 |   |   | 67.3 | % |   | 28,039 |   | 12.2 | % |
| Center gross  profit                                           |       | 120,917                                                 |       |   | 34.4 | % |   | 125,835 |   |   | 32.7 | % |   | 4,918 |   | 4.1 | % |
| **Corporate and Other Expenses (Income):**                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses                            |       | 32,180                                                  |       |   | 9.2 | % |   | 38,440 |   |   | 10.0 | % |   | 6,260 |   | 19.5 | % |
| Corporate  depreciation expense                                |       | 2,975                                                   |       |   | 0.8 | % |   | 3,390 |   |   | 0.9 | % |   | 415 |   | 13.9 | % |
| Interest expense                                               |       | 12,729                                                  |       |   | 3.6 | % |   | 2,914 |   |   | 0.7 | % |   | (9,815 | ) | (77.1 | )% |
| Interest income                                                |       | (116                                                    | )          |   | — |   |   | (208 | ) |   | (0.1 | )% |   | (92 | ) | (79.3 | )% |
| Loss on disposal  of property and equipment                    |       | 466                                                     |       |   | 0.1 | % |   | 448 |   |   | 0.1 | % |   | (18 | ) | (3.9 | )% |
| Loss on  impairment of assets                                  |       | —                                                  |       |   | — |   |   | 1,852 |   |   | 0.5 | % |   | 1,852 |   | 100.0 | % |
| Transaction  related expense                                   |       | 1,592                                                   |       |   | 0.5 | % |   | — |   |   | — |   |   | (1,592 | ) | (100.0 | )% |
| Total corporate  and other expenses                       |       | 49,826                                                  |       |   | 14.2 | % |   | 46,836 |   |   | 12.1 | % |   | (2,990 | ) | (6.0 | )% |
| Income before  income taxes                                    |       | 71,091                                                  |       |   | 20.2 | % |   | 78,999 |   |   | 20.6 | % |   | 7,908 |   | 11.1 | % |
| Income tax  expense                                            |       | 2,314                                                   |       |   | 0.6 | % |   | 32,187 |   |   | 8.4 | % |   | 29,873 |   | 1,291.0 | % |
| Income before income of  consolidated variable interest entity |       | 68,777                                                  |       |   | 19.6 | % |   | 46,812 |   |   | 12.2 | % |   | (21,965 | ) | (31.9 | )% |
| Income of  consolidated variable interest entity               |       | —                                                  |       |   | — |   |   | (476 | ) |   | (0.1 | )% |   | (476 | ) | 100.0 | % |
| Net income                                                     |       | $                                                       | 68,777     |   |   | 19.6 | % |   | $ | 46,336 |   |   | 12.1 | % |   | $ | (22,441 | ) | (32.6 | )% |

 

36

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| ** **                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                            | ** ** | **2005** | ** ** |
| **Center Information:**                                               |       |                                                |       |   |   |
| Number of centers  open at beginning of period                        |       | 2,039                                               |       | 2,408 |   |
| Opened                                                                |       | 346                                                 |       | 208 |   |
| Acquired                                                              |       | —                                              |       | 3 |   |
| Closed (excluding Georgia)                                            |       | (6                                                  | )          | (21 | ) |
| Suspended (Georgia)                                                   |       | (89                                                 | )          | — |   |
| Number of centers  open at end of period                              |       | 2,290                                               |       | 2,598 |   |
| Weighted average  number of centers open during the period            |       | 2,169                                               |       | 2,461 |   |
| Number of payday  cash advances provided and processed (in thousands) |       | 8,392                                               |       | 8,674 |   |
| Amount of average  payday cash advance provided and processed         |       | $                                                   | 327        |   | $ | 336 |   |
| Number of  installment loans provided and processed (in thousands)    |       | —                                              |       | 45 |   |
| Amount of average  installment loan provided and processed            |       | —                                              |       | $ | 494 |   |
|                                                                       |            |                                                     |            |  |  |  |  |

 

| ** **                                                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                                | ** ** | **2005** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | ** **                                              | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                             | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                    | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       | $                                                       | 162.0      |   |   | 100.0 | % |   | $ | 156.2 |   |   | 100.0 | % |   |   | $ | (5.8 | ) |   | (3.6 | )% |
| Center expenses:                                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 54.3                                                    |       |   | 33.5 | % |   | 52.4 |   |   | 33.5 | % |   |   | (1.9 | ) |   | (3.5 | )% |
| Occupancy costs                                                                       |       | 22.7                                                    |       |   | 14.0 | % |   | 23.9 |   |   | 15.3 | % |   |   | 1.2 |   |   | 5.3 | % |
| Center depreciation expense                                                           |       | 4.7                                                     |       |   | 2.9 | % |   | 4.5 |   |   | 2.9 | % |   |   | (0.2 | ) |   | (4.3 | )% |
| Advertising expense                                                                   |       | 8.9                                                     |       |   | 5.5 | % |   | 8.4 |   |   | 5.4 | % |   |   | (0.5 | ) |   | (5.6 | )% |
| Other center expenses                                                                 |       | 15.7                                                    |       |   | 9.7 | % |   | 15.9 |   |   | 10.2 | % |   |   | 0.2 |   |   | 1.3 | % |
| Total center expenses                                                                 |       | 106.3                                                   |       |   | 65.6 | % |   | 105.1 |   |   | 67.3 | % |   |   | (1.2 | ) |   | (1.1 | )% |
| Center gross profit                                                                   |       | $                                                       | 55.7       |   |   | 34.4 | % |   | $ | 51.1 |   |   | 32.7 | % |   |   | $ | (4.6 | ) |   | (8.3 | )% |

 

***Revenue Analysis***

Total revenues increased $50.8 million, or 12.4%,during the nine months ended September 30, 2005 to $461.3 million comparedto $410.5 million for the same period in 2004. The increase was primarily dueto:

·       Anincrease in the total number of payday cash advances made. The number of paydaycash advances made increased by approximately 0.3 million to approximately 8.7million in 2005 compared to approximately 8.4 million in 2004. Excluding paydaycash advances made in our Georgia centers during the nine months ended September 30,2004, the number of payday cash advances made increased approximately 0.5million to approximately 8.7 million in 2005 compared to approximately 8.2million in 2004.

·       Anincrease in the amount of the average payday cash advance closed. The averagefee per payday cash advance closed was approximately $52 and $54 during thenine months ended September 30, 2004 and 2005, respectively.

Total revenues for the nine months ended September 30,2005 were impacted by the loss of revenues from the 89 Georgia centers forwhich operations were suspended in May 2004 and have been subsequentlypermanently closed. Georgia total revenues for the nine months ended September 30,2004 were approximately $7.1 million. Excluding our Georgia centers and centersclosed in 2004 and 2005, total 

37

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revenues for the ninemonths ended September 30, 2005 increased $67.9 million, or 17.3%, to$460.3 million compared to $392.4 million for the same period in 2004.

Total revenues for the 1,822 centers opened prior to January 1,2004 (excluding centers closed or suspended in 2004 and 2005) increased $33.8million, or 8.7%, to $420.4 million for the nine months ended September 30,2005 compared to $386.6 million for the same period in 2004. Centers openedprior to January 1, 2004 were at least nine and twenty-one months old atthe end of the nine-month periods ended September 30, 2004 and 2005,respectively. Total revenues for the 666 centers opened after January 1,2004 (excluding centers closed or suspended in 2004 and 2005) increased $34.1million to $39.9 million for the nine months ended September 30, 2005compared to $5.8 million for the same period in 2004. Total revenues for theremaining 208 centers closed or suspended represented a decrease ofapproximately $17.2 million for the nine months ended September 30, 2005compared to the same periods in 2004.

Of our 2,408 centers open at December 31, 2004,we operated 540 centers under the agency business model in the states ofArkansas, Michigan, North Carolina, Pennsylvania and Texas. At September 30,2005, of our 2,598 centers, we operated 248 centers under the agency businessmodel in the states of Arkansas, North Carolina and Pennsylvania. The 292center decrease in the number of centers operated under the agency businessmodel at September 30, 2005 compared to December 31, 2004 primarilyresulted from our conversion of our Michigan centers to the standard businessmodel effective June 27, 2005 and the conversion of our Texas centers tothe standard business model July 7, 2005. On September 15, 2005, thelending bank for which we market, process and service payday cash advances andinstallment loans in our 117 centers in North Carolina temporarily suspendedits payday cash advance and installment loan originations. We continue toservice all payday cash advances and installment loans that are currently outstandingin North Carolina.

The provision for doubtfulaccounts and agency bank losses increased $17.9 million, or 30.2%, to $77.0million for the nine months ended September 30, 2005 compared to $59.1million for the same period in 2004. As a percentage of total revenues, theprovision increased to 16.7% in 2005 from 14.4% in 2004. This provisionincluded a net expense of approximately $4.2 million related to the contractualchanges in Texas, Michigan, North Carolina and Arkansas. In addition to the impactof the contractual changes, this provision increased due to increased lossrates. The provision for the comparable period in 2004 included an expense ofapproximately $1.3 million related to the expected losses related to thesuspension of operations at our 89 Georgia centers.

***Center Expense Analysis***

*Salariesand related payroll costs.**  *2005 salaries and related payroll costs increased$11.2 million, or 9.6%, to $128.9 million compared to $117.7 millionin 2004. The increase was due primarily to the new centers opened in 2004 and2005. Salaries and related payroll costs as a percentage of net revenues was33.5% in both 2005 and 2004. 2005 salaries and related payroll costs per centerdecreased to approximately $52,400 compared to $54,300 in 2004 due primarily tolower salaries and related payroll taxes, lower bonus expense and lower healthinsurance expense. We averaged approximately 2.14 and 2.26 full-time equivalentfield employees, including district directors, for each center in 2005 and2004, respectively.

*Occupancycosts.**  *2005occupancy costs increased $9.6 million, or 19.5%, to $58.7 millioncompared to $49.1 million in 2004. The increase was due primarily to ninemonths of occupancy costs for centers opened in 2004 and occupancy costsrelated to 2005 center openings. 2005 occupancy costs as a percentage of netrevenues increased to 15.3% compared to 14.0% in 2004, and 2005 occupancy costsper center increased to approximately $23,900 compared to approximately $22,700in 2004, due primarily to higher rent and common area maintenance expense.

*Centerdepreciation expense.**  *2005center depreciation expense increased $0.8 million, or 8.1%, to $11.0million compared to $10.2 million in 2004. The increase was due primarily tothe new centers opened 

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in 2004 and 2005. 2004 and2005 center depreciation expense per center was approximately $4,700 and$4,500, respectively. Depreciation expense as a percentage of net revenues was2.9% in both 2004 and 2005.

*Advertisingexpense.**  *2005advertising expense increased $1.5 million, or 7.7%, to $20.8 million comparedto $19.3 million in 2004. 2005 advertising expense as a percentage of netrevenues decreased to 5.4% compared to 5.5% in 2004. 2005 advertising expenseper center was approximately $8,400 compared to approximately $8,900 in 2004.

*Othercenter expenses.**  *2005other center expenses increased $4.9 million, or 14.3%, to $39.0 millioncompared to $34.1 million in 2004. This increase was due primarily to theaddition of new centers in 2004 and 2005. Other center expenses as a percentageof net revenues increased from 9.7% in 2004 to 10.2% in 2005. Other centerexpenses per center increased to approximately $15,900 in 2005 compared toapproximately $15,700 in 2004 due primarily to higher relocation expenses.

*Total center expenses.**  *Total center expenses increased$28.0 million, or 12.2%, to $258.5 million compared to $230.5 million in 2004. Totalcenter expenses as a percent of net revenues increased to 67.3% for the ninemonths ended September 30, 2005 compared to 65.6% in the same period in2004. The increase in total center expenses compared to 2004 was due primarilyto (dollars in millions):

| New centers  opened in 2004 and 2005                                    |   | $    | 30.5   |   |
|-------------------------------------------------------------------------|--------|------|--------|--------|
| Lower salaries  and related payroll costs in centers opened before 2004 |   | (2.9 | )      |
| Higher  advertising expense                                             |   | 1.5  |   |
| All other                                                               |   | (1.1 | )      |
| Total center  expenses increase                                         |   | $    | 28.0   |   |

 

***Corporate and Other Expense (Income) Analysis***

*General and administrativeexpenses.**  *2005general and administrative expenses increased $6.2 million, or 19.5% to$38.4 million compared to $32.2 million in 2004. This increase was dueprimarily to (dollars in millions):

| Higher expense  due to being a public company, including audit fees, legal fees and  filing fees—$1.5, and insurance expense—$1.0                                                 |   | $    | 2.5    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Higher  compensation expense related to annual compensation increases and additional  staff due primarily to center growth—$1.3, and restricted stock grant  amortization expense—$0.8 |   | 2.1  |   |
| Higher legal fees  (other than described above)                                                                                                                                                  |   | 2.2  |   |
| Lower airplane  operating expenses                                                                                                                                                               |   | (1.3 | )      |
| Net increase in  all other                                                                                                                                                                       |   | 0.7  |   |
| Total general and  administrative expenses increase                                                                                                                                              |   | $    | 6.2    |   |

2005 general and administrativeexpenses as a percentage of net revenues increased to 10.0% compared to 9.2% in2004.

