**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**
| **(****Mark One)** | ** ** | ** **                                                                                                                                                                                                                                            |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                |
|               |       | **For the quarterly period ended  March 31, 2005**                                                                                                                                                                                               |
| **OR**             |
| **o**              | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                               |
|               |       | **For the transition period from                     to                  ** |

 

**COMMISSIONFILE NUMBER 001-32363**

**ADVANCE AMERICA, CASHADVANCE CENTERS, INC.**

(Exact name of registrantas specified in its charter)
| **Delaware**                                                     | **58-2332639**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |

 

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

(Address of principal executive offices)

(Zip Code)

**864-342-5600**

(Registrant’s telephonenumber, including area code)

**None**

(Former name, formeraddress and former fiscal year, if changed 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 preceding 12months (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 the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.
| Class                                       | ** ** | **Outstanding as of May 11, 2005** |
|---------------------------------------------|------------|-----------------------------------------|
| **Common  Stock, par value $.01 per share** | ** ** | **83,958,270  shares**                  |

 

 

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**ADVANCE AMERICA,CASH ADVANCE CENTERS, INC.Form 10-QFor the quarter ended March 31, 2005**
|                                            | ** **                                                                                                | **Page** |
|--------------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING  STATEMENTS**            | 3                                                                                                         |     |
| **PART I—FINANCIAL INFORMATION** | 4                                                                                                         |     |
| Item 1.                                    | Financial  Statements                                                                                     | 4        |   |
|                                       | Unaudited  Consolidated Balance Sheets December 31, 2004 and March 31, 2005                     | 4        |   |
|                                       | Interim  Unaudited Consolidated Statements of Income Three Months Ended March 31,  2004 and 2005     | 5        |   |
|                                       | Interim  Unaudited Consolidated Statements of Cash Flows Three Months Ended  March 31, 2004 and 2005 | 6        |   |
|                                       | Notes  to Interim Unaudited Consolidated Financial Statements                                             | 7        |   |
| Item  2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               | 17       |   |
| Item  3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                               | 54       |   |
| Item  4.                                   | Controls  and Procedures                                                                                  | 55       |   |
| **PART II—OTHER INFORMATION**    | 56                                                                                                        |     |
| Item 1.                                    | Legal  Proceedings                                                                                        | 56       |   |
| Item  2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                              | 56       |   |
| Item  3.                                   | Defaults  Upon Senior Securities                                                                          | 56       |   |
| Item  4.                                   | Submission  of Matters to a Vote of Security Holders                                                      | 56       |   |
| Item 5.                                    | Other  Information                                                                                        | 56       |   |
| Item 6.                                    | Exhibits                                                                                                  | 56       |   |
| **SIGNATURES**                             | 57                                                                                                        |     |
| **INDEX TO EXHIBITS**                      | 58                                                                                                        |     |

 

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**FORWARD-LOOKINGSTATEMENTS**

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—Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RiskFactors,” as well as any cautionary language in this Quarterly Report, provideexamples of risks, uncertainties and events that may cause our actual resultsto differ materially from the expectations we describe in our forward-lookingstatements. Although we believe that our expectations are based on reasonableassumptions, actual results may differ materially from those in theforward-looking statements as a result of various factors, including, but notlimited to, those described under the heading “Risk Factors” in “Part I—Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” 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**

**ITEM 1.**                FINANCIALSTATEMENTS.

**Advance America,Cash Advance Centers, Inc.**

**Unaudited Consolidated Balance Sheets**

**December 31,2004 and March 31, 2005**

**(in thousands, except per share data)**
| ** **                                                                                                                                                            | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                                                                            |       |                        |       |                     |       |   |   |
| Current assets                                                                                                                                                        |       |                        |       |                     |       |   |   |
| Cash and cash  equivalents                                                                                                                                            |       |                        | $          | 18,224                   |       |   | $ | 13,690 |   |
| Advances and fees  receivable, net                                                                                                                                    |       |                        | 155,009    |                     |       | 131,901 |   |
| Deferred income taxes                                                                                                                                                 |       |                        | 3,141      |                     |       | 2,444 |   |
| Other current assets                                                                                                                                                  |       |                        | 9,887      |                     |       | 10,156 |   |
| Total current assets                                                                                                                                                  |       |                        | 186,261    |                     |       | 158,191 |   |
| Restricted cash                                                                                                                                                       |       |                        | 9,110      |                     |       | 9,149 |   |
| Property and equipment,  net                                                                                                                                          |       |                        | 72,247     |                     |       | 71,456 |   |
| Goodwill, net                                                                                                                                                         |       |                        | 122,324    |                     |       | 122,324 |   |
| Other assets                                                                                                                                                          |       |                        | 7,597      |                     |       | 7,381 |   |
| Total assets                                                                                                                                                          |       |                        | $          | 397,539                  |       |   | $ | 368,501 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                         |       |                        |       |                     |       |   |   |
| Current liabilities                                                                                                                                                   |       |                        |       |                     |       |   |   |
| Accounts payable                                                                                                                                                      |       |                        | $          | 13,911                   |       |   | $ | 7,102 |   |
| Accrued liabilities                                                                                                                                                   |       |                        | 23,027     |                     |       | 27,457 |   |
| Income taxes payable                                                                                                                                                  |       |                        | 2,169      |                     |       | 3,105 |   |
| Accrual for excess bank  losses                                                                                                                                       |       |                        | 3,219      |                     |       | 2,330 |   |
| Current portion of  long-term debt                                                                                                                                    |       |                        | 471        |                     |       | 478 |   |
| Total current  liabilities                                                                                                                                            |       |                        | 42,797     |                     |       | 40,472 |   |
| Revolving credit  facility                                                                                                                                            |       |                        | 39,506     |                     |       | — |   |
| Long-term debt                                                                                                                                                        |       |                        | 6,660      |                     |       | 6,543 |   |
| Deferred income taxes                                                                                                                                                 |       |                        | 12,286     |                     |       | 12,878 |   |
| Other liabilities                                                                                                                                                     |       |                        | —     |                     |       | 14 |   |
| Total liabilities                                                                                                                                                     |       |                        | 101,249    |                     |       | 59,907 |   |
| 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 March 31, 2005 |       |                        | 968        |                     |       | 968 |   |
| Paid in capital                                                                                                                                                       |       |                        | 284,004    |                     |       | 283,835 |   |
| Paid in capital—unearned  compensation                                                                                                                           |       |                        | (3,451     | )                        |       | (3,160 | ) |
| Retained earnings                                                                                                                                                     |       |                        | 52,492     |                     |       | 64,674 |   |
| Common stock in treasury  (12,863 shares at cost)                                                                                                                     |       |                        | (37,723    | )                        |       | (37,723 | ) |
| Total stockholders’  equity                                                                                                                                      |       |                        | 296,290    |                     |       | 308,594 |   |
| Total liabilities and stockholders’ equity                                                                                                                       |       |                        | $          | 397,539                  |       |   | $ | 368,501 |   |

 

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 Statements of Income**

**Three Months EndedMarch 31, 2004 and 2005**

**(in thousands, except per share data)**
| ** **                                                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Revenues**                                                                    |       |     |       |     |       |
| Fees and interest  charged to customers                                         |       | $        | 95,315     |     | $          | 105,156 |   |
| Processing,  marketing and servicing fees                                       |       | 32,845   |       | 33,227   |       |
| Total revenues                                                                  |       | 128,160  |       | 138,383  |       |
| Provision for  doubtful accounts and agency bank losses                         |       | (10,960  | )          | (10,091  | )          |
| Net revenues                                                                    |       | 117,200  |       | 128,292  |       |
| **Center Expenses**                                                             |       |     |       |     |       |
| Salaries and related payroll costs                                              |       | 39,876   |       | 42,048   |       |
| Occupancy costs                                                                 |       | 15,280   |       | 19,127   |       |
| Center depreciation expense                                                     |       | 3,164    |       | 3,537    |       |
| Advertising expense                                                             |       | 6,824    |       | 5,245    |       |
| Other center expenses                                                           |       | 11,640   |       | 12,437   |       |
| Total center expenses                                                           |       | 76,784   |       | 82,394   |       |
| Center gross profit                                                             |       | 40,416   |       | 45,898   |       |
| **Corporate and Other Expenses  (Income)**                                      |       |     |       |     |       |
| General and  administrative expenses                                            |       | 10,124   |       | 11,738   |       |
| General and  administrative expenses with related parties                       |       | 597      |       | 63       |       |
| Corporate  depreciation expense                                                 |       | 999      |       | 1,077    |       |
| Interest expense                                                                |       | 1,412    |       | 826      |       |
| Interest expense  with related parties                                          |       | 2,600    |       | —   |       |
| Interest income                                                                 |       | (36      | )          | (91      | )          |
| Loss on disposal  of property and equipment                                     |       | 160      |       | 96       |       |
| Income before income taxes                                                      |       | 24,560   |       | 32,189   |       |
| Income tax  expense                                                             |       | 819      |       | 12,451   |       |
| Net income                                                                      |       | $        | 23,741     |     | $          | 19,738 |   |
| Net income per common share—basic and diluted                              |       | $        | 0.35       |     | $          | 0.24 |   |
| Dividends declared per common share                                             |       | $        | 0.23       |     | $          | 0.09 |   |
| Weighted average number of shares outstanding—basic  and diluted           |       | 68,667   |       | 83,958   |       |
| **Pro  Forma Data**                                                             |       |     |       |     |       |
| Historical income before taxes                                                  |       | $        | 24,560     |     |       |   |
| Pro forma income tax expense                                                    |       | 9,578    |       |     |       |
| Net income adjusted for pro forma income tax expense                            |       | $        | 14,982     |     |       |   |
| Pro forma net income per common share—basic and  diluted                   |       | $        | 0.22       |     |       |   |
| Weighted average  pro forma number of shares outstanding—basic and diluted |       | 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 Statements of CashFlows**

**Three Months EndedMarch 31, 2004 and 2005**

**(in thousands)**
| ** **                                                                          | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating activities**                                            |       |     |       |     |       |
| Net income                                                                          |       | $        | 23,741     |     | $          | 19,738 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities   |       |     |       |     |       |
| Depreciation                                                                        |       | 4,163    |       | 4,614    |       |
| Non-cash interest  expense                                                          |       | 206      |       | 245      |       |
| Provisions for doubtful  accounts and agency bank losses                            |       | 10,960   |       | 10,091   |       |
| Deferred income taxes                                                               |       | (993     | )          | 1,289    |       |
| Loss on disposal of  property and equipment                                         |       | 178      |       | 96       |       |
| Amortization of  restricted stock                                                   |       | —   |       | 291      |       |
| Changes in operating assets and liabilities                                         |       |     |       |     |       |
| Other current assets                                                                |       | 276      |       | (269     | )          |
| Other assets                                                                        |       | (263     | )          | (29      | )          |
| Accounts payable                                                                    |       | 136      |       | (3,760   | )          |
| Accrued liabilities                                                                 |       | 6,235    |       | 3,155    |       |
| Income taxes payable                                                                |       | 1,077    |       | 936      |       |
| Accrual for excess bank  losses                                                     |       | (4,090   | )          | (4,374   | )          |
| Net cash provided by  operating activities                                          |       | 41,626   |       | 32,023   |       |
| **Cash flows from investing activities**                                            |       |     |       |     |       |
| Changes in advances and  fees receivable, net                                       |       | 15,809   |       | 16,502   |       |
| Changes in restricted  cash                                                         |       | 1,478    |       | (39      | )          |
| Proceeds from sale of  property and equipment                                       |       | 15       |       | 38       |       |
| Purchases of property  and equipment                                                |       | (6,608   | )          | (2,689   | )          |
| Net cash provided by  investing activities                                          |       | 10,694   |       | 13,812   |       |
| **Cash flows from financing activities**                                            |       |     |       |     |       |
| Payments on revolving  credit facility, net                                         |       | (49,277  | )          | (39,506  | )          |
| Common stock issuance  costs                                                        |       | —   |       | (169     | )          |
| Payments on mortgage  payable                                                       |       | (75      | )          | (83      | )          |
| Payments on note payable                                                            |       | —   |       | (27      | )          |
| Payments of dividends                                                               |       | (15,476  | )          | (7,535   | )          |
| Changes in book  overdrafts                                                         |       | 7,369    |       | (3,049   | )          |
| Net cash used in  financing activities                                              |       | (57,459  | )          | (50,369  | )          |
| Net decrease in cash and  cash equivalents                                          |       | (5,139   | )          | (4,534   | )          |
| Cash and cash  equivalents, beginning of period                                     |       | 10,484   |       | 18,224   |       |
| Cash and cash  equivalents, end of period                                           |       | $        | 5,345      |     | $          | 13,690 |   |
| Supplemental disclosures of cash flow information:                                  |       |     |       |     |       |
| Cash paid during the period for:                                                    |       |     |       |     |       |
| Interest, net of amount  capitalized                                                |       | $        | 4,039      |     | $          | 554 |   |
| Income taxes                                                                        |       | 766      |       | 10,226   |       |
| Supplemental schedule of non-cash investing and  financing activity:                |       |     |       |     |       |
| Property and equipment  purchases included in accounts payable and accrued expenses |       | 1,414    |       | 1,268    |       |
| Restricted stock dividends payable                                                  |       | —   |       | 21       |       |

 

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

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**Advance America, Cash Advance Centers, Inc.Notes to Interim Unaudited ConsolidatedFinancial 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 of America 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 of America for complete financialstatements. Although management believes that the disclosures are adequate toprevent the information from being misleading, the interim unaudited consolidatedfinancial statements should be read in conjunction with the Company’s auditedfinancial statements in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004 filed with the SEC. In the opinion of theCompany’s management, all adjustments, consisting of normal recurring accrualsconsidered necessary for a fair statement, have been included.

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

**Revenue Recognition**

Revenues on payday cashadvances 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 constant-yield basis ratably overthe term of each payday cash advance. Under the agency business model, allcharges of fees and/or interest paid by the lending banks’ customers aredeposited directly to the respective lending bank’s bank account, and theCompany’s revenues consist of the processing, marketing and servicing feespayable to the Company by the lending banks. These fees include the losses forwhich the lending banks are contractually obligated. The Company recognizesrevenue under the agency business model on a constant-yield basis ratablyover the term of each payday cash advance.

**Concentration of Risk**

The Company originates,markets and services payday cash advances, under either the standard or agencybusiness model, to a broad base of individuals in 34 states in the UnitedStates. For the three months ended March 31, 2004 and 2005, total revenueswithin five states accounted for approximately 42.4% and 40.8%, 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 months ended March 31, 2004 approximately 95% of total revenues wereattributable to companies that had elected Subchapter S status.

Income taxes have been accountedfor under the asset and liability method since the Company terminated its Scorporation 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 financial 

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statementcarrying value of existing assets and liabilities and their respective taxbases and for operating loss and tax credit carryforwards. Deferred tax assetsand liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which the related temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period that includesthe enactment date.

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

The Company isparty to processing, marketing and servicing agreements (“PM&S Agreements”)with the lending banks. The Company’s processing, marketing and servicingduties typically include the following:

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

b)              submitting theapplications for approval or denial to the lending bank’s independent,third-party credit scoring 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.

The Company is compensated under these PM&SAgreements by the lending banks for processing, marketing and servicing thepayday cash advances the lending banks make to their customers. Although theCompany processes, markets and services payday cash advances made by thelending banks under the agency business model, each lending bank is responsiblefor evaluating each of its customers’ applications and determining whether thepayday cash advance is approved. The Company is not involved in the lendingbanks’ payday cash advance approval process or the determination of theirpayday cash advance approval procedures or criteria, and the Company does notfund or acquire any payday cash advances from the lending banks. The paydaycash advances are repayable solely to the lending banks and are assets of thelending banks; accordingly, they are not included in the Company’s balancesheet. The lending banks are contractually obligated for the losses on paydaycash advances in an amount established as a percentage of the interest and/orfees charged by the banks to their customers. Depending upon the lending bank,this percentage currently ranges from 8.0% to 20.0%. If actual payday cashadvance losses exceed the percentage specified in the lending banks’ PM&SAgreement, the Company’s processing, marketing and servicing fee is reduced bythe excess, which the Company refers to as excess bank losses. If actual paydaycash advance losses are less than the loss percentage specified in the PM&SAgreement, the Company’s processing, marketing and servicing fee is increasedby the difference. As a result, if the amount of a lending bank’s uncollectedpayday cash advances exceed the lending bank’s contractual obligations, theCompany would likely be obligated to pay the lending bank the outstandingamount of the advances plus the lending bank’s fees and/or interest receivableon the advances, less the lending bank’s contractually obligated portion of thelosses. The lending banks typically charge-off payday cash advances sixtydays past the original due date of the payday cash advance if full payment isnot received. The outstanding balances of the lending bank advances and feesreceivable serviced by the Company were approximately $61.8 million and $46.3million at December 31, 2004 and March 31, 2005, respectively.

On March 1, 2005, the FDIC issued revised PaydayLending Guidance (the “Guidance”) to FDIC insured institutions that offerpayday cash advances, including the lending banks for which the Company 

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acts as an agent. Therevised Guidance targets the frequency of borrower usage of payday cashadvances offered by FDIC insured institutions and will limit the period acustomer may have payday cash advances outstanding from any lender to three monthsduring the previous twelve-month period. Based on an average term ofapproximately 15 days, this effectively caps the number of payday cash advancesthat may be made to any customer to six during any 12-month period. All paydaycash advances made from any lender would count against such limit. The revisedGuidance also suggests that lending banks may offer alternative long-termproducts.

Eachof the lending banks for which the Company acts as an agent has submitted tothe FDIC a plan for implementation of the revised Guidance. However, none ofthe lending banks has received FDIC approval of its plan. As a result, the Companycannot determine at this time the extent to which the Guidance wouldfinancially or otherwise affect the agency business model. However, the cap onthe number of payday cash advances will likely reduce the Company’s revenuesand increase the Company’s costs in the states in which the Company operates itsagency business model. Further, the FDIC may not accept any of the revisedprocedures or products the lending banks have proposed. If revised proceduresor products are not approved by the FDIC by the June 1, 2005 effective date ofthe Guidance, or if the lending banks otherwise choose to discontinue providingpayday cash advances, the Company could be required to substantially limit ordiscontinue its operations in some or all of the states in which it operatesunder the agency business model until such time as the lending banks receiveFDIC approval of alternative products and state-wide customer databases aredeveloped. Any of these developments could have a material adverse effect on theCompany’s business, results of operations and financial condition.

**3.   Advancesand Fees Receivable, Net**

Advancesand fees receivable, net, consisted of (in thousands):
| ** **                        | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Payday advances  receivable       |       |                        | $          | 137,309                  |       |   | $ | 114,476 |   |
| Fees and interest  receivable     |       |                        | 21,942     |                     |       | 18,395 |   |
| Returned items receivable         |       |                        | 25,705     |                     |       | 19,554 |   |
| Lending bank receivable           |       |                        | 10,762     |                     |       | 10,493 |   |
| Other                             |       |                        | 1,833      |                     |       | 1,365 |   |
| Allowance for doubtful  accounts  |       |                        | (29,221    | )                        |       | (23,598 | ) |
| Unearned revenues                 |       |                        | (13,321    | )                        |       | (8,784 | ) |
| Advances and fees receivable, net |       |                        | $          | 155,009                  |       |   | $ | 131,901 |   |

 

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

Changesin the allowance for doubtful accounts for the three months ended March 31,2004 and 2005 were as follows (in thousands):
| ** **                       | ** ** | **2004** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                |       | $        | 23,021     |     | $          | 29,221 |   |
| Provision for doubtful  accounts |       | 7,564    |       | 6,606    |       |
| Charge-offs                      |       | (15,093  | )          | (19,485  | )          |
| Recoveries                       |       | 5,137    |       | 7,256    |       |
| Ending balance                   |       | $        | 20,629     |     | $          | 23,598 |   |

 

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Changesin the accrual for excess bank losses for the three months ended March 31,2004 and 2005 were as follows (in thousands):
| ** **                        | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                 |       | $        | 3,623      |     | $          | 3,219 |   |
| Provision for agency  bank losses |       | 3,396    |       | 3,485    |       |
| Charge-offs                       |       | (6,975   | )          | (7,803   | )          |
| Recoveries                        |       | 2,885    |       | 3,429    |       |
| Ending balance                    |       | $        | 2,929      |     | $          | 2,330 |   |

 

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 consisted of (in thousands):
| ** **                        | ** ** | **December 31,  2004** | ** ** | ** March 31,   2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|
| Employee compensation             |       |                        | $          | 9,678                                |       |   |   | $ | 12,196 |   |   |
| Health and dental  insurance      |       |                        | 3,364      |                                 |       |   | 3,341 |   |   |
| Workers’ compensation        |       |                        | 3,521      |                                 |       |   | 3,668 |   |   |
| Advertising                       |       |                        | 261        |                                 |       |   | 2,450 |   |   |
| Legal                             |       |                        | 827        |                                 |       |   | 1,027 |   |   |
| Accrued construction in  progress |       |                        | 1,818      |                                 |       |   | 1,268 |   |   |
| Other                             |       |                        | 3,558      |                                 |       |   | 3,507 |   |   |
| Total                             |       |                        | $          | 23,027                               |       |   |   | $ | 27,457 |   |   |

 

**6.   Income Taxes**

Incometax expense for the three months ended March 31, 2004 and 2005 consistedof the following (in thousands):
| ** ** | ** ** | **        2004        ** | ** ** | **      2005      ** | ** ** |
|------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| Current    |       |                                                                                                     |       |                                                                             |       |   |   |   |   |
| Federal    |       |                                                                                                     | $          | —                                                                           |       |   |   | $ | 9,312 |   |   |
| State      |       |                                                                                                     | 1,812      |                                                                             |       |   | 1,850 |   |   |
|       |       |                                                                                                     | 1,812      |                                                                             |       |   | 11,162 |   |   |
| Deferred   |       |                                                                                                     | (993       | )                                                                                |       |   | 1,289 |   |   |
| Total      |       |                                                                                                     | $          | 819                                                                              |       |   |   | $ | 12,451 |   |   |

 

Areconciliation of the statutory federal income tax rate and the Company’seffective income tax rate for the three months ended March 31, 2004 and2005 follows:
| ** **                               | ** ** | **        2004        ** | ** ** | **      2005      ** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| Statutory income  tax rate               |       |                                                                                                     | 35.0       | %                                                                                |       |   | 35.0 | % |   |
| S corporation income  not subject to tax |       |                                                                                                     | (34.5      | )                                                                                |       |   | — |   |   |
| State income  taxes, net                 |       |                                                                                                     | 2.2        |                                                                             |       |   | 4.3 |   |   |
| Other                                    |       |                                                                                                     | 0.6        |                                                                             |       |   | (0.6 | ) |   |
| Effective income  tax rate               |       |                                                                                                     | 3.3        | %                                                                                |       |   | 38.7 | % |   |

 

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Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and deferred tax liabilities are (in thousands):
| ** **                                    | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Deferred tax assets                           |       |                        |       |                     |       |   |   |
| Accrued expenses                              |       |                        | $          | 2,762                    |       |   | $ | 2,842 |   |
| Bad debts                                     |       |                        | 1,819      |                     |       | 1,375 |   |
| Net operating loss carryforwards              |       |                        | 845        |                     |       | 575 |   |
| Other                                         |       |                        | 35         |                     |       | 23 |   |
| Total deferred tax assets                     |       |                        | 5,461      |                     |       | 4,815 |   |
| Deferred tax liabilities                      |       |                        |       |                     |       |   |   |
| Goodwill                                      |       |                        | (7,877     | )                        |       | (8,594 | ) |
| Depreciation                                  |       |                        | (1,882     | )                        |       | (1,776 | ) |
| Prepaid expenses                              |       |                        | (1,590     | )                        |       | (1,637 | ) |
| Book versus tax basis difference for aircraft |       |                        | (3,257     | )                        |       | (3,242 | ) |
| Total deferred tax liabilities                |       |                        | (14,606    | )                        |       | (15,249 | ) |
| Net deferred tax  liability                   |       |                        | $          | (9,145                   | )          |   | $ | (10,434 | ) |

 

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 SCorporation under the Internal Revenue Code and comparable state laws. As aresult, the Subchapter S Companies’ earnings were taxed for federal and moststate income 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. Asa 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 March 31, 2005 the Company had net operating loss carryforwardsfor federal and state income tax purposes totaling approximately $3.4 millionand $2.6 million, respectively, which will begin to expire in 2014.