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*Corporatedepreciation expense.**  *2005corporate depreciation expense increased $0.4 million, or 13.9%, to$3.4 million compared to $3.0 million in 2004. Corporate depreciationexpense increased to 0.9% of net revenues in 2005 from 0.8% of net revenues in2004.

*Interestexpense.**  *2005interest expense decreased $9.8 million, or 77.1%, to $2.9 million compared to$12.7 million in 2004 due to the repayment in the fourth quarter of 2004 of alllong-term debt with related parties and the reduction of advances under ourrevolving credit facility.

*Incometax expense.*   2005 income tax expense increased$29.9 million to $32.2 million compared to $2.3 million in 2004. The increaseis due primarily to our conversion to a C corporation for income tax purposes.See “—Prior S Corporation Status.”

*Losson impairment of assets.**  *2005loss on impairment of assets of $1.9 million represents a writedown ofapproximately $1.5 million to market value of an aircraft sold subsequent toSeptember 30, 2005, as well as a writedown of approximately $0.4 million of theundepreciated costs of certain fixed assets in centers identified for closureas of September 30, 2005.

*Transaction relatedexpenses.*   Transaction related expense of $1.6million in 2004 represents the costs associated with our initial publicoffering.**

**Liquidity and Capital Resources**

Thefollowing table presents a summary of cash flows for the nine months endedSeptember 30, 2004 and 2005 (dollars in thousands):

| ** **                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows  provided by (used in):                    |       |     |       |     |       |
| Operating activities                                  |       | $        | 129,920    |     | $          | 129,741 |   |
| Investing activities                                  |       | (79,767  | )          | (90,832  | )          |
| Financing activities                                  |       | (52,501  | )          | (31,419  | )          |
| Net  (decrease)/increase in cash and cash equivalents |       | (2,348   | )          | 7,490    |       |
| Cash and cash  equivalents, beginning of period       |       | 10,484   |       | 18,224   |       |
| Cash and cash  equivalents, end of period             |       | $        | 8,136      |     | $          | 25,714 |   |

 

Our principal sources of cash are from operations andfrom borrowings under our revolving credit facility. We anticipate that our primaryuses of cash will be to provide working capital, finance capital expenditures,meet debt service requirements, fund payday cash advances under the standardbusiness model, finance center growth and pay dividends on our common stock.

We borrow under our $265.0 million revolvingcredit facility to fund our payday cash advances and to fund our otherliquidity needs. Our day-to-day balances under our revolving credit facility,as well as our cash balances, vary because of seasonal and day-to-day requirementsresulting from making and collecting payday cash advances. For example, if amonth ends on a payday, our borrowings and our cash balances will be highcompared to a month that does not end on a payday. This is because asubstantial portion of the payday cash advances will be repaid in cash on thatday but sufficient time will not yet have passed for the cash to reduce theoutstanding borrowings under our revolving credit facility. Our borrowingsunder our revolving credit facility will also increase as the demand for paydaycash advances increases during our peak periods, such as the back-to-school andholiday seasons. Conversely, our borrowings typically decrease during the taxrefund season when cash receipts from customers peak or the customer demand fornew payday cash advances decreases. Advance and fees receivable, net, increasedapproximately $30.4 million, or 20.1%, to $181.8 million at September 30,2005 compared to $151.4 million at September 30, 2004, due primarilyto an increase in the number of new centers. Advances and fees receivable, net,at September 30, 2005 increased approximately $26.8 million, or17.3%, to $181.8 million 

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compared to $155.0 millionat December 31, 2004. In addition, cash and cash equivalents at September 30,2005 increased approximately $7.5 million, or 41.1%, to approximately$25.7 million compared to approximately $18.2 million at December 31,2004, and increased approximately $17.6 million, or 216.1%, compared toapproximately $8.1 million at September 30, 2004.

On May 4, 2005, we announced that our Board ofDirectors had approved a program authorizing the repurchase of up to $50million of our currently outstanding common stock. Our Board of Directorsdetermined that the stock repurchase program will serve the best interest ofthe Company and its stockholders by returning capital to our stockholders, byproviding an attractive investment opportunity for our funds, and by reducingthe dilutive impact of employee stock incentive programs and potentialacquisitions.

Share repurchases will be made from time to time andwill be effected on the open market, in block trades, or in privatelynegotiated transactions, and in compliance with applicable laws, includingSecurities and Exchange Commission Rule 10b-18 and Regulation M. Theprogram does not generally require us to purchase any specific number ofshares, and any purchases under the program depend on market and otherconditions. Our Board of Directors may suspend or cancel the stock repurchaseprogram at any time.

During the three and nine months ended September 30,2005, we repurchased 520,958 and 888,158 shares, respectively, of our commonstock at a cost of approximately $7.0 million and $11.4 million, respectively.

Although our revolvingcredit facility places restrictions on our capital expenditures andacquisitions, we believe that these restrictions do not prohibit us frompursuing our growth strategy as currently planned. Cash that is restricted dueto certain states’ regulatory liquidity requirements is not included in cashand cash equivalents. Instead, the restricted cash is shown on our consolidatedbalance sheet as a non-current asset under the line item “Restricted cash.” 

***Cash Flows from Operating Activities***

Net cash providedby operating activities was approximately $130 million for the nine monthsended September 30, 2005 and 2004. The stability was due primarily to:

·       A$22.4 million decrease in net income. Income before income taxes increased $7.9million, or 11.1%, for the nine months ended September 30, 2005 comparedto the same period in 2004. This was offset by a $29.9 million increase inincome tax expense due to our conversion from an S corporation to a C corporationfor income tax purposes. See “—Prior S Corporation Status.”

·       An increase of approximately$22.3 million in non-cash expenses and other changes in operating assets andliabilities due primarily to a $17.9 million increase in the provision fordoubtful accounts and agency bank losses.

***Cash Flows from Investing Activities***

Net cash used in investingactivities increased $11.0 million, or 13.9%, to $90.8 million forthe nine months ended September 30, 2005 compared to $79.8 millionfor the same period in 2004. This increase is primarily due to a $21.7 millionincrease in cash invested in advances and fees receivable, net. This increasewas partially offset by lower cash payments for purchases of property and equipmentof approximately $9.4 million due primarily to opening fewer new centersin 2005 compared to 2004. 

***Cash Flows from Financing Activities***

Net cash used in financingactivities decreased $21.1 million, or 40.2%, to $31.4 million forthe nine months ended September 30, 2005 compared to $52.5 millionfor the same period in 2004. The decrease is 

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dueprimarily to the decrease in dividends paid to stockholders during the ninemonths ended September 30, 2005 compared to the same period in 2004. As aresult of our conversion from an S corporation to a C corporation forincome tax purposes, our distributions to stockholders for the purpose ofpaying income tax on our earnings ceased. See “—Prior S Corporation Status.”The decrease in dividends paid was partially offset by approximately $11.4million of repurchases of our common stock during the nine months ended September 30,2005, as well as reduced borrowings under our revolving credit facility ofapproximately $27.5 million.

**Capital Expenditures**

For the nine months ended September 30,2004 and 2005, we spent $22.4 million and $13.0 million, respectively, oncapital expenditures. Capital expenditures included expenditures (1) fornew centers, (2) center remodels and (3) computer equipmentreplacements in our centers and at our corporate headquarters. Capitalexpenditures decreased approximately $9.4 million, or 41.7%, due primarily tofewer center openings during the nine months ended September 30, 2005compared to the same period in 2004.

**Off-BalanceSheet Arrangements with the Lending Banks**

On September 30, 2005 we operated as marketing,processing and servicing agent for payday cash advances and installment loans offered,made, and funded by FDIC insured, state-chartered banks through 248 of ourcenters located in three states. Prior to July 2005, pursuant to ourMP&S Agreements with the lending banks, we were the marketing, processingand servicing agent for payday cash advances offered, made and funded byVenture in Arkansas, Republic in North Carolina and Texas, and BankWest inPennsylvania. Under our prior MP&S Agreements with the various lendingbanks, the lending banks were contractually obligated for the losses on theirpayday cash advances in an amount established as a percentage of the fees andinterest charged by the lending banks to their customers. Therefore, under ourprior MP&S Agreements, our marketing, processing and servicing feeincreased by the lending bank’s contractual obligation for losses. If actualpayday cash advance losses by the lending bank exceeded the percentagespecified in its MP&S Agreement with us, we were potentially obligated topay the lending bank the outstanding amount of the advances and loans plus thelending bank’s fees and/or interest receivable on the advances, less thelending bank’s contractually obligated portion of the losses. 

Prior to June 26, 2005, we were also themarketing, processing and servicing agent for First Fidelity Bank in Michigan. EffectiveJune 26, 2005, however, we terminated our MP&S Agreement with FirstFidelity Bank relating to Michigan and began to offer check-cashing servicesdirectly to our customers in Michigan. As a result, we no longer accrue anyamounts for excess bank losses relating to our operations in Michigan, however,we still accrue amounts for doubtful accounts for these operations. On June 30,2005, we terminated our MP&S Agreement with Venture relating to Arkansasand entered into a new MP&S Agreement with First Fidelity Bank relating toArkansas. Pursuant to this new MP&S Agreement with First Fidelity Bank, weare no longer contractually obligated for any losses on payday cash advancesand installment loans made in Arkansas, and as a result we no longer accrue anyamounts for excess bank losses relating to our operations in Arkansas.Effective July 6, 2005, we terminated our MP&S Agreement with Republicrelating to North Carolina and entered into a new MP&S Agreement with FirstFidelity Bank relating to North Carolina. Pursuant to this new MP&SAgreement with First Fidelity Bank, we are no longer contractually obligatedfor any losses on payday cash advances and installment loans made in NorthCarolina, and as a result we no longer accrue any amounts for excess banklosses relating to our operations in North Carolina. We remain obligated inNorth Carolina and Arkansas for the advances and fees receivable in excess ofthe prior lending bank’s contractual obligations existing as of the time of ourtermination of those agreements. 

Beginning in July 2005, we ceased conductingbusiness under the agency business model in our 208 centers in Texas, andbegan conducting business in those centers as a Credit Services Organization. 

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Under our prior MP&SAgreement with the lending bank in Texas for payday cash advances made underthe agency business model, the lending bank was contractually obligated foruncollectible payday cash advance accounts in amounts determined as apercentage of fees and interest charged by the lending bank to its customers,which historically have been sufficient to cover all losses incurred. Under theCSO Agreement with that lender, we are contractually obligated for all lossesincurred by the lender with respect to loans it makes to its customers that arereferred by us. 

Approximately 23.8% and 11.3% of our total revenuesand 24.1% and 15.4% of our total center gross profit, in the three months endedSeptember 30, 2004 and 2005,respectively, were derived from marketing, processing and servicing fees paidto us by these lending banks. Approximately 24.1% and 19.1% of our totalrevenues and 21.0% and 22.5% of our total center gross profit, in the ninemonths ended September 30, 2004and 2005, respectively, were derived from marketing, processing and servicingfees paid to us by these lending banks.