**7.   Commitments and Contingencies**

The Company is involved in several active lawsuits,including lawsuits arising out of actions taken by state regulatory authoritiesand 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. On August 2, 2002, the Company and BankWest, Inc. (“BankWest”),the lending bank for whom the Company acted as processing, marketing andservicing agent in Georgia, filed suit against the Commissioner in the SuperiorCourt for Fulton County, Georgia seeking to enjoin him from enforcing theexamination certificate and proceeding with an examination. Later, theCommissioner served BankWest and the Company with administrative subpoenasseeking the production of loan documents, customer information and contractualand financial documentation relating to the Company regarding BankWest’s paydayadvance program in Georgia. In the Company’s lawsuit against the Commissioner,the Company sought a declaration that the Company, as BankWest’s agent,BankWest and BankWest’s payday cash advances in Georgia were exempt from theGeorgia Industrial Loan Act, and therefore the Commissioner should be enjoinedfrom enforcing the examination certificate and administrative subpoenas. TheGeorgia Superior Court issued an order granting a motion for summary judgmentmade by the Commissioner and denying the Company’s motion for summary judgment.This order was appealed to and affirmed by the 

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Georgia Court of Appeals.The Company filed a Petition for Certiorari to the Georgia Supreme Court, whichwas denied in September 2004, thereby permitting the Commissioner’sexamination to proceed. If the outcome of the Commissioner’s examination isadverse to the Company, it could have a material adverse effect on the Company’sbusiness, results of operation and financial condition by possibly forcing theCompany to permanently cease operations in Georgia. The Company’s case againstthe Commissioner has been stayed indefinitely pending the Eleventh Circuit’sdecision in the BankWest, et al. vs. Baker, et al. case discussed in the nextparagraph.

In the Spring of 2004, Georgia adopted a statute,which became effective in May 2004, that effectively prohibits payday cashadvance services in the state and effectively restricts the Company’s abilityto act as processing, marketing and servicing agent for a lending bank in thestate. On April 9, 2004, the Company, along with a lending bank, BankWest,and other banks and agents involved in providing payday cash advances inGeorgia, 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”), seekingdeclaratory and injunctive relief. The relief sought is a declaration from theDistrict Court that the recently passed Georgia anti-payday cash advance law isunconstitutional and is preempted by federal law and should not be enforceable.The District Court issued a temporary restraining order preventing the Georgialaw from taking effect until May 15, 2004. Subsequently, on May 13,2004, the District Court issued an order denying the Company’s motion for aninjunction but extending the temporary restraining order until May 25,2004. On May 25, 2004, upon expiration of the temporary restraining order,the Georgia law took effect. Accordingly, the Company suspended operations atits payday cash advance centers in Georgia. Net revenues from the Company’sGeorgia operations were approximately $4.4 million, or 3.8% of the Company’snet revenues, for the three months ended March 31, 2004. The Georgiaoperations have not generated revenue since operations were ceased in May 2004.The Company estimates that the cost to keep the Georgia centers open underthese limited operating conditions will be approximately $0.3 million per month.Additionally, if necessary, the Company estimates that it will costapproximately $1.0 million (which includes lease cancellation costs ofapproximately $0.6 million) to shut down the Georgia operationscompletely. The Company has appealed the District Court’s order to the U.S.Court of Appeals for the Eleventh Circuit and on July 21, 2004, the Courtof Appeals heard oral arguments on the appeal. The Company is awaiting thedecision of the Court of Appeals. The Company cannot predict when the Court ofAppeals will issue a decision on the Company’s appeal. An adverse ruling by theEleventh Circuit regarding the Company’s argument that state law is preemptedby federal law could have negative consequences not only as controllingauthority in the Eleventh Circuit but also as persuasive authority in otherjurisdictions presented with similar questions of law. Because the EleventhCircuit had not issued a decision, the Company recorded in the fourth quarter2004 an impairment of assets expense of approximately $1.3 million to write-offthe undepreciated costs of the remaining 86 centers located in Georgia.

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 whomis a customer of Republic Bank & Trust Company (“Republic”), thelending bank for whom the Company processes, markets and services 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 Chief ExecutiveOfficer, alleging, among other things, that the relationship between theCompany’s subsidiary that operates in North Carolina and Republic is 

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a “rent a charter”relationship and therefore the bank is not the “true lender” on the payday cashadvances. The lawsuit also claims that the payday cash advances are made,administered and collected in violation of numerous North Carolina consumerprotection laws. The lawsuit seeks an injunction barring the Company from continuingto do business in North Carolina, the return of the principal amount of thepayday cash advances made to the plaintiff class since August 2001, thereturn of any interest or fees associated with those advances, treble damages,attorneys’ fees and other unspecified costs. The case is in its preliminarystages. Thus far the only substantive motions the Company has filed are motionsto (1) dismiss or stay proceedings and (2) compel arbitration. On November 19,2004, plaintiffs filed a motion seeking class certification. On November 16,2004, North Carolina Superior Court Judge Ernest Fulwood denied the Company’smotion to have the case designated as a complex business case and assign it tothe North Carolina Business Court and instead granted the plaintiffs’ motion todesignate the case as exceptional and assign it to a special Superior Courtjudge. The ruling does not express any opinion on the merits of the case.Plaintiffs’ counsel indicated at the hearing held prior to the ruling, and inpapers filed in support of their motion for class certification (which has notyet been fully briefed or set for a hearing), that the distributions to theCompany’s stockholders of substantially all of the net income earned by theCompany in the form of cash dividends may be the subject of a fraudulentconveyance claim. At the hearing, plaintiffs’ counsel indicated that they mightseek injunctive relief to return such payments or to hold them in escrowpending a judgment in this lawsuit. Plaintiffs’ complaint contains a fraudulentconveyance claim but seeks no specific relief with respect to that claim. On December 1,2004, North Carolina Supreme Court Chief Justice I. Beverly Lake, Jr. signeda commission appointing Special Superior Judge D. Jack Hooks, Jr. to hearthe case. On March 10, 2005, the judge heard arguments on the motions tostay discovery pending a decision on arbitrability. The Company has not yetreceived an order, but the judge has indicated that he will allow discovery onthe issues of arbitration, personal jurisdiction and class certification andthen set a date to hear these motions together. An adverse ruling in this casecould have a material adverse effect on the Company’s results of operations andfinancial condition, including possibly forcing the Company to cease itsoperations in North Carolina. In addition, in September 2004, Republicfiled an action in federal court in North Carolina against the three plaintiffswho have sued the Company, seeking a declaratory judgment that all disputestheir customers have shall be submitted to arbitration and an injunctionpreventing the plaintiffs from pursuing disputes in a non-arbitral forum.A motion to dismiss Republic’s lawsuit was granted on February 10, 2005 ongrounds that Republic lacks standing. On February 18, 2005 Republic fileda motion to alter or amend the judgment and for reconsideration, which wasdenied on May 3, 2005.

·       OnAugust 6, 2004, Tahisha King and James E. Strong, who are customers ofBankWest, the lending bank for whom the Company processed, marketed 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 had been making illegal payday loansin Georgia in violation of Georgia’s usury law, the Georgia Industrial Loan Actand Georgia’s Racketeer Influenced and Corrupt Organizations Act. The complaintalleges that BankWest is not the “true lender” on the loans that the Companyprocesses, markets and services for BankWest in Georgia and that the Company isthe “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 federal court and filed an answer denying theallegations and asserting the defense of arbitration as well as other defenses.The plaintiffs filed a motion in September 2004 to remand the case toGeorgia state court to which the Company has responded. In September 2004,the Company filed a declaratory judgment action in federal court in Georgiaagainst the Georgia class action 

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plaintiffs seeking adeclaratory judgment that all disputes relating to the loans by BankWest shallbe submitted to arbitration and plaintiffs shall be prohibited from pursuingloan related disputes in a non-arbitral forum. A hearing was held on December 14,2004. While no formal opinion was issued, the court indicated its intention toplace the cases on hold until the Eleventh Circuit issues its ruling inBankWest vs. Baker, which challenges the constitutionality of Georgia’s paydaycash advance law and Jenkins vs. First American, which involves theenforceability of an arbitration clause similar to the one at issue in theCompany’s Georgia case. On February 18, 2005, the Eleventh Circuit held inthe Jenkins case that the arbitration clause was enforceable and binding on theplaintiffs. On March 24, 2005, the court issued a formal opinionindicating that it was staying the King and Strong case until the EleventhCircuit issued its decision in BankWest vs. Baker.

The Company is involved in another case in Georgiathat, while 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 has filed a motionfor summary judgment that the court has not yet ruled upon. The Company expectsa ruling will occur once the decision is made by the Eleventh Circuit in theBankWest vs. Baker case. Although the amount in controversy in the case is only$350, the underlying claims of Ms. Glasscock, if agreed with by theBankruptcy Court, could serve as a basis for future claims against the Companyin 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. The first lawsuit alleges that the Company engagedin unfair and deceptive trade practices and violated the Florida criminal usurystatute, the Florida Consumer Finance Act, and Florida’s Racketeer Influencedand Corrupt Organizations Act. The Company successfully moved to have Ms. Reuter’scase sent to arbitration and was awarded summary judgment as to Ms. Betts’claims. The arbitration order in Ms. Reuter’s case is currently on appealto the Florida Supreme Court and the summary judgment order in Ms. Betts’case was reversed on August 11, 2004 by Florida’s Fourth District Court ofAppeals. The Company is appealing the Fourth District Court of Appeals’ ruling.The suit seeks unspecified damages, and the Company could be required to refundfees and/or interest collected, refund the principal amount of payday cashadvances, pay multiple damages and pay other monetary penalties. The Companyexpects to receive an order from the Florida Supreme Court requesting briefingas to whether the Florida Supreme Court should summarily quash the decisionordering arbitration in light of another Florida Supreme Court decision onarbitration entitled *Cardegna v. Buckeye CheckCashing, Inc.*

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 theirfirst lawsuit discussed in the preceding paragraph. The Company has filedmotions to dismiss, to stay the proceedings pending determination ofdispositive actions by the Florida Supreme Court, and to compel arbitration. Thesemotions have not been fully briefed or set for hearing yet.

The Company was a defendant in a lawsuit brought onbehalf of a putative class of persons by a former customer, Lois Bennett, inTennessee. Ms. Bennett, on behalf of herself and others, alleged that theCompany’s subsidiary, McKenzie Check Advance LLC (“McKenzie”), violated theterms of a class action settlement order by wrongfully collecting fees andadvances from the class members during a period of time when collections wereallegedly prohibited. This lawsuit was pending at the date the Company acquiredMcKenzie and the McKenzie stockholders (the “Sellers”) agreed to retain theliability for this 

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lawsuit. The Sellerssettled the lawsuit in April 2005 and paid all amounts required under thesettlement agreement.

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. Acorporate representative appeared before the Commissioner, in closed session,on November 22, 2004, to provide factual information about the nature ofthe Company’s business. In addition, the Company has provided written answersto clarifying questions from the Commissioner. While no final determination hasbeen reached by the Attorney General’s office or the Commissioner of Banks inthis matter, on February 1, 2005, the Commissioner of Banks issued aNotice that he was going to hold a hearing on this matter on April 19,2005, or as soon thereafter as possible, regarding the Company’s operations inNorth Carolina. The Commissioner has not set a definitive hearing date and discoverybetween the parties is ongoing. The Attorney General for North Carolina as wellas the class action plaintiffs in the North Carolina class action case moved tointervene and participate in this hearing. The Attorney General was granted theright to intervene and participate. The class action plaintiffs were grantedthe right to submit an amicus brief. The Commissioner has issued several pre-hearingorders that have clarified the scope of discovery and eliminated thepossibility of retrospective relief. However, it is possible that the NorthCarolina Attorney General or the Commissioner of Banks for North Carolina maymake a determination or finding that is adverse to the Company’s businessoperations in the state. Specifically, the North Carolina Attorney General andBanking Commissioner potentially could issue an injunction or issue a cease anddesist 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 payday cash advancecenters currently operate under the agency business model. Net revenues fromthe Company’s North Carolina operations were $6.5 million, or 5.5% of theCompany’s net revenues, and $6.5 million, or 5.1% of the Company’s netrevenues, for the three months ended March 31, 2004 and 2005, respectively.The Company estimates that it would cost, as of March 31, 2005,approximately $7.8 million (including lease cancellation costs of $0.7million, the charge-off of accounts receivable of $3.5 million, thecharge-off of undepreciated cost of assets of approximately$1.4 million and other shut-down costs of approximately$2.2 million) if the Company is required to shut down its North Carolinaoperations completely as a result of this investigation. The Company does notbelieve that the cessation of the Company’s North Carolina operations as aresult of this investigation will result in any impairment of goodwill.

In December 2003 and again in September 2004,the Company received a letter and subpoena from the Attorney General of WestVirginia raising concerns that some of the Company’s collection practices mayviolate the West Virginia Consumer Credit and Protection Act. The Company iscooperating with this inquiry. Although the Company does not currently haveoperations in West Virginia, some West Virginia residents visit the Company’spayday cash advance centers in states bordering West Virginia in order toobtain payday cash advances. Since receiving the Attorney General’s firstletter the Company has discontinued collection visits in West Virginia andpursues collections there through phone calls and letters to customers.

Inaddition to the cases discussed above, the Company is also involved in otherlitigation and administrative proceedings. This litigation includes employeeclaims for workers’ compensation, wrongful termination, harassment,discrimination, payment of wages due and customer claims relating to collectionpractices and violations of state and/or federal consumer protection laws. Theconsequences of an adverse ruling in any current or future litigation orproceeding could have a material adverse effect on the 

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Company’s results of operations and financialcondition. The amount of loss, if any, cannot be reasonably estimated.

**8.   Subsequent Events**

On May 4, 2005 the Company’s Board of Directorsdeclared a cash dividend of $0.09 per share of common stock, payable on June10, 2005 to shareholders of record on May 31, 2005.

Additionally, on May 4, 2005, the Company announcedthat its Board of Directors had approved a program authorizing the repurchaseby the Company of up to $50 million of its currently outstanding common stock.The Company’s Board of Directors determined that the stock repurchase programwill serve the best interest of the Company and its stockholders by returningcapital to the Company’s stockholders, by providing an attractive investmentopportunity for the Company’s funds, and by reducing the dilutive impact ofemployee stock incentive programs and potential acquisitions.

Sharerepurchases will be made from time to time and will be effected on the openmarket, in block trades, or in privately negotiated transactions, and incompliance with applicable laws, including Securities and Exchange CommissionRule 10b-18 and Regulation M. The program does not require the Company topurchase any specific number of shares. Any purchases under the program willdepend on market conditions. The Company’s Board of Directors may suspend orcancel the stock repurchase program at any time.

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

*The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements and the related notes in “Item 1. Financial Statements.” Thisdiscussion contains forward-looking statements that involve risks anduncertainties. Our actual results could differ materially from thoseanticipated by these forward-looking statements. Please see “—RiskFactors” 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 payday cash advance centers operated. Our payday cashadvance centers provide, directly or on behalf of a lending bank, small-denomination,short-term, unsecured cash advances that are typically due on thecustomers’ next payday. As of March 31, 2005, we operated 2,424 paydaycash advance centers in 34 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 processing, marketing and servicing agent through our payday cash advancecenters for Federal Deposit Insurance Corporation (“FDIC”) insured, state-charteredbanks that make payday cash advances to their customers pursuant to theauthority of the laws of the states in which they are located and federalinterstate banking laws, regulations and guidelines (which we refer to as theagency business model). We refer to the banks for which we act as agent as thelending banks. As of March 31, 2005, we were making payday cash advancesdirectly to customers under the standard business model in 1,880 of our 2,424payday cash advance centers in 29 states and serving as agent for the lendingbanks under the agency business model in our 544 payday cash advance centerslocated in Arkansas, Michigan, North Carolina, Pennsylvania and Texas.

Wehave historically derived our revenues from (1) fees and/or interest paidto us directly by our customers under the standard business model and (2) processing,marketing and servicing fees paid to us by the lending banks under the agencybusiness model. On the payday cash advances made and funded by the lendingbanks from their own bank accounts and processed, marketed and serviced by usunder the agency business model, all payments of principal and fees and/orinterest paid by customers are deposited directly to the respective lendingbank’s bank account. We in turn are paid a processing, marketing and servicingfee by the lending bank after we send it an invoice. Our total revenues for thethree-month periods ended March 31, 2004 and 2005 consisted of (inmillions):
| ** **                                | ** ** | **2004**    | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|
| ** **                                | ** ** | **Dollars** | ** ** | **%**    | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest  charged to customers   |       | $           | 95.3       |     | 74.4       |   | $ | 105.2 |   | 76.0 |   |
| Processing,  marketing and servicing fees |       | 32.9        |       | 25.6     |       | 33.2 |   | 24.0 |   |
| Total revenues                            |       | $           | 128.2      |     | 100.0      |   | $ | 138.4 |   | 100.0 |   |

 

Our expenses relate primarily to the operation of our paydaycash advance centers. These expenses include salaries and related payrollcosts, occupancy expense related to our leased payday cash advance centers,center depreciation expense, advertising expense and other payday cash advancecenter expenses that consist principally of costs related to payday cashadvance center openings and closings, communications, delivery, supplies,travel, bank charges, various compliance and collection costs and costsassociated with theft.

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*PaydayCash Advance Centers.  *The following table lists thenumber of payday cash advance centers by state at December 31, 2004 and March 31,2005:
| **State**            | ** ** | ** ** | ** ** | **December 31, 2004** | ** ** | **March 31, 2005** | ** ** |
|----------------------|------------|------------|------------|---------------------------------|------------|------------------------------|------------|
| Alabama              |       |       | 127        |                            |       |                         | 127        |   |   |
| Arkansas(1)          |       |       | 30         |                            |       |                         | 30         |   |   |
| Arizona              |       |       | 49         |                            |       |                         | 49         |   |   |
| California           |       |       | 290        |                            |       |                         | 287        |   |   |
| Colorado             |       |       | 56         |                            |       |                         | 57         |   |   |
| Delaware             |       |       | 10         |                            |       |                         | 10         |   |   |
| Florida              |       |       | 173        |                            |       |                         | 173        |   |   |
| Georgia(1)(2)        |       |       | —     |                            |       |                         | —     |   |   |
| Iowa                 |       |       | 21         |                            |       |                         | 21         |   |   |
| Idaho                |       |       | 8          |                            |       |                         | 8          |   |   |
| Illinois             |       |       | 61         |                            |       |                         | 61         |   |   |
| Indiana              |       |       | 91         |                            |       |                         | 104        |   |   |
| Kentucky             |       |       | 33         |                            |       |                         | 33         |   |   |
| Louisiana            |       |       | 64         |                            |       |                         | 64         |   |   |
| Michigan(1)          |       |       | 87         |                            |       |                         | 87         |   |   |
| Missouri             |       |       | 62         |                            |       |                         | 62         |   |   |
| Mississippi          |       |       | 51         |                            |       |                         | 51         |   |   |
| Montana              |       |       | 8          |                            |       |                         | 8          |   |   |
| North Carolina(1)(3) |       |       | 118        |                            |       |                         | 118        |   |   |
| Nebraska             |       |       | 25         |                            |       |                         | 25         |   |   |
| New Hampshire        |       |       | 15         |                            |       |                         | 15         |   |   |
| New Mexico           |       |       | 12         |                            |       |                         | 12         |   |   |
| Nevada               |       |       | 10         |                            |       |                         | 10         |   |   |
| Ohio                 |       |       | 178        |                            |       |                         | 178        |   |   |
| Oklahoma             |       |       | 68         |                            |       |                         | 68         |   |   |
| Oregon               |       |       | 42         |                            |       |                         | 42         |   |   |
| Pennsylvania(1)      |       |       | 101        |                            |       |                         | 101        |   |   |
| South Carolina       |       |       | 105        |                            |       |                         | 105        |   |   |
| South Dakota         |       |       | 10         |                            |       |                         | 10         |   |   |
| Tennessee            |       |       | 59         |                            |       |                         | 58         |   |   |
| Texas(1)             |       |       | 204        |                            |       |                         | 208        |   |   |
| Virginia             |       |       | 109        |                            |       |                         | 110        |   |   |
| Washington           |       |       | 90         |                            |       |                         | 91         |   |   |
| Wisconsin            |       |       | 37         |                            |       |                         | 37         |   |   |
| Wyoming              |       |       | 4          |                            |       |                         | 4          |   |   |
| Total                |       |       | 2,408      |                            |       |                         | 2,424      |   |   |

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(1)          We have operated underthe agency business model in Arkansas and North Carolina since April 14,2001 and September 12, 2001, respectively. Prior to these dates, we operatedin Arkansas and North Carolina under the standard business model. We haveoperated in Georgia, Michigan, Pennsylvania and Texas only under the agencybusiness model.

(2)          In May 2004, aGeorgia law became effective that effectively prohibits payday cash advanceservices in the state and effectively restricts our ability to act asprocessing, marketing and servicing agent for a lending bank in the state. As aresult, we suspended operations at our 89 payday cash advance centers (three ofwhich were subsequently closed) in Georgia.

(3)          We are currently facingcertain litigation and regulatory proceedings in North Carolina that mayultimately force us to stop acting as processing, marketing and servicing agentfor a lending bank in that state.

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*New payday cash advance centers.  *Weopened 118 and 22 new payday cash advance centers during the three months endedMarch 31, 2004 and 2005, respectively.

*Closed payday cash advance centers.  *Weclosed 1 and 6 payday cash advance centers during the three months ended March 31,2004 and 2005, respectively. The expenses related to closing centers typicallyinclude the undepreciated costs of fixtures and signage that cannot be movedand reused at another center, moving costs, severance payments and any leasecancellation costs. We recorded expenses related to closed payday cash advancecenters of approximately $11.0 thousand and $59.0 thousand in the three monthsended March 31, 2004 and 2005, respectively.

In May 2004, a Georgia law became effective thateffectively prohibits payday cash advance services in the state and effectivelyrestricts our ability to act as processing, marketing and servicing agent for alending bank in the state (see “Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 7—Commitments andContingencies”). Accordingly, we suspended operations at our 89 (three of whichwere subsequently closed in 2004) payday cash advance centers in Georgia. Netrevenues from our Georgia operations were $4.4 million, or 3.8%, of our netrevenues for the three months ended March 31, 2004. Our Georgia operationshave not generated revenue since operations were ceased in May 2004. Weestimate that the cost to keep the Georgia centers open under these limitedoperating conditions will be approximately $0.3 million per month.Additionally, if necessary, we estimate that, as of March 31, 2005, itwill cost approximately $1.0 million (which includes lease cancellationcosts of approximately $0.6 million) to shut down the Georgia operationscompletely. Because the Eleventh Circuit had not issued a decision with respectto the validity of the new Georgia law, we recorded in the fourth quarter 2004an impairment of assets expense of approximately $1.3 million to write-off theundepreciated costs of the remaining 86 centers located in Georgia.

Thefollowing is a summary of the financial information for our operations inGeorgia for the three months ended March 31, 2004 and 2005 (in thousands):
| ** **                               | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| **Georgia Revenues:**                    |       |     |       |     |       |
| Processing, marketing and servicing fees |       | $        | 5,067      |     | $          | — |   |
| Provision for agency bank losses         |       | (632     | )          | —   |       |
| Net revenues                             |       | 4,435    |       | —   |       |
| **Georgia Center Expenses:**             |       |     |       |     |       |
| Salaries and related payroll costs       |       | 1,507    |       | 79       |       |
| Occupancy costs                          |       | 608      |       | 539      |       |
| Center depreciation expense              |       | 161      |       | —   |       |
| Advertising expense                      |       | 270      |       | —   |       |
| Other center expenses                    |       | 467      |       | 117      |       |
| Total center expenses                    |       | 3,013    |       | 735      |       |
| **Georgia Center Gross  Profit/(Loss)**  |       | $        | 1,422      |     | $          | (735 | ) |

 

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 between our North Carolina subsidiary and Republic, thelending bank for whom we act as processing, marketing and servicing agent inNorth Carolina (see “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 7—Commitments and Contingencies”). AllNorth Carolina payday cash advance centers currently operate under the agencybusiness model. Net revenues from our North Carolina operations were $6.5million, or 5.5% of our net revenues, and $6.5 million, or 5.1% of our netrevenues, for the three months ended March 31, 2004 and 2005, respectively.We estimate 

19

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that it would cost, as of March 31,2005, approximately $7.8 million (including lease cancellation costs of$0.7 million, the charge-off of accounts receivable of $3.5 million,the charge-off of undepreciated cost of assets of approximately$1.4 million and other shut-down costs of approximately$2.2 million) if we are required to shut down our North Carolinaoperations completely as a result of this investigation. We do not believe thatthe cessation of our North Carolina operations as a result of thisinvestigation will result in any impairment of goodwill.