Thenumber of centers at which the lending banks were offering their payday cashadvances and installment loans at September 30, 2004 and 2005 and the marketing,processing and servicing fees paid to us by each of the lending banks in thethree months ended September 30, 2004 and 2005 (including, in 2004, ourcenters in Michigan and Texas, in which we no longer operate under the agencybusiness model), in dollars and as a percent of total revenues, were (dollarsin millions):

| ** **              | ** ** | **2004**   | ** ** | **2005**    | ** ** |
|-------------------------|------------|------------|------------|-------------|------------|
| **Lending Bank**   | ** ** | ** ** | ** ** | **Centers** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Centers** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| BankWest(1)             |       |       | 101        |        |       |   | $ | 12.2 |   |   |   | 8.0 | % |   |   | 101 |   |   |   | $ | 11.4 |   |   |   | 6.6 | % |   |
| Republic                |       |       | 312        |        |       |   | 15.4 |   |   |   | 10.1 | % |   |   | — |   |   |   | 1.6 |   |   |   | 0.9 | % |   |
| First Fidelity  Bank(2) |       |       | 87         |        |       |   | 6.6 |   |   |   | 4.4 | % |   |   | 147 |   |   |   | 6.5 |   |   |   | 3.8 | % |   |
| Venture                 |       |       | 30         |        |       |   | 2.0 |   |   |   | 1.3 | % |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                   |       |       | 530        |        |       |   | $ | 36.2 |   |   |   | 23.8 | % |   |   | 248 |   |   |   | $ | 19.5 |   |   |   | 11.3 | % |   |
|                         |            |            |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Both periods exclude ourGeorgia centers 

(2)          On September 15,2005, First Fidelity Bank temporarily suspended its payday cash advance andinstallment loan originations in North Carolina We continue to service all payday cash advances and installment loansthat are currently outstanding in North Carolina.

Thenumber of centers at which the lending banks were offering their payday cashadvances and installment loans at September 30, 2004 and 2005 and themarketing, processing and servicing fees paid to us by each of the lendingbanks in the nine months ended September 30, 2004 and 2005 (including ourcenters in Michigan and Texas, in which we no longer operate under the agencybusiness model) in dollars and as a percent of total revenues were (dollars inmillions):

| ** **              | ** ** | **2004**   | ** ** | **2005**    | ** ** |
|-------------------------|------------|------------|------------|-------------|------------|
| **Lending Bank**   | ** ** | ** ** | ** ** | **Centers** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Centers** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| BankWest(1)             |       |       | 190        |        |       |   | $ | 39.3 |   |   |   | 9.6 | % |   |   | 101 |   |   |   | $ | 33.3 |   |   |   | 7.2 | % |   |
| Republic                |       |       | 312        |        |       |   | 39.2 |   |   |   | 9.5 | % |   |   | — |   |   |   | 32.7 |   |   |   | 7.1 | % |   |
| First Fidelity  Bank(2) |       |       | 87         |        |       |   | 15.2 |   |   |   | 3.7 | % |   |   | 147 |   |   |   | 18.6 |   |   |   | 4.0 | % |   |
| Venture                 |       |       | 30         |        |       |   | 5.4 |   |   |   | 1.3 | % |   |   | — |   |   |   | 3.7 |   |   |   | 0.8 | % |   |
| Total                   |       |       | 619        |        |       |   | $ | 99.1 |   |   |   | 24.1 | % |   |   | 248 |   |   |   | $ | 88.3 |   |   |   | 19.1 | % |   |
|                         |            |            |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          2004 includes the 89Georgia centers that were operating during the nine months ended September 30,2004. 2005 does not include any Georgia centers.

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(2)          On September 15,2005, First Fidelity Bank temporarily suspended its payday cash advance andinstallment loan originations in North Carolina We continue to service all payday cash advances and installment loansthat are currently outstanding in North Carolina.

Although we market, process and service payday cashadvances and, as of July 2005, installment loans offered, made and fundedby the lending banks under the agency business model in Pennsylvania, NorthCarolina and Arkansas, each lending bank is responsible for evaluating each ofits customers’ applications and determining whether the payday cash advanceand/or installment loan is approved. The lending banks for which we act asagent utilize an automated third-party credit scoring system to evaluateand approve each customer application. We are not involved in the lending banks’payday cash advance or installment loan approval process, we are not involvedin determining the approval procedures or criteria of the lending banks and we donot fund or acquire any payday cash advances or installment loans from thelending banks. The payday cash advances and installment loans are repayablesolely to the lending banks and are assets of the lending banks. Consequently,the lending banks’ payday cash advances and installment loans are not includedin our payday cash advance and installment loan portfolios nor are theyreflected on our balance sheet within our advances and fees receivable, net.Under our recently terminated MP&S Agreements with lending banks that wereoffering payday cash advances in Michigan, Texas, North Carolina and Arkansas,the lending banks were contractually obligated for the losses on payday cashadvances in an amount established as a percentage of the fees and/or interestcharged by the banks to their customers. This continues to be the case underour amended MP&S Agreement with the lending bank offering payday cashadvances and installment loans in Pennsylvania, but not under our MP&SAgreements for North Carolina and Arkansas, where the lending bank is nowresponsible for any and all losses on payday cash advances and installmentloans. The contractual percentages were negotiated by us, in part, based on ourhistorical data regarding our loss history and serve as an incentive for us todiligently pursue collection efforts for the lending bank. In aggregate, thispercentage was 16.7% and 7.0% for the three months ended September 30,2004 and 2005, and was 14.4% and 12.0% for the nine months ended September 30,2004 and 2005, respectively. If the amount of uncollected payday cash advances andinstallment loans exceeds the lending bank’s contractual obligation, we couldbe obligated to pay the lending bank the outstanding amount of the advances orinstallment loan plus its fees and/or interest receivable, less itscontractually obligated portion of the losses. As of September 30, 2005,our aggregate contingent liability to the lending bank in Pennsylvania amountedto $17.2 million. This contingent liability to the lending bank was notincluded on our balance sheet. We could also be obligated to pay this amount tothe lending bank if, as a result of a change in law, regulation or otherwise,the lending bank’s payday cash advances and installment loans were to becomeuncollectible. 

Because of our economicexposure for excess bank losses related to the lending banks’ payday cashadvances and installment loans, we have established an accrual for excess banklosses, to reflect our probable losses related to uncollected lending bankpayday cash advances and installment loans. The accrual for excess bank lossesthat was reported in our balance sheet was $3.2 million and $1.9 million as of December 31,2004 and September 30, 2005, respectively. The accrual for excess banklosses has been established on a basis similar to the allowance for doubtfulaccounts for the standard business model payday cash advances. If the lendingbanks’ payday cash advance and installment loan losses are materially greaterthan our accrual for excess bank losses, our business, results of operationsand financial condition could be materially adversely affected. 

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**CertainContractual Cash Commitments**

Ourprincipal future contractual obligations and commitments as of September 30,2005, including periodic interest payments, included the following (dollars inthousands): 

| ** **                                 | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**                                           | ** ** | **2005** | ** ** | **2006 and  2007** | ** ** | **2008 and  2009** | ** ** | **2010 and  thereafter** | ** ** |
| Long term debt  obligations:               |       |       |       |                                                |       |   |   |   |   |   |   |   |   |
| Revolving credit facility                  |       | $          | 43,661     |                                                | $          | — |   | $ | — |   | $43,661 |   |   | $ | — |   |   |
| Mortgage payable                           |       | 9,360      |       | 199                                                 |       | 1,593 |   | 1,593 |   |   | 5,975 |   |   |
| Note payable                               |       | 554        |       | 35                                                  |       | 277 |   | 242 |   |   | — |   |   |
| Operating lease  obligations(1)            |       | 131,635    |       | 15,656                                              |       | 92,800 |   | 22,282 |   |   | 897 |   |   |
| Purchase  obligations                      |       | 2,005      |       | 2,005                                               |       | — |   | — |   |   | — |   |   |
| Total                                      |       | $          | 187,215    |                                                | $          | 17,895 |   | $ | 94,670 |   | $ | 67,778 |   |   | $6,872 |   |   |
|                                            |            |            |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includesleases for aircraft hangar space, centers, security equipment and faxequipment.

***Long-Term Debt Obligations***

Total debt (borrowings under our revolving credit facility,mortgage payable and note payable) at September 30, 2005 increasedapproximately $3.8 million, or 8.1%, to approximately $50.4 million compared toapproximately $46.6 million at December 31, 2004, and decreasedapproximately $200.3 million, or 79.9%, compared to total debt of approximately$250.7 million at September 30, 2004. The increase from December 31,2004 compared to September 30, 2005 is due primarily to increasedborrowings under our revolving credit facility due to increased customer demandsfor payday cash advances during the back-to-school season. The decrease from September 30,2004 compared to September 30, 2005 is due primarily to the payment of ourlong-term debt from the proceeds of our initial public offering in December 2004.

*RevolvingCredit Facility.**  *Asof September 30, 2005, we had $43.7 million outstanding on our revolvingcredit facility and approximately $15.5 million of letters of creditoutstanding, leaving approximately $205.8 million available for futureborrowings under our credit facility.

On July 16, 2004, we entered into an amendmentand restatement of our prior credit facility with a syndicate of banks. Asamended and restated, our revolving credit facility provides us with a$265.0 million revolving line of credit, which amount includes the abilityto issue up to $20.0 million in letters of credit. Our revolving creditfacility matures on July 16, 2009. We have the option to (i) increaseour revolving credit facility by an additional $10.0 million and (ii) extendits maturity date to July 16, 2010, in each case upon our satisfaction ofcertain covenants and conditions. Any portion of our revolving credit facilitythat is repaid may be borrowed again. In May 2005, we amended ourrevolving credit facility to allow the repurchase of up to $50 million of ouroutstanding common stock. In June 2005, we further amended our revolvingcredit facility to permit our operations as a Credit Services Organization inTexas. At September 30, 2005, we had $43.7 million outstanding under ourrevolving credit facility.

In order to limit our exposure to interest ratefluctuations, in May 2001 we entered into an interest rate swap agreementwith National City Bank that converted a portion of our variable rate debtoutstanding under our prior credit facility to a fixed rate of 4.78% plus amargin. The swap notional amount amortized by $2.5 million per month andmatured on May 7, 2004. Under the interest rate swap agreement, we wereexposed to losses in the event of nonperformance by the counterparty.

In general, our borrowings under our revolving creditfacility bear interest, at our option, at either a base rate plus an applicablemargin or a LIBOR-based rate plus an applicable margin. The base rateequals the greater of (i) the prime rate announced by Bank of America, theadministrative agent under the 

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revolving credit facility,or (ii) the sum of the federal funds rate plus 0.50%. The applicablemargin is determined each quarter by a pricing grid based on our seniorleverage ratio of our consolidated senior debt to consolidated EBITDA. The baserate applicable margin ranges from 0.75% to 1.50% based upon our seniorleverage ratio. The LIBOR-based applicable margin ranges from 2.50% to3.25% based upon our senior leverage ratio. As of September 30, 2005, theapplicable margin for the prime rate based rate was 0.75% and the applicablemargin for the LIBOR-based rate was 2.50%.

The applicable rate is chosen at the time a draw downis requested under the revolving credit facility and is based on the forecastedworking capital requirements and the required notice period for each type ofborrowing. LIBOR-based rates can be selected for one month, two month,three month or six-month terms. In the case of a base rate loan, notice must begiven to the bank on the business day prior to the date of the requiredborrowing and in the case of a LIBOR-based loan notice must be given tothe bank on the third business day prior to the date of the requestedborrowing. Base rate loans are variable, and the rates on those loans are changedwhenever the underlying rate changes. LIBOR-based loans bear interest forthe term of the loan at the rate set at the time of borrowing for that loan.

Our obligations under the revolving credit facilityare guaranteed by each of our subsidiaries. Our borrowings under the revolvingcredit facility are secured by substantially all of our assets and the assetsof our subsidiaries. In addition, our borrowings under the revolving creditfacility are secured by a pledge of all of the capital stock, or similar equityinterests, of our subsidiaries. Our revolving credit facility contains variousfinancial covenants that require, among other things, the maintenance of aminimum net worth and leverage and fixed charge coverage ratios. The revolvingcredit facility contains customary covenants and events of default, includingcovenants that restrict our ability to encumber assets, to create indebtednessand to declare and pay dividends. The revolving credit facility also includescross default provisions where an event of default with respect to any otherindebtedness in excess of $1.0 million in the aggregate could cause allamounts outstanding under the revolving credit facility to become due andpayable. We were in compliance with all covenants at September 30, 2005.