Thefollowing is a summary of financial information for our operations in NorthCarolina for the three months ended March 31, 2004 and 2005 (inthousands):
| ** **                               | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| **North Carolina Revenues:**             |       |     |       |     |       |
| Processing, marketing and servicing fees |       | $        | 7,177      |     | $          | 7,204 |   |
| Provision for agency bank losses         |       | (710     | )          | (691     | )          |
| Net revenues                             |       | 6,467    |       | 6,513    |       |
| **North Carolina Center Expenses:**      |       |     |       |     |       |
| Salaries and related payroll costs       |       | 2,107    |       | 2,095    |       |
| Occupancy costs                          |       | 860      |       | 852      |       |
| Center depreciation expense              |       | 133      |       | 126      |       |
| Advertising expense                      |       | 296      |       | 268      |       |
| Other center expenses                    |       | 498      |       | 416      |       |
| Total center expenses                    |       | 3,894    |       | 3,757    |       |
| **North Carolina Center Gross  Profit**  |       | $        | 2,573      |     | $          | 2,756 |   |

 

**Revised FDIC Guidance**

On March 1, 2005, the FDIC issued revised PaydayLending Guidance (the “Guidance”) to FDIC insured institutions that offerpayday cash advances, including the lending banks for which we act as an agent.The revised Guidance targets the frequency of borrower usage of payday cashadvances offered by FDIC insured institutions and will limit the period acustomer may have payday cash advances outstanding from any lender to three monthsduring the previous twelve-month period. Based on an average term ofapproximately 15 days, this effectively caps the number of payday cash advancesthat may be made to any customer to six during any 12-month period. All paydaycash advances made from any lender would count against such limit. The revisedGuidance also suggests that lending banks may offer alternative long-termproducts.

Each of the lending banks for which we act as an agenthas submitted to the FDIC a plan for implementation of the revised Guidance. However,none of the lending banks has received FDIC approval of its plan. As a result,we cannot determine at this time the extent to which the Guidance wouldfinancially or otherwise affect the agency business model. However, the cap onthe number of payday cash advances will likely reduce our revenues and increaseour costs in the states in which we operate our agency business model. Further,the FDIC may not accept any of the revised procedures or products the lendingbanks have proposed. If revised procedures or products are not approved by theFDIC by the June 1, 2005 effective date of the Guidance, or if the lendingbanks otherwise choose to discontinue providing payday cash advances, we couldbe required to substantially limit or discontinue our operations in some or allof the states in which we operate under the agency business model until suchtime as the lending banks receive FDIC approval of alternative products andstate-wide customer databases are developed. Any of these developments couldhave a material adverse effect on our business, results of operations andfinancial condition. 

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Informationfor our payday cash advance centers operating under the agency business model forthe three months ended and as of March 31, 2004 and 2005 was as follows(in thousands, except payday cash advance centers):
| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2004(1)**                                      | ** ** | **2005** | ** ** |
| **Agency  Business Model Revenues:**           |       |                                             |       |   |   |
| Processing, marketing and servicing fees       |       | $                                                | 32,845     |   | $ | 33,227 |   |
| Provision for agency bank losses               |       | (3,396                                           | )          | (3,485 | ) |
| Net revenues                                   |       | 29,449                                           |       | 29,742 |   |
| **Agency  Business Model Center Expenses:**    |       |                                             |       |   |   |
| Salaries and related payroll costs             |       | 11,117                                           |       | 9,850 |   |
| Occupancy costs                                |       | 4,443                                            |       | 4,825 |   |
| Center depreciation expense                    |       | 942                                              |       | 866 |   |
| Advertising expense                            |       | 1,840                                            |       | 1,194 |   |
| Other center expenses                          |       | 2,628                                            |       | 2,244 |   |
| Total center expenses                          |       | 20,970                                           |       | 18,979 |   |
| **Agency Business Model Center  Gross Profit** |       | $                                                | 8,479      |   | $ | 10,763 |   |

 
| ** **                                | ** ** | **March 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **2004(1)**        | ** ** | **2005** | ** ** |
| **Payday  cash advance centers**          |       | 596                |       | 544 |   |
| **Assets:**                               |       |               |       |   |   |
| Cash                                      |       | $                  | 1,454      |   | $ | 5 |   |
| Accounts receivable from lending banks    |       | 3,536              |       | 7,316 |   |
| Restricted cash                           |       | 5,710              |       | 5,283 |   |
| Property and equipment, net               |       | 11,829             |       | 9,909 |   |
| Goodwill, net                             |       | 26,314             |       | 26,314 |   |
| All other                                 |       | 2,113              |       | 1,722 |   |
| **Total assets**                          |       | $50,956            |       | $ | 50,549 |   |
| **Contingent liability to lending banks** |       | $                  | 44,692     |   | $ | 46,252 |   |

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(1)   Includes the 89 Georgia payday cash advance centers.

**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, theSubchapter S Companies’ earnings were taxed for federal and most state incometax purposes directly to AACACI’s stockholders rather than to the Subchapter SCompanies. On December 21, 2004, the Subchapter S Companies terminated theirstatus as S Corporations and are now taxed as C corporations. As a result ofthe termination of the Subchapter S Companies’ S corporation status, werecorded a net deferred tax liability and corresponding income tax expense onthe termination 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 

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tax onour earnings will cease. We believe the combination of these two items willincrease our cash flow because the corporate tax payments should be less thanthe distributions historically made to enable our stockholders to pay theirincome 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.

We believe that thefollowing critical accounting policies affect the more significant estimatesand assumptions used in the preparation of our financial statements:

***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 we process, market and service forthe lending banks under the agency business model (which is reported as acurrent liability on our balance sheet in our accrual for 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 made and funded by the lending banks under the agency business modelare not reflected on our balance sheet within our advances and fees receivable,net because these advances are repayable solely to the lending banks and areassets of the lending banks. The lending banks are 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. Depending upon the lending bank, this percentagecurrently ranges from 8.0% to 20.0%. In aggregate, this percentage was 14.3%and 15.4% for the three months ended March 31, 2004 and 2005. Under theagency business model, estimated losses consist 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 

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March 31, 2004 and2005, the provision for excess bank losses was a reduction of expense ofapproximately $1.3 million and $1.6 million, respectively.

The portion of payday cash advances and fees deemed tobe uncollectible is charged against the allowance for doubtful accounts or theaccrual for excess bank losses, as appropriate, and 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 portfolios. We periodically review the allowance for doubtful accountsand the accrual for excess bank losses, with any changes reflected in currentoperations. The allowance for doubtful accounts and accrual for excess banklosses is adjusted from time to time when future conditions differsubstantially 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 payment of at least 15% of his or her outstandingbalance within 60 days of the due date. Under the agency business model, unpaidpayday cash advances and the related fees and/or interest are generally chargedoff 60 days from inception.

To estimate the allowancefor doubtful accounts and accrual for excess bank losses, we use the followingmethod to determine the allowance for doubtful accounts under the standardbusiness model:

·  on a state-by-state basis, we apply ourhistorical charge-off rate applicable in a particular state for a trailing24-month period to that state’s currently outstanding payday cash advances andfees and/or interest receivable;

·  we evaluate the need for additional reserveson receivables for deposited customer checks that are returned because ofnon-sufficient funds using historical collection patterns; and

·  we consider the potential impact of (i) newpayday cash advance centers within the state and (ii) specific economicand 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 historiccredit 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 March 31, 2005, if averagedefault rates were 5% higher or lower, the allowance for doubtful accounts andaccrual for excess bank losses would change by approximately $1.3 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 expected historical or projected future cashflows, significant changes in the manner of use of the acquired assets or thestrategy of the overall business and significant negative industry trends. Toidentify potential impairment, we compare the fair value of a reporting unitwith its carrying amount, including goodwill. If the fair value of a reportingunit does not 

23

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exceedits carrying amount, we measure the amount of impairment loss by comparing theimplied fair value of the reporting unit’s goodwill with the carrying amount ofthat goodwill. The amount of any impairment would lower our net income.

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

Accrued liabilities in our December 31, 2004 and March 31,2005 financial statements include accruals of approximately $3.4 millionand $3.3 million, respectively, for the self-insured portion of ourhealth and dental insurance and approximately $3.5 million and $3.7 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 claim history isnot indicative of future claim history, there are changes in enrollment oremployee history, workers’ compensation loss development factors change orother assumptions used by management do not prevail, our expense and relatedaccrued liabilities could increase or decrease.

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**Results ofOperations**

***Three Months Ended March 31, 2004 Compared toThree Months Ended March 31, 2005***

Thefollowing table sets forth our results of operations for the three months endedMarch 31, 2004 compared to the three months ended March 31, 2005 (dollars in thousands, except center information):
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                             | ** ** | **2005** | ** ** | **Variance** | ** ** |
| ** **                                              | ** ** | ** **                                           | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Dollars**                                          | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues**                                            |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                 |       | $                                                    | 95,315     |   |   | 81.4 | % |   | $ | 105,156 |   |   | 82.0 | % |   | $ | 9,841 |   | 10.3 | % |
| Processing,  marketing and servicing fees               |       | 32,845                                               |       |   | 28.0 | % |   | 33,227 |   |   | 25.9 | % |   | 382 |   | 1.2 | % |
| Total revenues                                          |       | 128,160                                              |       |   | 109.4 | % |   | 138,383 |   |   | 107.9 | % |   | 10,223 |   | 8.0 | % |
| Provision for  doubtful accounts and agency bank losses |       | (10,960                                              | )          |   | (9.4 | )% |   | (10,091 | ) |   | (7.9 | )% |   | 869 |   | (7.9 | )% |
| Net revenues                                            |       | 117,200                                              |       |   | 100.0 | % |   | 128,292 |   |   | 100.0 | % |   | 11,092 |   | 9.5 | % |
| **Center  Expenses**                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and  related payroll costs                |       | 39,876                                               |       |   | 34.0 | % |   | 42,048 |   |   | 32.8 | % |   | 2,172 |   | 5.4 | % |
| Occupancy costs                                         |       | 15,280                                               |       |   | 13.0 | % |   | 19,127 |   |   | 14.9 | % |   | 3,847 |   | 25.2 | % |
| Center  depreciation expense                            |       | 3,164                                                |       |   | 2.7 | % |   | 3,537 |   |   | 2.7 | % |   | 373 |   | 11.8 | % |
| Advertising  expense                                    |       | 6,824                                                |       |   | 5.8 | % |   | 5,245 |   |   | 4.1 | % |   | (1,579 | ) | (23.1 | )% |
| Other center  expenses                                  |       | 11,640                                               |       |   | 10.0 | % |   | 12,437 |   |   | 9.7 | % |   | 797 |   | 6.8 | % |
| Total center expenses                                   |       | 76,784                                               |       |   | 65.5 | % |   | 82,394 |   |   | 64.2 | % |   | 5,610 |   | 7.3 | % |
| Center gross  profit                                    |       | 40,416                                               |       |   | 34.5 | % |   | 45,898 |   |   | 35.8 | % |   | 5,482 |   | 13.6 | % |
| **Corporate  and Other Expenses (Income)**              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses                     |       | 10,721                                               |       |   | 9.1 | % |   | 11,801 |   |   | 9.2 | % |   | 1,080 |   | 10.1 | % |
| Corporate  depreciation  expense                        |       | 999                                                  |       |   | 0.9 | % |   | 1,077 |   |   | 0.8 | % |   | 78 |   | 7.8 | % |
| Interest expense                                        |       | 4,012                                                |       |   | 3.4 | % |   | 826 |   |   | 0.7 | % |   | (3,186 | ) | (79.4 | )% |
| Interest income                                         |       | (36                                                  | )          |   | 0.0 | % |   | (91 | ) |   | (0.1 | )% |   | (55 | ) | 152.8 | % |
| Loss on disposal  of property and equipment        |       | 160                                                  |       |   | 0.1 | % |   | 96 |   |   | 0.1 | % |   | (64 | ) | (40.0 | )% |
| Total corporate and other expenses                      |       | 15,856                                               |       |   | 13.5 | % |   | 13,709 |   |   | 10.7 | % |   | (2,147 | ) | (13.5 | )% |
| Income before  income taxes                             |       | 24,560                                               |       |   | 21.0 | % |   | 32,189 |   |   | 25.1 | % |   | 7,629 |   | 31.1 | % |
| Income tax  expense                                     |       | 819                                                  |       |   | 0.7 | % |   | 12,451 |   |   | 9.7 | % |   | 11,632 |   | 1,420.3 | % |
| Net income                                              |       | $                                                    | 23,741     |   |   | 20.3 | % |   | $ | 19,738 |   |   | 15.4 | % |   | $ | (4,003 | ) | (16.9 | )% |