We borrow under our $265.0 million revolvingcredit facility to fund our payday cash advances and to fund our otherliquidity needs. Our day-to-day balances under our revolving credit facility,as well as our cash balances, vary because of seasonal and day-to-dayrequirements resulting from making and collecting payday cash advances. Forexample, if a month ends on a payday, our borrowings and our cash balances willbe higher compared to a month that does not end on a payday. This is because asubstantial portion of the payday cash advances will be repaid in cash on thatday but sufficient time will not yet have passed for the cash to reduce theoutstanding borrowings under our revolving credit facility. Our borrowingsunder our revolving credit facility will also increase as the demand for paydaycash advances increases during our peak periods such as the back-to-school andholiday seasons. Conversely, our borrowings typically decrease during the taxrefund season when cash receipts from customers peak or the customer demand fornew payday cash advances decreases.

*Mortgage Payable.**  *Our corporate headquarters buildingand related land are subject to a mortgage, the principal amount of which wasapproximately $6.5 million and $6.3 million at December 31, 2004 and September 30, 2005, respectively. Themortgage is payable to an insurance company and is secured by our corporateheadquarters building and related land. The mortgage is payable in 180 monthlyinstallments of approximately $66,400, including principal and interest, andbears interest at a fixed rate of 7.30% over its term. The mortgage matures on June 10,2017. The carrying amount of our corporate headquarters (land, landimprovements and building) was approximately $5.6 million and $5.5 millionat December 31, 2004 and September 30,2005, respectively.

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***Operating Lease Obligations***

We lease all but three ofour centers from third-party lessors under operating leases. These leasestypically have initial terms of three years and may contain provisions forrenewal options, additional rental charges based on revenue and payment of realestate taxes and common area charges. In addition, we lease aircraft hangarspace and have certain other leases for security and office equipment. Thelessors under three center leases and the aircraft hanger space operating leaseare companies controlled by our Chairman.

***Purchase Obligations***

We enter into agreementswith vendors to purchase furniture, fixtures and other items used to open newcenters. These purchase commitments typically extend for a period of two tothree months after the opening of a new center. As of September 30, 2005,our purchase obligations totaled approximately $2.0 million.

**CriticalEstimates, Uncertainties or Assessments in the Financial Statements**

The preparation of our financial statements inconformity with GAAP requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. In applying theaccounting principles, we must often make individual estimates and assumptionsregarding expected outcomes or uncertainties. As might be expected, the actualresults or outcomes are generally different than the estimated or assumed amounts.These differences are usually minor and are included in our consolidatedfinancial statements as soon as they are known. Estimates, judgments andassumptions are continually evaluated based on available information andexperience. Because of the use of estimates inherent in the financial reportingprocess, actual results could differ from those estimates.

Actual results related to the estimates andassumptions made in preparing our consolidated financial statements will emergeover periods of time, such as estimates and assumptions underlying thedetermination of allowance for doubtful accounts. These estimates andassumptions are monitored and periodically adjusted as circumstances warrant.These amounts may be adjusted based on higher or lower actual loss experience.Although there is greater risk with respect to the accuracy of these estimatesand 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 assumptionsover the same period.

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

**Impact of Inflation**

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

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**RISK FACTORS**

**RisksRelated to Our Business and Industry**

***The  agencyrelationships with the lending banks are highly regulated and any changes inlaws and regulations governing these relationships could have a materialadverse effect on our business, results of operations and financial condition.***

The agency relationships with the lending banks arehighly regulated. Under federal banking law, an FDIC insured, state-charteredbank located in one state can make loans to a consumer in another state and chargefees and/or interest allowed by the lending bank’s home state even if the feesand/or interest exceed what may be charged in the consumer’s state under thatstate’s usury law. This “export” lending law allows the lending banks for whichwe act as marketing, processing and servicing agent to export the interestrates permitted by the states in which they are located into the states inwhich we act as their agent. Currently, only state-chartered banks can belending banks for payday cash advances, because the federal regulators fornational banks and federal savings associations have effectively prohibitedsuch banks and associations from participating in the payday cash advanceservices industry with agents.

The two lending banks for which, as of July 2005,we act as marketing, processing and servicing agent are subject to extensivefederal and state banking regulations and are subject to regular examinationand review by state and federal regulatory authorities such as the FDIC.Because of our relationships with the lending banks, our own activitiesregarding the lending banks’ payday cash advances and installment loans arealso subject to examination by regulatory authorities. For example, we are generallyexamined annually by the FDIC. Inconnection with any regulatory examination, the FDIC or other regulatoryauthority may require us to provide information, grant access to our centers,personnel and records or alter our business practices, perhaps materially, ormay prevent the lending banks from providing payday cash advances andinstallment loans using us as an agent, which could preclude us from conductingbusiness under the agency business model. Any of these actions could have amaterial adverse impact on our business, results of operations and financialcondition, especially if we are required to materially modify our businesspractices or terminate our use of the agency business model.

A director of the FDIC has publicly questioned whetherpayday cash advances are predatory and abusive to consumers. The FDIC directoralso questioned whether agents for lending banks are entitled to the benefit ofthe federal banking law that permits a lending bank to “export” the lendinginterest rate on payday cash advances permitted by the state in which it islocated to consumers in other states. If agent-assisted payday cash advances andinstallment loans made by the lending banks were no longer entitled to thebenefit of the federal banking laws permitting the exportation of interestrates, we would no longer be able to conduct business under the agency bankmodel and the resulting decline in our net revenues would have a materialadverse effect on our business, results of operations and financial condition.

Other federal regulators have also increasinglyscrutinized agency relationships between banks and payday cash advancecompanies. During 2002 and 2003, for example, the Office of the Comptroller ofthe Currency (“OCC”), which supervises national banks, took actions toeffectively prohibit certain national banks from offering and makingsmall-denomination, short-term consumer loans, including payday cash advances,through the use of agents such as ourselves. After a notice of charges wasissued in 2002 against Peoples National Bank, one of the lending banks whose paydaycash advances we marketed, processed and serviced at that time, we entered intoa consent agreement with the OCC to terminate our agency relationship with thatbank. Future actions against the lending banks whose payday cash advances andinstallment loans we market, process and service could result in a significantinterruption or curtailment of our business. Any such business disruption orcurtailment could have a material adverse effect on our business, results ofoperations and financial condition.

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Lending banks for which weact as marketing, processing and servicing agent may also have agencyrelationships with other agents. Actions taken by these other agents, overwhich we have no control, could cause a lending bank to lose its ability tomake payday cash advances or installment loans through an agent such as us, orcould cause a lending bank to choose to terminate its relationship with us. Anysuch event could also have a material adverse effect on our business, resultsof operations and financial condition.

***Our failure toefficiently and profitably market, service and process a new installment loanproduct or to introduce or manage a check-cashing or credit services businesscould have a material adverse effect on our business, results of operations andfinancial condition.***

In response to the RevisedGuidance, in July 2005, we began marketing, servicing and processinginstallment loans offered by the lending banks in Pennsylvania, North Carolinaand Arkansas, offering check-cashing and deferred presentment services directlyto customers in Michigan and offering additional credit services as a CreditServices Organization to customers in Texas. See “—Revised FDIC Guidance” for amore detailed description of these developments. Each of these changes issubject to risks and uncertainty and requires significant investment in timeand capital. Due to our lack of experience in offering these services, wecannot assure you that we will be able to successfully implement any of thesechanges. Furthermore, we cannot anticipate the demand for any of these newservices. Nor do we know if we will be able to offer these new services in anefficient manner or on a profitable basis. Our failure to do so, or lowcustomer demand for any of these new services, could have a material adverseeffect on our business, results of operations and financial condition.

***Complying with theRevised Guidance will reduce our revenues and decrease our margins under theagency business model, which could have a material adverse effect on ourbusiness, results of operations and financial condition.***

Revenues under the agencybusiness model will decrease because (1) the Revised Guidance limits thenumber of payday cash advances that may be made, (2) the more stringentunderwriting standards that the lending banks apply to their installment loanswill likely reduce the number of eligible customers, and (3) the longerduration of installment loans will likely result in fewer installment loantransactions than payday cash advances that would have been made in the sameperiod. Additionally, due to the fixed nature of some of our expenses and theincremental cost of marketing, processing and servicing a new product, ourmargins under the agency business model will erode. A reduction in revenues ora decrease in margins under the agency business model could have a materialadverse effect on our business, results of operations and financial condition.

***Our failure, or thefailure of any of the lending banks for whom we act as agent, to comply withthe Revised Guidance could result in the limitation or suspension of businessin certain states, potentially resulting in a material adverse effect on ourbusiness, results of operations and financial condition.***

In response to the RevisedGuidance, we have undertaken certain operational changes, have terminated oramended the old MP&S Agreements, and have entered into new MP&SAgreements with certain lending banks. Additionally, we and the lending bankshave adopted new procedures, and the lending banks have introduced a newinstallment loan product, in an effort to comply with the Revised Guidance. See“—Revised FDIC Guidance.” Our failure, or the failure of any of the lendingbanks for whom we act as agent, including with respect to the new installmentloan product, to comply with the Revised Guidance could result in thelimitation or suspension of business in some or all of the states in which wecontinue to operate under the agency business model. Any such event could havea material adverse effect on our business, results of operations and financialcondition.

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***If we are no longerable to market, process and service payday cash advances or installment loans madeand funded by the lending banks, our business, results of operations andfinancial condition could be materially adversely affected.***

If the FDIC’s implementation of the Revised Guidanceor the promulgation of any additional guidelines were to ultimately restrictthe ability of all or certain state-chartered banks (including the lendingbanks for whom we act as marketing, processing and servicing agent) to maintainrelationships with payday cash advance marketers, processors and servicers(such as us), it would have a material adverse impact on our business, resultsof operations and financial condition. In addition, if state banking regulatorswere to take action to restrict the ability of all or certain state-charteredbanks, including the lending banks for whom we act as marketing, processing andservicing agent, to provide payday cash advances or installment loans, ourdistribution opportunities in those states where we operate as an agent for alending bank would be limited and we could have to permanently cease ouroperations in those states.

If, as a result of changes in laws or regulations, anadverse result in litigation or regulatory proceedings or otherwise, we couldno longer market, process and service payday cash advances or installment loansmade and funded by the lending banks in one or more of our present or futuremarkets, our business, results of operations and financial condition could bematerially adversely affected. In addition, any such changes in laws orregulations or adverse result in litigation or regulatory proceedings coulddeprive us of the agency business model as an alternative method for conductingour business in the event that statutory provisions or regulations specificallyauthorizing payday cash advances or installment loans changed or expired in anyof the states in which we currently operate under the standard business model.

On September 15,2005, the lending bank for which we market, process and service payday cashadvances and installment loans in our 117 centers in North Carolina temporarilysuspended its payday cash advance and installment loan originations. Wecontinue to service all payday cash advances and installment loans that arecurrently outstanding in North Carolina. We believe that a ruling from theCommissioner of Banks in North Carolina is imminent. Such ruling could cause usto permanently cease marketing, processing and servicing advances and loans inNorth Carolina. We estimate that it would cost, as of September 30, 2005,approximately $3.1 million (including lease cancellation costs of approximately$0.6 million, the charge-off of undepreciated cost of assets ofapproximately $1.2 million and other shut-down costs ofapproximately $1.3 million) if we are required to shut down our NorthCarolina operations completely.

***The payday cashadvance services industry is highly regulated under state law. Changes in statelaws and regulations could have a material adverse effect on our business,results of operations and financial condition.***

Our business is regulated under numerous state lawsand regulations, which are subject to change and which may impose significantcosts or limitations on the way we conduct or expand our business. As of September 2005,37 states and the District of Columbia had specific laws that permitted paydaycash advances or allowed a form of payday cash advances under small loan laws.The states with specific payday cash advance laws have laws that generallygovern the terms of the transaction and require certain consumer protections. Asof September 2005, we operated in 33 of these 37 states under the standardbusiness model. We do not conduct business in the remaining four of these 37states or in the District of Columbia because we do not believe it is economicallyattractive at this time to operate in these jurisdictions due to specificlegislative restrictions such as interest rate ceilings, an unattractivepopulation density or unattractive location characteristics. The remaining 13of the 50 states do not currently have laws specifically authorizing the paydaycash advance business. As of September 2005, we operate in three of these13 states under the agency business model, serving as marketing, processing andservicing agent 

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through our centers fortwo lending banks that make payday cash advances to their customers in thosestates, and in one of these states under the standard business model.