 

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| ** **                                                            | ** ** | **Three Months Ended  March 31,**                     | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **     2004     ** | ** ** | **     2005     ** | ** ** |
| **Center Information**                                                |       |                                                                 |       |   |   |   |   |   |   |
| Number of centers  open at beginning of period                        |       |                                                                 | 2,039      |   |   |   | 2,408 |   |   |
| Opened                                                                |       |                                                                 | 118        |   |   |   | 22 |   |   |
| Closed                                                                |       |                                                                 | (1         | ) |   |   | (6 | ) |   |
| Number of centers  open at end of period                              |       |                                                                 | 2,156      |   |   |   | 2,424 |   |   |
| Weighted average  number of centers open during the period            |       |                                                                 | 2,095      |   |   |   | 2,416 |   |   |
| Number of payday  cash advances provided and processed (in thousands) |       |                                                                 | 2,538      |   |   |   | 2,623 |   |   |
| Amount of average payday  cash advance provided and processed         |       |                                                                 | $          | 326 |   |   |   | $ | 333 |   |   |
|                                                                       |            |                                                                      |            |  |  |  |  |  |  |  |  |

 
| ** **                                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                             | ** ** | **2005** | ** ** | **Variance** | ** ** |
| ** **                                                                           | ** ** | ** **                                           | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | ** ** | ** ** |
| ** **                                                                           | ** ** | ** Dollars **                              | ** ** | **Revenues** | ** ** | ** Dollars ** | ** ** | **Revenues** | ** ** | ** Dollars ** | ** ** | **%** | ** ** |
| ** **                                                                           | ** ** | **(Dollars in thousands)**                 | ** ** |
| **Per Center (based on weighted  average number of centers open during the period)** |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                 |       |                                                 | $          | 55.9 |   |   |   | 100.0 | % |   |   | $ | 53.1 |   |   |   | 100.0 | % |   |   | $ | (2.8 | ) |   | (5.1 | )% |
| Center expenses:                                                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                   |       |                                                 | 19.0       |   |   |   | 34.0 | % |   |   | 17.4 |   |   |   | 32.8 | % |   |   | (1.6 | ) |   | (8.6 | )% |
| Occupancy costs                                                                      |       |                                                 | 7.3        |   |   |   | 13.0 | % |   |   | 7.9 |   |   |   | 14.9 | % |   |   | 0.6 |   |   | 8.5 | % |
| Center depreciation expense                                                          |       |                                                 | 1.5        |   |   |   | 2.7 | % |   |   | 1.5 |   |   |   | 2.7 | % |   |   | 0.0 |   |   | (0.0 | )% |
| Advertising expense                                                                  |       |                                                 | 3.3        |   |   |   | 5.8 | % |   |   | 2.2 |   |   |   | 4.1 | % |   |   | (1.1 | ) |   | (33.4 | )% |
| Other center expenses                                                                |       |                                                 | 5.6        |   |   |   | 10.0 | % |   |   | 5.1 |   |   |   | 9.7 | % |   |   | (0.5 | ) |   | (7.3 | )% |
| Total center expenses                                                                |       |                                                 | 36.7       |   |   |   | 65.5 | % |   |   | 34.1 |   |   |   | 64.2 | % |   |   | (2.6 | ) |   | (7.0 | )% |
| Center gross profit                                                                  |       |                                                 | $          | 19.2 |   |   |   | 34.5 | % |   |   | $ | 19.0 |   |   |   | 35.8 | % |   |   | $ | (0.2 | ) |   | (1.5 | )% |

 

***Revenue Analysis***

Total revenuesincreased $10.2 million, or 8.0%, during the three months endedMarch 31, 2005 to $138.4 million compared to $128.2 million for thesame period in 2004. The increase was due primarily to:

·  A $16.3 million increase in total revenuesfrom payday cash advance centers opened in 2002 and thereafter (excludingpayday cash advance centers closed or suspended in 2004 and 2005).

·  An increase in the total number of payday cashadvances made. The number of payday cash advances made increased byapproximately 0.1 million to approximately 2.6 million in 2005 compared toapproximately 2.5 million in 2004. Excluding payday cash advances made in ourGeorgia payday cash advances centers during the three months endedMarch 31, 2004, the number of payday cash advances made increasedapproximately 0.2 million to approximately 2.6 million in 2005compared to approximately 2.4 million in 2004.

·  An increase in the amount of the average paydaycash advance provided and processed. The average fee per payday cash advanceprovided and processed was approximately $51 and $53 during the three monthsended March 31, 2004 and 2005.

Total revenues for thethree months ended March 31, 2005 were impacted by the loss of revenuesfrom the 89 Georgia payday cash advance centers for which operations weresuspended in May 2004. Georgia total revenues for the three months endedMarch 31, 2004 were approximately $5.0 million. Excluding our Georgiapayday cash advance centers and payday cash advance centers closed in 2004 and 

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2005, total revenues forthe three months ended March 31, 2005 increased $15.7 million, or12.8%, to $138.3 million compared to $122.6 for the same period in 2004.

Excluding 2004 total revenues from our Georgia paydaycash advance centers, total revenues for payday cash advance centers openedprior to April 1, 2003 (including closed centers) increasedapproximately $2.5 million, or 2.1%, to $119.7 million compared to $117.2million for the same period in 2004. Payday cash advance centers opened priorto April 1, 2003 were at least one and two years old at the end ofthe three-month periods ended March 31, 2004 and 2005, respectively.Total revenues for payday cash advance centers opened afterMarch 31, 2003 (excluding our Georgia payday cash advance centers butincluding closed centers) increased approximately $12.7 million, or 211.7%, to$18.7 million compared to $6.0 million for the same period in 2004.

Total revenues for the 1,406 payday cash advancecenters opened prior to January 1, 2002, (excluding payday cashadvance centers closed or suspended in 2004 and 2005) decreased$0.6 million, or 0.6%, to $103.7 million for the three months endedMarch 31, 2005 compared to $104.3 million for the same period in2004. Payday cash advance centers opened prior to January 1, 2002were at least two and three years old at the beginning of the three-monthperiods ended March 31, 2004 and 2005, respectively. Total revenuesfor the 1,018 payday cash advance centers opened afterJanuary 1, 2002 (excluding payday cash advance centers closed orsuspended in 2004 and 2005) increased $16.3 million, or 89.0%, to $34.6 millionfor the three months ended March 31, 2005 compared to $18.3 millionfor the same period in 2004. The 1,018 payday cash advance centers opened afterJanuary 1, 2002 includes 372 payday cash advance centers opened fromApril 1, 2004 through March 31, 2005. Total revenues forthe remaining 105 payday cash advance centers closed or suspended represented adecrease of approximately $5.5 million for the three months ended March 31,2005 compared to the same period in 2004.

We believe ourrevenues for the three months ended March 31, 2005 compared to the same periodin 2004 were negatively impacted by:

·  The acceleration in the timing of the filingof individual tax returns in 2005.

·  An increase in the number and size ofindividual income tax refunds received during the 2005 tax-filing season.

·  The implementation of a customer database inAlabama in August 2004 and Oklahoma in May 2004.

·  We voluntarily tightened our credit guidelinesin South Carolina and Illinois, which reduced the amount we could advance tocustomers in those states.

Improved revenues in Indiana, due to a legislativechange, partially offset these negative impacts.

Of our 2,408 payday cash advance centers open atDecember 31, 2004, we operated 540 centers under the agency business model inthe states of Arkansas, Michigan, North Carolina, Pennsylvania and Texas. AtMarch 31, 2005, of our 2,424 payday cash advance centers, we operated 544payday cash advance centers under the agency business model in the states of Arkansas,Michigan, North Carolina, Pennsylvania and Texas. The four-center increase inthe number of payday cash advance centers operated under the agency businessmodel at March 31, 2005 compared to December 31, 2004 resulted from our openingfour new payday cash advance centers in Texas.

The provision for doubtful accounts and agency banklosses (the “Provision”) decreased $0.9 million, or 7.9%, to $10.1 million forthe three months ended March 31, 2005 compared to $11.0 million for the sameperiod in 2004. As a percentage of total revenues, the Provision decreased to7.3% in 2005 from 8.6% in 2004. The 2004 Provision included an expense ofapproximately $1.3 million related to the expected losses related to thesuspension of operations at our 89 Georgia payday cash advance centers.Excluding this $1.3 million expense, the Provision increased $0.4 million, or4.7%, from approximately $9.7 million to 

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$10.1million and the Provision as percentage of total revenues decreased to 7.3% in2005 compared to 7.5% in 2004.

***Payday Cash Advance Center Expense Analysis***

*Salaries and related payroll costs.  *2005salaries and related payroll costs increased $2.2 million, or 5.4%, to $42.0million compared to $39.8 million in 2004. The increase was due primarily to(dollars in millions):
| New centers  opened in 2004 and 2005       |   | $    | 5.5 |   |
|--------------------------------------------|--------|------|-----|--------|
| Lower costs in  centers opened before 2004 |   | (3.3 | )   |
| 2005 increase                              |   | $    | 2.2 |   |

 

2005 salaries andrelated payroll costs as a percentage of net revenues decreased to 32.8%compared to 34.0% in 2004 and 2005 salaries and related payroll costs percenter decreased to approximately $17,400 compared to $19,000 in 2004 dueprimarily to lower salaries and related payroll taxes, lower bonus expense and lowerhealth insurance expense. We averaged approximately 2.14 and 2.30 full-timeequivalent field employees, including district directors, for each center in2005 and 2004, respectively.

*Occupancy costs.  *2005occupancy costs increased $3.8 million, or 25.2%, to $19.1 million compared to$15.3 million in 2004. The increase was due primarily to occupancy costsrelated to new centers opened in 2004. 2005 occupancy costs as a percentage ofnet revenues were 14.9% compared to 13.0% in 2004 and 2005 occupancy costs percenter increased to approximately $7,900 compared to approximately $7,300 in2004, due primarily to higher rent and common area maintenance expense.

*Center depreciation expense.  *2005center depreciation expense increased $0.3 million, or 11.8%, to $3.5 millioncompared to $3.2 million in 2004. The increase was due primarily to the newcenters opened in 2004 and 2005. 2004 and 2005 center depreciation expense percenter was approximately $1,500 or 2.7% of net revenues during both periods.

*Advertising expense.**  *2005 advertisingexpense decreased $1.6 million, or 23.1%, to $5.2 million compared to $6.8million in 2004. 2005 advertising expense as a percentage of net revenuesdecreased to 4.1% compared to 5.8% in 2004. 2005 advertising expense per centerwas approximately $2,200 compared to approximately $3,300 in 2004. The decreasewas due primarily to opening fewer centers during the three months ended March 31,2005 compared to the same period in 2004 and a decision to conduct lessadvertising during our seasonal slowdown in February and March.

*Other center expenses.**  *2005 other centerexpenses increased $0.8 million, or 6.8%, to $12.4 million compared to$11.6 million in 2004. This increase was due primarily to the addition of newcenters in 2004 and 2005. Other center expenses as a percentage of net revenuesdecreased from 10.0% in 2004 to 9.7% in 2005. Other center expenses per centerdecreased to approximately $5,100 in 2005 compared to approximately $5,600 in2004 due primarily to lower taxes and business license expense, lower officesupplies expense and lower travel expense.