During the last few years, legislation has beenadopted in some states that prohibits or severely restricts payday cash advanceservices. Many bills to restrict or prohibit payday cash advances have alsobeen introduced in state legislatures. Future laws or regulations prohibitingpayday cash advance services or making them unprofitable could be passed in anyother state at any time or existing payday cash advance laws could expire or beamended, any of which could have a material adverse effect on our business,results of operations and financial condition.

Statutes authorizing payday cash advance servicestypically provide state agencies that regulate banks and financial institutionswith significant regulatory powers to administer and enforce the law. Understatutory authority, state regulators have broad discretionary power and mayimpose new licensing requirements, interpret or enforce existing regulatoryrequirements in different ways or issue new administrative rules, even if notcontained in state statutes, that impact the way we do business and may forceus to terminate or modify our operations in particular states. They may alsoimpose rules that are generally adverse to our industry.

Additionally, stateattorneys general and banking regulators have begun to scrutinize the paydaycash advance services industry and may take actions against the industry thatcould require us to cease or suspend operations in their respective states. See“Item 1. Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 7. Commitments and Contingencies.”

***The payday cashadvance services industry is also regulated under federal law. Changes infederal laws and regulations could have a material adverse effect on ourbusiness, results of operations and financial condition.***

Although states provide the primary regulatoryframework under which we offer payday cash advance services, certain federallaws also impact our business. For example, because payday cash advances areviewed as extensions of credit, the lending banks and we must comply with thefederal Truth-in-Lending Act and Regulation Z adopted under that Act.Additionally, the lending banks and we are subject to the Equal CreditOpportunity Act, the Fair Debt Collection Practices Act, as applicable, and theGramm-Leach-Bliley Act. Any failure to comply with any of these federal lawsand regulations could have a material adverse effect on our business, resultsof operations and financial condition.

We are also subject to supervision by other federalagencies, including the Federal Trade Commission, or the FTC. In December 2002,the FTC requested that certain payday cash advance providers, including us,respond to a series of questions and document requests concerning theiroperations. This review may result in recommendations regarding the payday cashadvance services industry or specific conclusions about us, either of which mayhave a material adverse effect on our business, results of operations andfinancial condition. Future reviews by other federal agencies could also have amaterial adverse effect on our business, results of operations and financialcondition.

Additionally, since 1999,various anti-payday cash advance legislation has been introduced in the U.S.Congress, with recent legislation specifically targeting the agencyrelationships between banks and payday cash advance companies. Congressionalmembers continue to receive pressure from consumer advocates and other industryopposition groups to adopt such legislation. Any federal legislative orregulatory action that restricts or prohibits payday cash advance services orour activities as marketing, processing and servicing agent for the lendingbanks could have a material adverse impact on our business, results ofoperations and financial condition.

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***The payday cashadvance services industry is subject to various local rules andregulations. Changes in these local regulations could have a material adverseeffect on our business, results of operations and financial condition.***

In addition to state andfederal laws and regulations, our business is subject to various local rules andregulations such as local zoning regulations. Any actions taken in the futureby local zoning boards or other governing bodies to require special use permitsfor, or impose other restrictions on, payday cash advance service providerscould have a material adverse effect on our business, results of operations andfinancial condition.

***Current and futurelitigation and regulatory proceedings against us could have a material adverseeffect on our business, results of operations and financial condition.***

Our business is subject to lawsuits and regulatoryproceedings that could generate adverse publicity and cause us to incursubstantial expenditures. See “Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 7. Commitments andContingencies.” For example, marketing, processing and servicing payday cashadvances as agent of a lending bank, such as what we do under the agencybusiness model, has come under increasing legal and regulatory scrutiny at boththe state and federal levels. The opposing parties in many of these lawsuitsand proceedings maintain that payday cash advance companies, like us, thatmarket, process and service payday cash advances made by a lending bank shouldbe regarded as the “true lenders” due to the agent services they provide andtheir participation and/or economic interests in the payday cash advances. Manyof these opposing parties allege that these relationships are “rent a charter”relationships, and as a result the payday cash advances made by banks usingnon-bank agents should be governed by the laws of the respective states inwhich the borrowers reside (i.e., they argue that there should be no federalpreemption of state law and therefore no “exporting” of interest rates). Ifpayday cash advance companies, like us, were held to be the “true lenders” inany of these lawsuits, the fees and/or interest charged would violate most ofthe applicable states’ usury laws, which impose maximum rates of interest orfinance charges that a non-bank lender may charge. In addition, payday cashadvance companies, like us, could be found to be in violation of state consumerprotection laws and other laws, including certain criminal laws. If any stateor federal court were to conclude that certain state laws applied to the agencybusiness model and that we violated those laws, the decision could have amaterial adverse effect on our business, results of operation and financialcondition. The impact of a negative ruling in any specific state would not onlyimpair our operations in the specific state but could also hurt our business inother states due to the possibility such a decision could be cited as adverseprecedent in pending or potential litigation and enforcement actions in otherstates. Adverse rulings in some of these lawsuits could significantly impairour business or force us to cease doing business in one or more states.

We are also involved inother litigation and administrative proceedings. See “Item 1. FinancialStatements—Notes to Interim Unaudited Consolidated Financial Statements—Note 7.Commitments and Contingencies.” We are likely to be subject to further litigationand proceedings in the future. The consequences of an adverse ruling in anycurrent or future litigation or proceeding could cause us to have to refundfees and/or interest collected on payday cash advances, refund the principalamount of payday cash advances, pay treble or other multiple damages, paymonetary penalties and/or modify or terminate our operations in particularstates. We may also be subject to adverse publicity. Defense of any lawsuits orproceedings, even if successful, would require substantial time and attentionof our senior officers and other management personnel that would otherwise bespent on other aspects of our business and would require the expenditure ofsignificant amounts for legal fees and other related costs. Any of these eventscould have a material adverse effect on our business, results of operations andfinancial condition.

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***Legislative orregulatory action or an adverse result in litigation or regulatory proceedingscould cause us to cease, suspend or modify our operations in a state,potentially resulting in a material adverse effect on our business, results ofoperations and financial condition.***

If we close our centers in a state, in addition to theloss of net revenues attributable to that closing, we would incur closing costssuch as severance payments and lease cancellation payments and we would have towrite off assets that we could no longer use. If we were to suspend rather thanpermanently cease our operations in a state, we may also have continuing costsassociated with maintaining our centers and our employees in that state, withlittle or no revenues. See “Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 7. Commitments andContingencies” for a discussion of our North Carolina operations.

From time to time, we mayalso choose to operate in a state even if legislation or regulations cause usto lose money on our operations in that state. The passage of a 2002 Indianastatute, for example, established a rate structure at which we could notoperate on a profitable basis. However, we continued to provide payday cashadvances in the state while experiencing operating losses until a new, lessrestrictive, law was passed in March 2004. Any of these actions or eventscould have a material adverse effect on our business, results of operations andfinancial condition.

***We lack product andbusiness diversification; as a result, our future revenues and earnings may bedisproportionately negatively impacted by external factors and may be moresusceptible to fluctuations than more diversified companies.***

Our primary businessactivity is offering payday cash advance services. If we are unable to maintainand grow our payday cash advance services business, our future revenues andearnings could decline. Our lack of product and business diversification couldinhibit our opportunities for growth, reduce our revenues and profits and makeus more susceptible to earnings fluctuations than many of our competitors whoare more diversified and provide other services such as pawn lending, titlelending, wire transfer services or other similar services. External factors,such as changes in laws and regulations, new entrants and enhanced competition,could also make it more difficult for us to operate as profitably as a morediversified company could operate. Any internal or external change in thepayday cash advance services industry could result in a decline in our futurerevenues and earnings, which could have a material adverse effect on our stockprice.

***We depend to asubstantial extent on borrowings under our revolving credit facility to fundour liquidity needs.***

We have an existingrevolving credit facility that allows us to borrow up to $265.0 million,assuming we are in compliance with a number of covenants and conditions. Becausewe typically use substantially all of our available cash generated from ouroperations to repay borrowings on our revolving credit facility on a currentbasis, we have limited cash balances and we expect that a substantial portionof our liquidity needs, including any amounts to pay any future cash dividendson our common stock, will be funded primarily from borrowings under ourrevolving credit facility. As of September 30, 2005, we had approximately$205.8 million available for future borrowings under this facility. Due to theseasonal nature of our business, our borrowings are historically the lowestduring the first calendar quarter and increase during the remainder of the year.If our existing sources of liquidity are insufficient to satisfy our financialneeds, we may need to raise additional debt or equity in the future.

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***Competition in theretail financial services industry could cause us to lose market share,possibly resulting in a decline in our future revenues and earnings.***

The industry in which weoperate has low barriers to entry and is highly fragmented and verycompetitive. We believe that the market may become even more competitive as theindustry grows and/or consolidates. We compete with services provided bytraditional financial institutions, such as overdraft protection, and withother payday cash advance providers, small loan providers, credit unions,short-term consumer lenders, and other financial service entities and otherretail businesses that offer consumer loans or other products and services thatare similar to ours. We also compete with companies offering payday cashadvances and short-term loans over the internet as well as by phone. Some ofthese competitors have larger local or regional customer bases, more locationsand substantially greater financial, marketing and other resources than wehave. As a result of this increasing competition, we could lose market share,possibly resulting in a decline in our future revenues and earnings.

***The concentrationof our revenues in certain states could adversely affect us.***

Our cash advance centersoperate in 37 states and, for the three months ended September 30, 2004 and 2005, our five largest states(measured by total revenues) accounted for approximately 42% and 40%,respectively, of our total revenues, with California, our largest state(measured by total revenues), representing approximately 11% and 10%,respectively, of total revenues in both periods. For the nine months ended September 30,2004 and 2005, our five largest states (measured by total revenues) accountedfor approximately 42% and 41%, respectively, of our total revenues, withCalifornia, our largest state (measured by total revenues), representingapproximately 11% of our total revenues. While we believe we have a diversegeographic presence, for the near term we expect that significant revenues willcontinue to be generated by certain states, largely due to the currentlyprevailing economic, demographic, regulatory, competitive and other conditionsin those states. Furthermore, our five largest states, as measured by revenues,are not in all instances our five largest states as measured by the number ofcenters operated. Changes to prevailing economic, demographic, regulatory orany other conditions in the markets in which we operate could lead to areduction in demand for our payday cash advance services, a decline in ourrevenues or an increase in our provision for doubtful accounts and agency banklosses that could result in a deterioration of our financial condition.

***Media reports andpublic perception of payday cash advances as being predatory or abusive couldmaterially adversely affect our business, results of operations and financialcondition.***

Over the past few years,consumer advocacy groups and certain media reports have advocated withincreasing frequency governmental and regulatory action to prohibit or severelyrestrict payday cash advances. The consumer groups and media reports typicallyfocus on the cost to a consumer for a payday cash advance. The consumer groupsand media reports typically characterize these payday cash advances aspredatory or abusive toward consumers. If this negative characterization ofpayday cash advances becomes widely accepted by consumers, demand for paydaycash advance services could significantly decrease, which could materiallyadversely affect our business, results of operations and financial condition.Negative perception of payday cash advances or other activities could alsoresult in increased regulatory scrutiny and increased litigation, and encouragerestrictive local zoning rules and make it more difficult to obtaingovernment approvals necessary to open new centers. These trends couldmaterially adversely affect our business, results of operations and financialcondition.

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***Our provision fordoubtful accounts and agency bank losses could increase if the lending bank’spayday cash advance and installment loan approval processes are flawed and morepayday cash advances or installment loans go uncollected than anticipated. Thiswould result in a decline in our future revenues and earnings, which could havea material adverse effect on our stock price.***

Pursuant to our agreementsto market, process and service payday cash advances and installment loans madeby the lending banks, the banks are responsible for evaluating each of theircustomers’ applications and determining whether the payday cash advance orinstallment loan is approved. We are not involved in the lending banks’approval process, we are not involved in determining the approval procedures orcriteria of the lending banks and generally we do not fund or acquire anypayday cash advances or installment loans from the lending banks. Consequently,the lending banks’ payday cash advances and installment loans are not includedin our payday cash advance and installment loan portfolios nor are theyreflected on our balance sheet within our advances and fees receivable, net.However, pursuant to our MP&S Agreement with BankWest, and our recentlyterminated agreements with other lending banks, the lending banks arecontractually obligated for the losses on payday cash advances in an amountestablished as a percentage of the fees and/or interest charged by the lendingbank to its customers. If the amount of uncollected payday cash advancesexceeds the lending bank’s contractual obligation, we would likely be obligatedto pay the lending bank the outstanding amount of the advances plus its feesand/or interest receivable on the advances, less its contractually obligatedportion of the losses. As of September 30,2005, this aggregate contingent liability amounted to $17.2 million and was notincluded on our balance sheet. If the banks’ payday cash advance andinstallment loan approval processes are flawed and the number of uncollectedpayday cash advances or installment loans increases, our provision for doubtfulaccounts and agency bank losses could increase. This would result in a declinein our future revenues and earnings, which could have a material adverse effecton our stock price.

***The provision fordoubtful accounts and agency bank losses may increase and net income maydecrease if we are unable to collect customers’ personal checks that arereturned due to non-sufficient funds (NSF) in the customers’ accounts or otherreasons.***

For the three months endedSeptember 30, 2005, we deposited approximately 6.4% of all the customerchecks we received and approximately 79.5% of these deposited customer checkswere returned unpaid because of non-sufficient funds in the customers’ bankaccounts or because of closed accounts or stop-payment orders. For the ninemonths ended September 30, we deposited approximately 5.5% of all thecustomer checks we received and approximately 78.7%  of these deposited customer checks werereturned unpaid because of non-sufficient funds in the customers’ bank accountsor because of closed accounts or stop-payment orders. Total charge-offs, net ofrecoveries, for the three months ended September 30, 2004 and 2005 wereapproximately $26.9 million and $31.8 million, respectively. Total charge-offs,net of recoveries, for the nine months ended September 30, 2004 and 2005were approximately $54.7 million and $65.7 million, respectively. If the numberof customer checks that we deposit increases or the percent of the customers’returned checks that we charge-off increases, our provision for doubtfulaccounts and agency bank losses will increase and our net income will decrease.

***We are subject tocredit risk as a result of our arrangements with lending banks. The lendingbanks’ failure to honor their obligations to us could have a material adverseeffect on our business, results of operations and financial condition.***

Under the agency businessmodel, all charges of fees and/or interest paid by a lending bank’s customersare deposited directly in the lending bank’s bank account. We invoice thelending bank for the marketing, processing and servicing fees payable to us bysuch bank. In addition, the lending bank in Pennsylvania is responsible formaking payments to us if actual payday cash advance and installment loan lossesare less than the bank’s contractually obligated portion of the losses. We aresubject to the risk that 

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thelending banks may fail to pay all or a portion of the amounts due to us or thatthey fail to pay us on a timely basis. Any such failure could have a materialadverse effect on our business, results of operations and financial condition.

***If our estimates ofpayday cash advance, installment loan or credit services losses are notadequate to absorb losses, our provision for doubtful accounts and agency banklosses would increase. This would result in a decline in our future revenuesand earnings, which could have a material adverse effect on our stock price.***

We maintain an allowance for doubtful accounts forestimated losses for payday cash advances we make directly to consumers andcheck-cashing and other credit services we offer under the standard businessmodel and an accrual for excess bank losses for our share of losses on paydaycash advances and installment loans we market, process and service for lending banksunder the agency business model. To estimate the appropriate allowance fordoubtful accounts and accrual for excess bank losses, we consider the amount ofoutstanding payday cash advances owed to us, the amount of payday cash advancesand installment loans owed to the lending banks and serviced by us, thecontract with each lending bank, historical payday cash advances or installmentloans we have charged off, our current collection patterns and the currenteconomic trends in the markets we serve. As of September 30, 2005, our allowance for doubtful accounts was$41.8 million and our accrual for excess bank losses was $1.9 million. Theseamounts, however, are estimates, and we have less experience upon which to baseour estimates of losses from installment loans, check-cashing or creditservices. If our actual payday cash advance, check-cashing or credit serviceslosses are greater than our allowance for doubtful accounts, or if the actuallosses on the advances or loans made by the lending banks are greater than ouraccrual for excess bank losses, our provision for doubtful accounts and agencybank losses would increase. This would result in a decline in our futurerevenues and earnings, which could have a material adverse effect on our stockprice.

With respect to the paydaycash advances and installment loans that we market, process and service for thelending bank in Pennsylvania, as of September 30,2005, our aggregate contingent liability was $17.2 million and this amount wasnot included on our balance sheet. We could be obligated to pay this amount tothe lending bank if the lending bank’s payday cash advances and installmentloans were to become uncollectible. The accrual for excess bank losses that wasreported in our current liabilities in our balance sheet was $1.9 million as ofSeptember 30, 2005. Our accrualfor excess bank losses is, however, an estimate. If actual payday cash advance andinstallment loan losses are greater than our recorded accrual for excess banklosses, our provision for doubtful accounts and agency bank losses wouldincrease. This would result in a decline in our future revenues and earnings,which could have a material adverse effect on our stock price.

***Our ability tomanage our growth may deteriorate, and our ability to execute our growthstrategy may be adversely affected.***

We have experienced substantial growth in recentyears. Our growth strategy, which is based on rapidly opening a large number ofcenters in existing and new markets, is subject to significant risks. We cannotassure you that we will be able to expand our market presence in our currentmarkets or successfully enter new markets through the opening of new centers oracquisitions. Moreover, the start-up costs and the losses from initialoperations attributable to each newly opened center place demands upon ourliquidity and cash flow, and we cannot assure you that we will be able tosatisfy these demands.

In addition, ourability to execute our growth strategy will depend on a number of otherfactors, some of which may be beyond our control, including:

·       theprevailing laws and regulatory environment of each state in which we operate orseek to operate, which are subject to change at any time;

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·       ourability to obtain and maintain any regulatory approvals, government permits orlicenses that may be required;

·       ourability to market, process and service an installment loan and to manage acheck-cashing and deferred presentment business and credit serviceorganization business;

·       thedegree of competition in new markets and its effect on our ability to attractnew customers;

·       ourability to compete for expansion opportunities in suitable locations;

·       ourability to recruit, train and retain qualified personnel;

·       ourability to adapt our infrastructure and systems to accommodate our growth; and

·       ourability to obtain adequate financing for our expansion plans.

We cannot assure you thatour systems, procedures, controls and existing space will be adequate tosupport expansion of our operations. Our growth has placed significant demandson all aspects of our business, including our administrative, technical andfinancial personnel and systems. Additional expansion may further strain our management,financial and other resources. Our future results of operations willsubstantially depend on the ability of our officers and key employees to managechanging business conditions and to implement and improve our technical,administrative, financial control and reporting systems. In addition, we cannotassure you that we will be able to implement our business strategy profitablyin geographic areas we do not currently serve.

***We may incursubstantial additional debt, which could adversely affect our business, resultsof operations and financial condition by limiting our ability to obtainfinancing in the future and react to changes in our business.***

We may incursubstantial additional debt in the future. As of September 30, 2005, ourtotal debt was approximately $43.7 million and our stockholders’ equity wasapproximately $309.3 million. Due to the seasonal nature of our business, ourtotal debt is historically the lowest during the first calendar quarter andthen increases during the remainder of the year. If we incur substantialadditional debt, it could have important consequences to our business. Forexample, it could:

·       restrictour operational flexibility through restrictive covenants that will limit ourability to make acquisitions, explore certain business opportunities, disposeof assets and take other actions;

·       limitour flexibility in planning for, or reacting to, changes in our business;

·       limitour ability to borrow additional funds in the future, if we need them, due toapplicable financial and restrictive covenants in our debt instruments;

·       makeus vulnerable to interest rate increases, because a portion of our borrowingsis, and will continue to be, at variable rates of interest;

·       requireus to dedicate a substantial portion of our cash flow from operations topayments on our debt obligations, which will reduce our funds available forworking capital, capital expenditures and our growth strategy; and

·       placeus at a disadvantage compared to our competitors that have proportionately lessdebt.

The terms of our debt limit our ability to incuradditional debt but do not prohibit us from incurring additional debt. Whencurrent debt levels increase, the related risks that we now face will alsoincrease.

If we fail to generatesufficient cash flow from future operations to meet our debt serviceobligations, we may need to seek refinancing of all or a portion of ourindebtedness or obtain additional financing in 

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order tomeet our obligations with respect to our indebtedness. We cannot assure youthat we will be able to refinance any of our indebtedness or obtain additionalfinancing on satisfactory terms or at all.

***We depend on loansfrom banks to operate our business. If banks decide to stop making loans tocompanies in the payday cash advance services industry, it could have amaterial adverse affect on our business, results of operations and financialcondition.***

We depend on borrowingsunder our revolving credit facility to fund payday cash advances, capitalexpenditures to build new centers and other needs. One major regional bankannounced that it had revised its credit policies to prohibit future loans tocompanies engaged in the payday cash advance services or car title lendingindustries in a letter that the bank filed with the Federal Reserve Board inconnection with the bank’s application for approval of an acquisition. The bank’sletter referred to comments filed by certain consumer advocacy organizations inconnection with the bank’s application, and stated that it had revised itscredit policies “after considering the potential reputational risks andconsumer harm” that could result from lending to companies in these industries.While this bank is not one of our existing lenders under our revolving creditfacility, if our current or potential credit banks decided not to lend money tocompanies in the payday cash advance services industry, we could face higherborrowing costs, limitations on our ability to grow our business as well aspossible cash shortages, any of which could have a material adverse effect onour business, results of operations and financial condition.

***Our revolvingcredit facility contains restrictions and limitations that could significantlyaffect our ability to operate our business.***

Our revolvingcredit facility contains a number of significant covenants that could adverselyaffect our business. These covenants restrict our ability, and the ability ofour subsidiaries to, among other things:

·       incuradditional debt;

·       createliens;

·       effectmergers or consolidations;

·       makeinvestments, acquisitions or dispositions;

·       paydividends or make other payments;

·       enterinto certain sale and leaseback transactions;

·       becomesubject to further restrictions on the creation of liens; and

·       haveforeign subsidiaries.

The breach of anycovenants or obligation in our revolving credit facility will result in adefault. If there is an event of default under our revolving credit facility,the lenders under the revolving credit facility could cause all amountsoutstanding there under to be due and payable, subject to applicable graceperiods. This could trigger cross-defaults under our other existing or futuredebt instruments. As a result, our ability to respond to changing business andeconomic conditions and to secure additional financing, if needed, may besignificantly restricted, and we may be prevented from engaging in transactionsthat might further our growth strategy. If we are unable to repay, refinance orrestructure our indebtedness under our revolving credit facility, the lendersunder that facility could proceed against the collateral securing thatindebtedness. Our obligations under the revolving credit facility areguaranteed by each of our existing and future subsidiaries. The borrowingsunder the revolving credit facility and the subsidiary guarantees are securedby substantially all of our assets and the assets of the subsidiary guarantors.In addition, borrowings under the revolving credit facility are secured by apledge of substantially all of the capital stock, or similar equity interests,of the subsidiary guarantors. In the event of our insolvency, liquidation, 

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dissolutionor reorganization, the lenders under our revolving credit facility and anyother existing or future debt of ours would be entitled to payment in full fromour assets before distributions, if any, were made to our stockholders.

***We are a holdingcompany with no operations of our own and we depend on our subsidiaries forcash. If our subsidiaries do not generate a sufficient amount of cash that theycan provide to us, our liquidity and ability to service our indebtedness, fundour operations or pay dividends on our common stock would be harmed, any ofwhich could have a material adverse effect on our business, results ofoperations and financial condition.***

We have no operations ofour own and derive substantially all of our cash flow and liquidity from oursubsidiaries and from our borrowings. We have substantial contractualcommitments and debt service obligations. We depend on distributions from oursubsidiaries and borrowings to meet our contractual commitments and debtservice obligations and to pay dividends on our common stock. We cannot assureyou that our business will generate sufficient cash flow from operations orthat future borrowings will be available to us to enable us to meet ourcontractual commitments, to pay our indebtedness, to pay dividends on ourcommon stock or to fund our other liquidity needs. Certain states require us tomaintain some minimum net worth or liquidity based on the number of centers weoperate in the state and other factors. These requirements may restrict oursubsidiaries’ ability to pay dividends or make other distributions to us. Inorder to comply with these requirements, we were required to maintain cash andcash equivalents at our subsidiaries in an aggregate amount of $9.1 million and$9.5 million as of December 31, 2004 and September 30, 2005,respectively. In addition, if we undertake additional expansion efforts in thefuture, our cash requirements may increase significantly. Because of this, wemay not have enough cash flow to meet our future liquidity needs, which mayhave a material adverse effect on our business, results of operations andfinancial condition.