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*Total center expenses.**  *Total centerexpenses increased $5.6 million or 7.3% to $82.4 million compared to $76.8million in 2004. Total center expenses as a percent of net revenues decreasedto 64.2% for the three months ended March 31, 2005 compared to 65.5% inthe same period in 2004. The increase in total center expenses compared to 2004was due primarily to (dollars in millions):
| New centers opened in  2004 and 2005                                    |   | $    | 11.6 |   |
|-------------------------------------------------------------------------|--------|------|------|--------|
| Lower salaries and  related payroll costs in centers opened before 2004 |   | (3.3 | )    |
| Lower advertising expense                                               |   | (1.6 | )    |
| All other                                                               |   | (1.1 | )    |
| Total center expenses increase                                          |   | $    | 5.6  |   |

 

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

*General and administrative expenses.  *2005general and administrative expenses increased $1.1 million, or 10.1% to$11.8 million compared to $10.7 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—$0.3,  and insurance expense—$0.5                                                      |   | $    | 0.8    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Higher compensation  expense related to annual compensation increases and additional staff due  primarily to center growth—$0.4, and restricted stock grant amortization  expense—$0.3 |   | 0.7  |   |
| Higher legal fees                                                                                                                                                                                |   | 0.3  |   |
| Lower airplane operating  expenses due primarily to one fewer airplane                                                                                                                           |   | (0.5 | )      |
| Net decrease in all  other                                                                                                                                                                       |   | (0.2 | )      |
| Total general and administrative expenses increase                                                                                                                                               |   | $    | 1.1    |   |

 

2005 general andadministrative expenses as a percentage of net revenues increased to 9.2%compared to 9.1% in 2004.

*Corporatedepreciation expense.**  *2005 corporate depreciation expenseincreased $0.1 million, or 7.8%, to $1.1 million compared to$1.0 million in 2004. Corporate depreciation expense was 0.9% and 0.8% ofnet revenues in 2004 and 2005, respectively.

*Interestexpense.**  *2005 interest expense decreased$3.2 million, or 79.4%, to $0.8 million compared to $4.0 million in 2004 due tothe repayment in the fourth quarter of 2004 of all long-term debt with relatedparties and the reduction of advances under our revolving credit facility.

*Incometax expense*.   2005income tax expense increased $11.7 million, or 1,420.3%, to $12.5 millioncompared to $0.8 million in 2004. The increase is due primarily to ourconversion to a C Corporation for income tax purposes. See “—Prior SCorporation Status.”

**Liquidity and Capital Resources**

The following tablepresents a summary of cash flows for the three months ended March 31, 2004and 2005 (dollars in thousands):
| ** **                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows provided by (used in):              |       |     |       |     |       |
| Operating activities                           |       | $        | 41,626     |     | $          | 32,023 |   |
| Investing activities                           |       | 10,694   |       | 13,812   |       |
| Financing activities                           |       | (57,459  | )          | (50,369  | )          |
| Net decrease in cash and cash equivalents      |       | (5,139   | )          | (4,534   | )          |
| Cash and cash equivalents, beginning of period |       | 10,484   |       | 18,224   |       |
| Cash and cash equivalents, end of period       |       | $        | 5,345      |     | $          | 13,690 |   |

 

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Our principal sources of cash are from operations andfrom borrowings under our revolving credit facility. We anticipate that ourprimary uses of cash will be to provide working capital, finance capitalexpenditures, meet debt service requirements, fund payday cash advances underthe standard business model, finance payday cash advance center growth and paydividends 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-dayrequirements resulting from making and collecting payday cash advances. Forexample, if a month ends on a payday, our borrowings and our cash balances willbe high 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. Advance and fees receivable, net increasedapproximately $17.1 million, or 14.9%, to $131.9 million at March 31, 2005compared to $114.8 million at March 31, 2004, due primarily to an increasein the number of new payday cash advance centers and an increase in the averageadvance. Advances and fees receivable, net at March 31, 2005 decreasedapproximately $23.1 million, or 14.9%, to $131.9 million compared to $155.0million at December 31, 2004. In addition, cash and cash equivalents at March 31,2005 decreased approximately $4.5 million, or 24.9%, to approximately $13.7million compared to approximately $18.2 million at December 31, 2004, andincreased approximately $8.4 million, or 156.1%, compared to approximately $5.3million at March 31, 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. The programdoes not require us to purchase any specific number of shares. Any purchasesunder the program will depend on market conditions. Our Board of Directors maysuspend or cancel the stock repurchase program at any time.

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 decreased $9.6 million, or 23.1%, to $32.0 millionfor the three months ended March 31, 2005 compared to $41.6 million forthe same period in 2004. The decrease was due primarily to:

·       A$4.0 million decrease in net income. Income before income taxes increased $7.7million, or 31.1%, for the three months ended March 31, 2005 compared tothe same period in 2004. This was offset by an $11.7 million increase in incometax expense due to our conversion from an S Corporation to a C Corporation forincome tax purposes. See “—PriorS Corporation Status.”

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·       Adecrease of approximately $3.0 million in non-cash expenses.

·       A$2.3 million increase in deferred income taxes due to our conversion from an SCorporation to a C Corporation for income tax purposes. See “—Prior S CorporationStatus.”

***Cash Flows from Investing Activities***

Net cash provided byinvesting activities increased $3.1 million, or 29.2%, to $13.8 millionfor the three months ended March 31, 2005 compared to $10.7 millionfor the same period in 2004. Cash payments for purchases of property andequipment were approximately $3.9 million less during the three months ended March 31,2005 compared to the same period in 2004 due primarily to opening fewer newcenters in 2005 compared to 2004.

***Cash Flows from Financing Activities***

Net cash used in financingactivities decreased $7.1 million, or 12.3%, to $50.4 million for thethree months ended March 31, 2005 compared to $57.5 million for thesame period in 2004. The decrease is due primarily to the decrease in dividendspaid to stockholders during the three months ended March 31, 2005 comparedto the same period in 2004. As a result of our conversion from an S Corporationto a C Corporation for income tax purposes, our distributions to stockholdersfor the purpose of paying income tax on our earnings ceased. See “—Prior SCorporation Status.”

**Capital Expenditures**

For the three months endedMarch 31, 2004 and 2005, we spent $6.6 million and $2.7 million,respectively, on capital expenditures. Capital expenditures includedexpenditures (1) for new centers, (2) center remodels and (3) computerequipment replacements in our payday cash advance centers and at our corporateheadquarters. Capital expenditures decreased approximately $3.9 million, or 59.3%,due primarily to not building as many new centers during the three months endedMarch 31, 2005 compared to the same period in 2004.

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

Through 544 of our paydaycash advance centers located in five states, we serve as processing, marketingand servicing agent for payday cash advances offered, made and funded by fourFDIC insured, state-chartered banks. As of March 31, 2005, pursuantto our processing, marketing and servicing agreements with the lending banks,we are the processing, marketing and servicing agent for payday cash advancesoffered, made and funded by BankWest in Pennsylvania, First Fidelity Bank inMichigan, Republic in North Carolina and Texas, and Venture Bank in Arkansas. Underprocessing, marketing and servicing agreements with these lending banks, we arecompensated by the lending banks for processing, marketing and servicing thepayday cash advances the lending banks make to their customers. Approximately25.6% and 24.0% of our total revenues and 21.0% and 23.4% of our total centergross profit, in the three months ended March 31, 2004 and 2005,respectively, were derived from processing, marketing and servicing fees paidto us by these lending banks.

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Thenumber of payday cash advance centers at which the lending banks were offeringtheir payday cash advances at March 31, 2004 and 2005 and the processing,marketing and servicing fees paid to us by each of the lending banks in thethree months ended March 31, 2004 and 2005, in dollars and as a percent oftotal revenues were (dollars in millions):
| ** **            | ** ** | **2004**   | ** ** | **2005**    | ** ** |
|-----------------------|------------|------------|------------|-------------|------------|
| **Lending Bank** | ** ** | ** ** | ** ** | **Centers** | ** ** | **  Dollars  ** | ** ** | **Percent** | ** ** | **Centers** | ** ** | **  Dollars  ** | ** ** | **Percent** | ** ** |
| BankWest(1)           |       |       | 190        |        |       |   | $ | 15.2 |   |   |   | 11.9 | % |   |   | 101 |   |   |   | $ | 10.7 |   |   |   | 7.7 | % |   |
| Republic              |       |       | 291        |        |       |   | 11.8 |   |   |   | 9.2 | % |   |   | 326 |   |   |   | 14.9 |   |   |   | 10.8 | % |   |
| First Fidelity  Bank  |       |       | 85         |        |       |   | 4.2 |   |   |   | 3.2 | % |   |   | 87 |   |   |   | 5.9 |   |   |   | 4.2 | % |   |
| Venture Bank          |       |       | 30         |        |       |   | 1.7 |   |   |   | 1.3 | % |   |   | 30 |   |   |   | 1.7 |   |   |   | 1.3 | % |   |
| Total                 |       |       | 596        |        |       |   | $ | 32.9 |   |   |   | 25.6 | % |   |   | 544 |   |   |   | $ | 33.2 |   |   |   | 24.0 | % |   |
|                       |            |            |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          2004 includes the 89Georgia payday cash advance centers that were operating during the three monthsended March 31, 2004. 2005 does not include any Georgia payday cashadvance centers.

Although we process, market and service payday cashadvances offered, made and funded by the lending banks under the agencybusiness model, each lending bank is responsible for evaluating each of itscustomers’ applications and determining whether the payday cash advance isapproved. The lending banks for which we act as agent utilize an automatedthird-party credit scoring system to evaluate and approve each customerapplication. We are not involved in the lending banks’ payday cash advanceapproval process, are not involved in determining the approval procedures orcriteria of the lending banks and do not fund or acquire any payday cashadvances from the lending banks. The payday cash advances are repayable solelyto the lending banks and are assets of the lending banks. Consequently, thelending banks’ payday cash advances are not included in our payday cash advanceportfolio nor are they reflected on our balance sheet within our advances andfees receivable, net. Under our processing, marketing and servicing agreementswith the lending banks, the lending banks are contractually obligated for thelosses on payday cash advances in an amount established as a percentage of thefees and/or interest charged by the banks to their customers on their paydaycash advances. The contractual percentages were negotiated by us, in part,based on our historical data regarding our loss history and serve as anincentive for us to diligently pursue collection efforts for the lending banks.Depending upon the lending bank, this percentage currently ranges from 8.0% to20.0%. In aggregate, this percentage was 14.3% and 15.4% for the three monthsended March 31, 2004 and 2005, respectively. If actual payday cash advancelosses exceed the percentage specified in a lending bank’s processing,marketing and servicing agreement with us, our processing, marketing andservicing fees are reduced by the excess through the provision for doubtfulaccounts and agency bank losses. If actual payday cash advance losses are lessthan the loss percentage specified in such agreement, our processing, marketingand servicing fees are increased by the difference through the provision fordoubtful accounts and agency bank losses. As a result, if the amount ofuncollected payday cash advances exceeds the lending bank’s contractualobligation, we could be obligated to pay the lending bank the outstandingamount of the advances plus its fees and/or interest receivable on theadvances, less its contractually obligated portion of the losses. As of March 31,2005, our contingent liability to each of the lending banks amounted to$22.2 million to Republic, $13.7 million to BankWest,$7.1 million to First Fidelity Bank and $3.3 million to Venture Bank.This contingent liability to the lending banks was not included on our balancesheet. We could also be obligated to pay this amount to the lending banks if,as a result of a change in law, regulation or otherwise, the lending banks’payday cash advances were to become uncollectible.

Because of our economicexposure for excess bank losses related to the lending banks’ payday cashadvances, we have established a payable, called accrual for excess bank losses,to reflect our probable losses related to uncollected lending bank payday cashadvances. The accrual for excess bank losses that was reported in our balancesheet was $3.2 million and $2.3 million as of December 31, 2004 and 

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March 31, 2005,respectively. The accrual for excess bank losses has been established on abasis similar to the allowance for doubtful accounts for the standard businessmodel payday cash advances. We cannot assure you, however, that our estimateswill be accurate, and if the lending banks’ payday cash advance losses arematerially greater than our accrual for excess bank losses, our business,results of operations and financial condition could be materially adverselyaffected.