***Our business isseasonal in nature, which causes our revenues, collection rates and earnings tofluctuate. These fluctuations could have a material adverse effect on ourresults of operations and stock price.***

Our business is seasonal due to the impact offluctuating demand for payday cash advances and fluctuating collection ratesthroughout the year. Demand has historically been highest in the third andfourth quarters of each year, corresponding to the back-to-school and holidayseasons, and lowest in the first quarter of each year, corresponding to ourcustomers’ receipt of income tax refunds. Our provision for doubtful accountsand agency bank losses, allowance for doubtful accounts and accrual for excessbank losses are historically lowest as a percentage of revenues in the firstquarter of each year, corresponding to our customers’ receipt of income taxrefunds, and increase as a percentage of revenues for the remainder of eachyear. This seasonality requires us to manage our cash flows over the course ofthe year. If our revenues or collections were to fall substantially below whatwe would normally expect during certain periods, our ability to service ourdebt, pay dividends on our common stock and meet our other liquidityrequirements may be adversely affected, which could have a material adverse effecton our results of operations and stock price.

In addition, our quarterlyresults have fluctuated in the past and are likely to continue to fluctuate inthe future because of these seasonal fluctuations. If they do so, our quarterlyrevenues and results of operations may be difficult to forecast. Thisdifficulty in forecasting could cause our future quarterly results ofoperations to not meet the expectations of securities analysts or investors.Our failure to meet quarterly expectations could cause a material drop in themarket price of our common stock.

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***Because we maintain a significant supply of cash inour centers, we may be subject to cash shortages due to employee andthird-party theft and errors. We also may be subject to liability as a resultof crimes at our centers.***

Because our businessrequires us to maintain a significant supply of cash in each of our centers, weare subject to the risk of cash shortages resulting from employee andthird-party theft and errors. Although we have implemented various programs toreduce these risks, maintain insurance coverage for theft and provide securityfor our employees and facilities, we cannot assure you that employee andthird-party theft and errors will not occur. Cash shortages from employee andthird-party theft and errors were approximately $0.3 million (0.17% of totalrevenues) and $0.5 million (0.27% of total revenues) in the three months ended September 30,2004 and 2005, respectively. Cash shortages from employee and third-partytheft and errors were approximately $0.9 million (0.21% of total revenues) and$1.0 million (0.23% of total revenues) in the nine months ended September 30,2004 and 2005, respectively. Theft and errors could lead to cash shortages andcould adversely affect our business, results of operations and financialcondition. It is also possible that crimes such as armed robberies may becommitted at our centers. We could experience liability or adverse publicityarising out of such crimes. For example, we may be liable if an employee,customer or bystander suffers bodily injury, emotional distress or death. Anysuch event may have a material adverse effect on our business, results ofoperations and financial condition.

***Any disruption in the availability of our informationsystems could adversely affect operations at our centers.***

We rely upon ourinformation systems to manage and operate our centers and business. Each centeris part of an information network that is designed to permit us to maintainadequate cash inventory, reconcile cash balances on a daily basis and reportrevenues and expenses to our headquarters. Our back-up systems andsecurity measures could fail to prevent a disruption in our informationsystems. Any disruption in our information systems could adversely affect our business,results of operations and financial condition.

***Our auditors concluded that, as of June 30, 2004,there was a significant deficiency in our internal controls.***

Under standardsestablished by the Public Company Accounting Oversight Board, we had a significantdeficiency in our financial reporting internal controls as of June 30,2004. In Auditing Standard No. 2 issued in March 2004, the PublicCompany Accounting Oversight Board defined a “significant deficiency” as adeficiency that results in more than a remote likelihood that a misstatement ofthe financial statements that is more than inconsequential will not beprevented or detected. Under this new standard, our independent auditorsconcluded, and we agreed, that a significant deficiency existed relating to ourfinancial reporting capability as a public company. The significant deficiencywas determined to exist based on the need to increase our existing financedepartment resources to be able to prepare financial statements that are fullycompliant with all SEC reporting guidelines on a timely basis, as well as basedon the failure to properly apply two financial pronouncements: (i) FASBFinancial Interpretation No. 45 (“FIN 45”), Guarantors Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others; and (ii) FASB Financial Interpretation No. 46(“FIN 46”), Consolidation of Variable Interest Entities. We required additionaltechnical assistance from our independent auditors in applying the provisionsof FIN 45 to the agency business model transactions and in applying theprovisions of FIN 46 to our related party lease transactions as well as tocomply with the disclosure requirements of these pronouncements. Prior to ourinitial public offering in December 2004, we had been operating as aprivate company since inception. To address this deficiency and in connectionwith becoming a public company, we hired a director of accounting and reporting.In addition, we are enhancing our financial reporting capability by investingin additional personnel and creating an internal audit department, all of whichwill increase our costs. We cannot assure you that these measures or any futuremeasures will enable us to remedy this significant deficiency or avoid othersignificant deficiencies in the future.

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***If we fail to maintain an effective system of internalcontrols, we may not be able to accurately report our financial results andcomply with the Sarbanes-Oxley Act of 2002.***

Effective internalcontrols are necessary for us to provide reliable financial reports, includingreports on internal controls required under the Sarbanes-Oxley Act of 2002, andassist in the prevention of fraud. If we cannot provide reliable financialreports, our results of operations could be misstated and our reputation may beharmed. Historically, we may not have maintained a system of internal controlsthat was adequate for a public company, and in preparing the financialstatements included in this Quarterly Report we placed only limited reliance onour historical internal control structure. We cannot assure you that themeasures we have taken to date or any future measures will ensure that we willbe able to implement and maintain adequate controls over our future financialprocesses and reporting. If we are unable to implement and maintain adequateinternal controls in the future, our business, results of operations andfinancial condition could be materially adversely affected.

***Ourcentralized headquarters functions are susceptible to disruption bycatastrophic events, which could have a material adverse effect on ourbusiness, results of operations and financial condition.***

Our headquarters buildingis located in Spartanburg, South Carolina. Our information systems andadministrative and management processes are primarily provided to our zone andregional management and to our centers from this centralized location, and theycould be disrupted if a catastrophic event, such as a tornado, power outage oract of terror, destroyed or severely damaged our headquarters. Any of these catastrophicevents could have a material adverse effect on our business, results ofoperations and financial condition.

***Potentialfuture acquisitions could be difficult to integrate, divert the attention ofkey management personnel, disrupt our business, dilute stockholder value andadversely affect our business, results of operations and financial condition.***

We mayconsider acquisitions of companies, technologies and products that we feelcould accelerate our ability to compete or allow us to enter new markets.Acquisitions involve numerous risks, including:

·       difficultiesin integrating operations, technologies, accounting and personnel;

·       difficultiesin supporting and transitioning customers of our acquired companies;

·       diversionof financial and management resources from existing operations;

·       risksof entering new markets;

·       potentialloss of key employees; and

·       inabilityto generate sufficient revenues to offset acquisition costs.

Acquisitions alsofrequently result in the recording of goodwill and other intangible assets thatare subject to potential impairments in the future that could harm ourfinancial results. In addition, if we finance acquisitions by issuingconvertible debt or equity securities, our existing stockholders may bediluted, which could affect the market price of our stock. As a result, if wefail to properly evaluate acquisitions or investments, we may not achieve theanticipated benefits of any such acquisitions, and we may incur costs in excessof what we anticipate, either of which could have a material adverse effect onour business, results of operations and financial condition.

***If welose key management, fail to adjust to changes in key management or are unableto attract and retain the talent required for our business, our business,results of operations and financial condition could suffer.***

Our future success dependsto a significant degree upon the members of our senior management, particularlyWilliam M. Webster, IV, the Vice-Chairman of our Board of Directors, andKenneth E. Compton, our President and Chief Executive Officer. Mr. Websteris our co-founder and has been 

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instrumentalin the development of the regulatory and legislative framework in which weoperate. Mr. Compton has leadership, operational and management expertisethat we believe is critical to our future success. Our performance depends onthe successful transition of Mr. Webster to Vice-Chairman and theintegration of Mr. Compton as President and Chief Executive Officer. Theloss of the services of one or more members of senior management, or theunsuccessful transition of our senior management, could harm our business anddevelopment. Neither Messrs. Webster nor Compton has an employmentagreement with us, and we do not maintain key man life insurance policies withrespect to any of our employees. Our continued growth also will depend upon ourability to attract and retain additional skilled management personnel. If weare unable to attract and retain personnel as needed in the future, ourbusiness, results of operations and financial condition could suffer.

***Regularturnover among our managers and employees at our centers makes it moredifficult for us to operate our centers and increases our costs of operations,which could have an adverse effect on our business, results of operations andfinancial condition.***

The annual turnover as of September 30,2005, among our center managers was approximately 50% and among our othercenter employees was approximately 92%. Approximately 50% of the turnover hastraditionally occurred in the first six months following the hire date of ourcenter managers and employees. This turnover increases our cost of operationsand makes it more difficult to operate our centers. If we are unable to retainour employees in the future, our business, results of operations and financialcondition could be adversely affected.

***We usedto be taxed as an S corporation under Subchapter S of the Internal Revenue Codeand claims of taxing authorities related to our prior status as an Scorporation could harm us.***

Between October 1,2001, and the closing of our initial public offering (“IPO”) on December 21,2004, we were taxed as a “pass-through” entity under Subchapter S of theInternal Revenue Code. Currently, we are taxed as a C corporation under SubchapterC of the Internal Revenue Code, which is applicable to most corporations andtreats the corporation as an entity that is separate and distinct from itsstockholders. If our tax returns for the years in which we were an Scorporation were to be audited by the Internal Revenue Service or anothertaxing authority and we were determined not to have qualified for, or to haveviolated, our S corporation status, we could be obligated to pay back taxes,interest and penalties. These amounts could include taxes on all of our netincome while we were an S corporation. We currently estimate that the netincome during the period we were an S corporation was approximately $225million to $235 million. Any such claims could result in additional costs to usand could have a material adverse effect on our business, results of operationsand financial condition.

***Unauthorizeduse of our intellectual property by third parties may damage our brand.***

Unauthorized use of ourintellectual property by third parties may damage our brand and our reputationand could result in a loss of customers. It may be possible for third partiesto obtain and use our intellectual property without our authorization. Thirdparties have in the past infringed or misappropriated our intellectual propertyor similar proprietary rights. For example, competitors of ours have used ourname and other trademarks of ours on their websites to advertise theirfinancial services. We believe infringements and misappropriations willcontinue to occur in the future.

**Risks Related to Our Common Stock**

***Ourexecutive officers, directors and pre-IPO stockholders may be able to exertsignificant control over our future direction.***

Our executive officers,directors and pre-IPO stockholders together control approximately 70% of ouroutstanding common stock. As a result, these stockholders, if they acttogether, may be able to control, as a 

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practicalmatter, all matters requiring our stockholders’ approval, including theelection of directors and approval of significant corporate transactions. As aresult, this concentration of ownership may delay, prevent or deter a change incontrol, could deprive our stockholders of an opportunity to receive a premiumfor their common stock as part of a sale of our company or its assets and mightreduce the market price of our common stock.

***The useof our common stock to fund acquisitions or to refinance debt incurred foracquisitions could dilute existing shares.***

From time to time, we mayconsider opportunities to acquire payday cash advance companies or businesses.Future acquisitions, if any, could provide for consideration to be paid incash, shares of our common stock or a combination of cash and shares. If theconsideration for an acquisition is paid in common stock, existing stockholders’investments could be diluted. Furthermore, we may decide to incur debt to fundall or part of the costs of an acquisition and may later issue additionalshares of common stock to reduce that debt or to provide funds for futureacquisitions. The issuance of additional shares of common stock for thosepurposes would also dilute our existing stockholders’ investments.

***Applicablelaws and our certificate of incorporation and bylaws may discourage takeoversand business combinations that our stockholders might consider in their bestinterest.***

State laws and ourcertificate of incorporation and bylaws may delay, defer, prevent or rendermore difficult a takeover attempt that our stockholders might consider in theirbest interests. For instance, they may prevent our stockholders from receivingthe benefit from any premium to the market price of our common stock offered bya bidder in a takeover context. Even in the absence of a takeover attempt, theexistence of these provisions may adversely affect the prevailing market priceof our common stock if they are viewed as discouraging takeover attempts in thefuture.

State laws and ourcertificate of incorporation and bylaws may also make it difficult forstockholders to replace or remove our directors. These provisions mayfacilitate entrenchment of directors that may delay, defer or prevent a changein our control, which may not be in the best interests of our stockholders.

Thefollowing provisions that are included in our certificate of incorporation andbylaws have anti-takeover effects and may delay, defer or prevent a takeoverattempt that our stockholders might consider in their best interests. Inparticular, our certificate of incorporation and bylaws:

·       permitour board of directors to issue one or more series of preferred stock;

·       prohibitstockholders from filling vacancies on our board of directors;

·       prohibitstockholders from calling special meetings of stockholders and from takingaction by written consent;

·       imposeadvance notice requirements for stockholder proposals and nominations ofdirectors to be considered at stockholder meetings; and

·       requirethe approval by the holders of at least 80% of the voting power of ouroutstanding capital stock entitled to vote on the matter for the stockholdersto amend the provisions of our bylaws and certificate of incorporationdescribed in the second through fourth bullet points above and in this bulletpoint.

In addition, many of oursubsidiaries are licensed by, and subject to, the regulatory and supervisory jurisdictionof the states where they do business. Under change in control statutes of someof these states, any person, acting alone or with others, who is seeking toacquire, directly or indirectly, 5% or more of our outstanding common stock mayneed to be approved by the authorities within those states. As a result,prospective investors who intend to acquire a substantial portion of our commonstock may need to be aware of and to comply with those state requirements, tothe extent applicable.

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In addition, Section 203of the General Corporation Law of the State of Delaware may limit the abilityof an “interested stockholder” to engage in business combinations with us. Aninterested stockholder is defined to include persons owning 15% or more of ouroutstanding voting stock.

***We canredeem your common stock if you are or if you become a disqualified person.***

Federal and state laws andregulations applicable to providers of payday cash advance services may now orin the future restrict direct or indirect ownership or control of providers ofpayday cash advance services by disqualified persons (such as convictedfelons). Our certificate of incorporation provides that we may redeem shares ofyour common stock to the extent deemed necessary or advisable, in the solejudgment of our Board of Directors, to prevent the loss of, or to secure thereinstatement or renewal of, any license or permit from any governmental agencythat is conditioned upon some or all of the holders of our common stockpossessing prescribed qualifications or not possessing prescribeddisqualifications. The redemption price will be the average closing sale priceper share of our common stock during the 20-trading-day period ending onthe second business day preceding the redemption date fixed by our Board ofDirectors. At the discretion of our Board of Directors, the redemption pricemay be paid in cash, debt or equity securities or a combination of cash anddebt or equity securities.

***Sales ofa substantial number of shares of our common stock may adversely affect themarket price of our common stock and the issuance of additional shares willdilute all other stockholdings.***

Sales of a substantial number of shares of our commonstock in the public market or otherwise, or the perception that such salescould occur, could adversely affect the market price of our common stock. As ofNovember 4, 2005, there were approximately 82 million shares of our commonstock outstanding. All of the 24,725,000 shares of common stock sold in ourinitial public offering are freely tradable in the public market, except forany shares sold to our “affiliates,” as that term is defined in Rule 144under the Securities Act of 1933, as amended (the “Securities Act”). Theapproximately 58 million shares of our common stock outstanding prior to ourinitial public offering that were not sold in the offering and theapproximately 700,000 shares issued in connection with our acquisition of twoaircraft and the entity that owns our headquarters building are eligible for futuresale in the public market at prescribed times pursuant to Rule 144 underthe Securities Act, or otherwise. Sales of a significant number of these sharesof common stock in the public market could reduce the market price of thecommon stock. In addition, our certificate of incorporation permits theissuance of up to approximately 168 million additional shares of common stock.Thus, we have the ability to issue substantial amounts of common stock in thefuture, which would dilute the percentage ownership held by our currentstockholders. Certain of our pre-IPO stockholders entered into a registrationrights agreement with us, pursuant to which these stockholders may demand thatwe register under the Securities Act for resale all or a portion of theirapproximately 31 million shares of our common stock. Registration of the saleof these shares of our common stock would facilitate their sale into the publicmarket, which could, in turn, cause the market price of our common stock todecline.

Additionally, sharesissued under our 2004 Stock Plan, and under other restricted stock and optionagreements, will be available for sale into the public markets, subject to thevesting of restricted stock and the exercise of stock options.

**FORWARD-LOOKING STATEMENTS**

This Quarterly Report on Form 10-Q includesforward-looking statements. All statements other than historical information orstatements of current condition contained in this Quarterly Report, includingstatements regarding our future financial performance, our business strategyand expected developments in the payday cash advance services industry, areforward-looking statements. The words “expect,” 

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“intend,” “plan,” “believe,”“project,” “anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,”“continue” and similar expressions are intended to identify forward-lookingstatements.

We have based theseforward-looking statements on management’s current views and expectations.Although we believe that the current views and expectations reflected in theseforward-looking statements are reasonable, those views and expectations, andthe related statements, are inherently subject to risks, uncertainties andother factors, many of which are not under our control and may not even bepredictable. These risks, uncertainties and other factors could cause theactual results, performance or achievements to differ materially from anyfuture results, performance or achievements expressed or implied by theforward-looking statements. These risks, uncertainties and factors include, butare not limited to:

·       currentand future litigation and regulatory proceedings against us, including but notlimited to those against us in Florida, Georgia and North Carolina;

·       theeffect the revised FDIC payday lending guidance may have on the lending banksand our results of operations from the agency business model;

·       federaland state governmental regulation of payday cash advance services, consumerlending and related financial services businesses;

·       ourability to efficiently and profitably market, process and service a newinstallment loan product and manage a credit services organization business anda check-cashing business;

·       customerdemand and response to services and products offered at our payday cashadvance, check-cashing or credit service centers;

·       theextent to which revised levels of underwriting analysis by the lending banksfor installment loans may cause fewer customers to qualify for extensions ofcredit;

·       theuncertainty of consumer and investor reception to our involvement withinstallment loan products, credit services and check-cashing services;

·       theaccuracy of our estimates of payday cash advance, installment loan or creditservice losses;

·       ourrelationships with the lending banks and with the banks party to our revolvingcredit facility;

·       thepossibility that we may have to permanently cease our operations in NorthCarolina;

·       theftand employee errors;

·       theavailability of adequate financing, suitable centers and experienced managementemployees to implement our growth strategy;

·       increasesin interest rates, which would increase our borrowing costs;

·       thefragmentation of the payday cash advance services industry and competition fromvarious other sources, such as other payday cash advance providers, small loanproviders, short-term consumer lenders, banks, savings and loans and othersimilar financial services entities, as well as retail businesses that offerconsumer loans or other products or services similar to those offered by us;

·       ourlack of product and business diversification; and

·       theother matters set forth under “—Risk Factors” above.

We expressly disclaim any obligation to update orrevise any of these forward-looking statements, whether because of futureevents, new information, a change in our views or expectations or otherwise. Wemake no prediction or statement about the performance of our shares of commonstock.

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You are cautioned not torely unduly on any forward-looking statements. These risks and uncertaintiesare discussed in more detail elsewhere in this Quarterly Report, includingunder “—Risk Factors” and in this Item.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no market-risk-sensitiveinstruments entered into for trading purposes, as defined by GAAP.

***InterestRate Risk***

We are exposed to interest rate risk on our revolvingcredit facility. We may from time to time enter into interest rate swaps,collars or similar instruments with the objective of reducing our volatility inborrowing costs. We do not use derivative financial instruments for speculativeor trading purposes. We had no derivative financial instruments outstanding asof December 31, 2004 or September 30, 2005. In addition, our variableinterest expense is sensitive to changes in the general level of interestrates. The weighted average interest rate on our $39.5 million of variableinterest debt as of December 31, 2004 was approximately 6.35%. Theweighted average interest rate on our $43.7 million of variable interestdebt as of September 30, 2005 was approximately 6.53%.

We had total interestexpense of $4.7 million and $1.4 million for the three months ended September 30,2004 and 2005, respectively. We had total interest expense of $12.7 million and$2.9 million for the nine months ended September 30, 2004 and 2005,respectively. The estimated change in interest expense from a hypothetical 200basis-point change in applicable variable interest rates would have beenapproximately $0.8 million and $0.2 million for the three months ended September 30,2004 and 2005, respectively, and approximately $1.7 million and $0.2 millionfor the nine months ended September 30, 2004 and 2005, respectively.

***CreditRisk***

Under the agency businessmodel, all charges of fees and/or interest paid by a lending bank’s customersare deposited directly to the lending bank’s bank account. We invoice the bankfor the marketing, processing and servicing fees payable to us by such bank. Inaddition, the lending bank in Pennsylvania is responsible for making paymentsto us if actual payday cash advance and installment loan losses are less thanthe payday cash advance and installment loan losses retained by the lendingbank. We are subject to the risk that the lending banks will fail to pay all ora portion of the amounts due to us or that they will fail to pay us on a timelybasis. Any such failure could have a material adverse effect on our business,results of operations and financial condition.

**ITEM 4.**                CONTROLSAND PROCEDURES

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, andour internal control over financial reporting, as of the end of the periodcovered by this Report. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that those disclosure controls andprocedures are effective. There were no changes in our internal control overfinancial reporting during the quarter ended September 30, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II.   OTHER INFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS.

See “Part I.Financial Information—Item 1. Financial Statements—Notes to the InterimUnaudited Consolidated Financial Statements—Note 7. Commitments andContingencies”, which is incorporated herein by reference.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Thefollowing table sets forth information about our stock repurchases for thethree months ended September 30, 2005.

| ** **                                         | ** ** | **Issuer Purchase of Equity Securities** | ** ** | **Approximate**                              | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|
| **Period(1)**                                      | ** ** | ** **                                                   | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs(2)** | ** ** | **Dollar Value of  Shares That May  Yet Be  Purchased Under  the Plans or  Programs(2)** | ** ** |
| July 1, 2005  to July 31, 2005           |       |                                                         | —     |                                         |       |   | — |   |   |   | — |   |   |   | $ | 45,563,449 |   |   |
| August 1,  2005 to August 31, 2005       |       |                                                         | 276,212    |                                         |       |   | 13.76 |   |   |   | 276,212 |   |   |   | $ | 41,763,292 |   |   |
| September 1,  2005 to September 30, 2005 |       |                                                         | 375,846    |                                         |       |   | 12.99 |   |   |   | 375,846 |   |   |   | $ | 36,879,951 |   |   |
| Total                                              |       |                                                         | 652,058    |                                         |       |   | 13.32 |   |   |   | 652,058 |   |   |   | $ | 36,879,951 |   |   |
|                                                    |            |                                                              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Based on trade date.

(2)          OnMay 4, 2005, we announced a stock repurchase program pursuant to which wewere authorized to repurchase up to $50 million of our outstanding commonstock.

**ITEM 6.**                EXHIBITS

| Exhibit    | ** ** | ** **                                                                                                                                                                                                 |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description**                                                                                                                                                                                            |
| 31.1       |       | Certification of Principal Executive Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as Amended                                              |
| 31.2       |       | Certification of Principal Financial Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as Amended                                              |
| 32.1       |       | Certification of Chief Executive Officer of Advance  America, Cash Advance Centers, Inc. pursuant to 18 U.S.C. Section 1350  (Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |
| 32.2       |       | Certification of Chief Financial Officer of Advance  America, Cash Advance Centers, Inc. pursuant to 18 U.S.C. Section 1350  (Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                         | **ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.** |
|-------------------------|------------------------------------------------------|
| November 14,  2005 | By:                                                  | /s/ JOHN I. HILL |
|                    |                                                 | John I. Hill |
|                    |                                                 | *Executive Vice President and* |
|                    |                                                 | *Chief Financial Officer* |
|                    |                                                 | *(Duly  authorized officer and  principal financial officer)* |

 

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**INDEX TO EXHIBITS**
| Exhibit    | ** ** | ** **                                                                                                                                                                                                  |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description**                                                                                                                                                                                             |
| 31.1       |       | Certification of Principal Executive Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as Amended                                               |
| 31.2       |       | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as Amended                                                    |
| 32.1       |       | Certification of Chief  Executive Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002) |
| 32.2       |       | Certification of Chief  Financial Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002) |

 

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