**CertainContractual Cash Commitments**

Ourprincipal future contractual obligations and commitments as of March 31,2005, excluding periodic interest payments, included the following (dollars in thousands):
| ** **                                 | ** ** | ** ** | ** ** | **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                  |       | $          | —     |                                                | $          | — |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Mortgage payable                           |       | 6,438      |       | 251                                                 |       | 740 |   | 856 |   |   | 4,591 |   |   |
| Note payable                               |       | 583        |       | 112                                                 |       | 240 |   | 231 |   |   | — |   |   |
| Operating lease  obligations(1)            |       | 145,553    |       | 44,984                                              |       | 81,799 |   | 18,478 |   |   | 292 |   |   |
| Purchase  obligations                      |       | 2,312      |       | 2,312                                               |       | — |   | — |   |   | — |   |   |
| Total                                      |       | $154,886   |       | $47,659                                             |       | $82,779 |   | $19,565 |   |   | $ | 4,883 |   |   |
|                                            |            |            |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includesleases for aircraft hangar space, payday cash advance centers, securityequipment and fax equipment.

***Long-Term Debt Obligations***

Total debt (borrowings under our revolving creditfacility, mortgage payable and note payable) at March 31, 2005decreased approximately $39.6 million, or 84.9%, to approximately$7.0 million compared to approximately $46.6 million atDecember 31, 2004, and decreased approximately $162.9 million, or95.9%, compared to total debt of approximately $169.9 million atMarch 31, 2004. The decrease from December 31, 2004compared to March 31, 2005 is due primarily to the repayment of debtwith cash generated from seasonal payments of payday cash advances related toour customers’ receipt of income tax refunds. The decrease fromMarch 31, 2004 compared to March 31, 2005 is due primarilyto the payment of our long-term debt from the proceeds of our initial publicoffering in December 2004.

*Revolving Credit Facility.  *Asof March 31, 2005, we had no borrowings outstanding on our revolvingcredit facility and approximately $11.8 million of letters of creditoutstanding, leaving approximately $253.2 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. On May 11, 2005, we amended our revolvingcredit facility to allow the repurchase of up to $50 million of our outstandingcommon stock. See “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 8—Subsequent Events.” At March 31,2005 we had no borrowings under our revolving 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 debt 

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outstanding under ourprior credit facility to a fixed rate of 4.78% plus a margin. The swap notionalamount amortized by $2.5 million per month and matured on May 7,2004. Under the interest rate swap agreement, we were exposed to losses in theevent 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 revolving credit facility, or (ii) the sumof the federal funds rate plus 0.50%. The applicable margin is determined eachquarter by a pricing grid based on our senior leverage ratio of ourconsolidated senior debt to consolidated EBITDA. The base rate applicablemargin ranges from 0.75% to 1.50% based upon our senior leverage ratio. TheLIBOR-based applicable margin ranges from 2.50% to 3.25% based upon oursenior leverage ratio. As of March 31, 2005, the applicable margin for theprime rate based rate was 0.75% and the applicable margin for the LIBOR-basedrate 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 arechanged whenever the underlying rate changes. LIBOR-based loans bearinterest for the term of the loan at the rate set at the time of borrowing forthat 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 March 31, 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.

*MortgagePayable.  *Our corporate headquarters building andrelated land are subject to a mortgage, the principal amount of which wasapproximately $6.5 million and $6.4 million at December 31, 2004 and March 31,2005, respectively. The mortgage is payable to an insurance company and issecured by our corporate headquarters building and related land. The mortgageis payable in 180 monthly installments of approximately $66,400, includingprincipal and interest, and bears interest at a fixed rate of 7.30% over its 

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term. The mortgagematures on June 10, 2017. The carrying amount of our corporateheadquarters (land, land improvements and building) was approximately$5.6 million at December 31, 2004 and March 31, 2005.

***Operating Lease Obligations***

We lease all but three ofour payday cash advance centers from third-party lessors under operatingleases. These leases typically have initial terms of three years and maycontain provisions for renewal options, additional rental charges based onrevenue and payment of real estate taxes and common area charges. In addition,we lease aircraft hangar space and have certain other leases for security andoffice equipment. The lessors under three payday cash advance center leases andthe aircraft hanger space operating lease are companies controlled by ourChairman.

***Purchase Obligations***

We enter into agreementswith vendors to purchase furniture, fixtures and other items used to open newpayday cash advance centers. These purchase commitments typically extend for aperiod of two to three months after the opening of a new payday cash advancecenter. As of March 31, 2005, our purchase obligations totaledapproximately $2.3 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 assumedamounts. These differences are usually minor and are included in ourconsolidated financial statements as soon as they are known. Estimates,judgments and assumptions are continually evaluated based on available informationand experience. Because of the use of estimates inherent in the financialreporting process, 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 andassumptions over 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 offuture cash flows and fair value are reasonable. Changes in estimates of thosecash flows and fair value, however, could affect the evaluation.

**Impact of Inflation**

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

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**RISKFACTORS**

**RisksRelated to Our Business and Industry**

***Our 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.***

Our 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 andcharge fees and/or interest allowed by the lending bank’s home state even ifthe fees and/or interest exceed what may be charged in the consumer’s stateunder that state’s usury law. This “export” lending law allows the lendingbanks for which we act as processing, marketing and servicing agent to exportthe interest rates permitted by the states in which they are located into thestates in which we act as their agent. As of March 31, 2005, pursuant toour processing, marketing and servicing agreements with the lending banks, weserved as an agent for payday cash advances offered, made and funded byBankWest in Pennsylvania, First Fidelity Bank in Michigan, Republic in NorthCarolina and Texas and Venture Bank in Arkansas. We also processed, marketedand serviced payday cash advances for BankWest in Georgia, but in May 2004we suspended our operations in that state. Currently, only state-charteredbanks can be lending banks for payday cash advances, because the federalregulators for national banks and federal savings associations have effectivelyprohibited such banks and associations from participating in the payday cashadvance services industry with agents.

The four lending banks for which we currently act asprocessing, marketing and servicing agent are subject to extensive federal andstate banking regulations and are subject to regular examination by state andfederal regulatory authorities such as the FDIC. Because of our relationshipswith the lending banks, our own activities regarding the lending banks’ paydaycash advances are also subject to examination by regulatory authorities. Forexample, we are examined annually by theFDIC. In connection with any regulatory examination, the FDIC or otherregulatory authority may require us to provide information, grant access to ourpayday cash advance centers, personnel and records or alter our businesspractices, perhaps materially, or may prevent the lending banks from providingpayday cash advances using us as an agent, which could preclude us fromconducting business under the agency business model. Any of these actions couldhave a material adverse impact on our business, results of operations andfinancial condition, especially if we are required to materially modify ourbusiness practices or terminate our use of the agency business model.

In July 2003, the FDIC issued guidelinesgoverning permissible agency arrangements between state-chartered banks andprocessing, marketing and servicing agents of the banks’ payday cash advances,such as us. If the FDIC’s implementation of these guidelines or thepromulgation of any additional guidelines were to ultimately restrict theability of all or certain state-chartered banks (including the lending banksfor whom we act as processing, marketing and servicing agent) to maintainrelationships with payday cash advance processors, marketers 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 processing, marketing andservicing agent, to provide payday cash advances, our distributionopportunities in those states where we operate as an agent for a lending bankwould be limited and we could have to permanently cease our operations in thosestates. This would have a material adverse impact on our business, results ofoperations and financial condition.

On March 1, 2005, the FDIC issued revised PaydayLending Guidance to FDIC insured institutions that offer payday cash advancesincluding the lending banks for which we act as an agent. See “—Revised FDIC Guidance”for a description of the revised guidance, which will likely lower our revenuesand increase our costs and could result in the limitation or suspension of ouroperations in some or all of the 

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states in which we operateunder the agency business model. Any such event could have a material adverseeffect on our business, results of operations and financial condition.

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 advancesmade by the lending banks were no longer entitled to the benefit of the federalbanking laws permitting the exportation of interest rates, we would no longerbe able to conduct business under the agency bank model and the resultingdecline in our net revenues would have a material adverse effect on ourbusiness, 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 whosepayday cash advances we processed, marketed and serviced, we entered into aconsent agreement with the OCC to terminate our agency relationships with thatbank. Future actions against the lending banks whose payday cash advances weprocess, market and service could result in a significant interruption orcurtailment of our business. Any such business disruption or curtailment could havea material adverse effect on our business, results of operations and financialcondition.

Lending banks for which weact as processing, marketing and servicing agent may also have agencyrelationships with other processing, marketing and servicing agents. Actionstaken by these other agents, over which we have no control, could cause alending bank to lose its ability to make payday cash advances through an agentsuch as us, or could cause a lending bank to choose to terminate itsrelationship with us. Any such event could also have a material adverse effecton our business, results of operations and financial condition.

***If we are no longerable to process, market and service payday cash advances made and funded by thelending banks, our business, results of operations and financial conditioncould be materially adversely affected.***

Revenues derived fromprocessing, marketing and servicing payday cash advances made and funded by thelending banks under the agency business model accounted for 25.6% and 24.0% ofour total revenues in the three months ended March 31, 2004 and 2005,respectively. If, as a result of changes in laws or regulations, an adverseresult in litigation or regulatory proceedings or otherwise, we could no longerprocess, market and service payday cash advances made and funded by the lendingbanks in one or more of our present or future markets, our business, results ofoperations and financial condition could be materially adversely affected. Inaddition, any such changes in laws or regulations or adverse result inlitigation or regulatory proceedings could deprive us of the agency businessmodel as an alternative method for conducting our business in the event thatstatutory provisions or regulations specifically authorizing payday cash advanceschanged or expired in any of the states in which we currently operate under thestandard business model.

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***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 March 31,2005, 37 states and the District of Columbia had specific laws that permittedpayday cash advances or allowed a form of payday cash advances under small loanlaws. The states with specific payday cash advance laws have laws thatgenerally govern the terms of the transaction and require certain consumerprotections. As of March 31, 2005, we operated in 29 of these 37 statesunder the standard business model and in one of these 37 states under theagency business model. We do not conduct business in the remaining seven ofthese 37 states or in the District of Columbia because we do not believe it isas economically attractive at this time to operate in these jurisdictions dueto specific legislative restrictions such as interest rate ceilings, anunattractive population density or unattractive location characteristics. Theremaining 13 of the 50 states did not have laws specifically authorizing thepayday cash advance business. As of March 31, 2005, we operated in four ofthese 13 states under the agency business model, serving as processing,marketing and servicing agent through our payday cash advance centers for fourlending banks that make payday cash advances to their customers in thosestates.

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 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.

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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 cashadvance legislation has been introduced in the U.S. Congress, with recentlegislation specifically targeting the agency relationships between banks andpayday cash advance companies. Congressional members continue to receivepressure from consumer advocates and other industry opposition groups to adoptsuch legislation. Any federal legislative or regulatory action that restrictsor prohibits payday cash advance services or our activities as processing,marketing and servicing agent for the lending banks could have a materialadverse impact on our business, results of operations and financial condition.

***The payday cash advance servicesindustry is subject to various local rules and regulations. Changes inthese local regulations could have a material adverse effect 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 tolawsuits and regulatory proceedings that could generate adverse publicity andcause us to incur substantial expenditures. See “Item 1. Financial Statements—Notesto Interim Unaudited Consolidated Financial Statements—Note 7—Commitments andContingencies.” For example, processing, marketing 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, thatprocess, market 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 

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rulingsin some of these lawsuits could significantly impair our business or force usto 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—Commitmentsand Contingencies.” We are likely to be subject to further litigation andproceedings in the future. The consequences of an adverse ruling in any currentor future litigation or proceeding could cause us to have to refund fees and/orinterest collected on payday cash advances, refund the principal amount ofpayday cash advances, pay treble or other multiple damages, pay monetarypenalties and/or modify or terminate our operations in particular states. Wemay 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.

***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 paydaycash advance centers in a state, in addition to the loss of net revenuesattributable to that closing, we would incur closing costs such as severancepayments and lease cancellation payments and we would have to write off assetsthat we could no longer use. If we were to suspend rather than permanentlycease our operations in a state, we may also have continuing costs associatedwith maintaining our payday cash advance centers and our employees in thatstate, with little or no revenues. For example, we have decided to continue tomaintain our 86 payday cash advance centers in Georgia for the foreseeablefuture until certain litigation and regulatory matters currently pending inGeorgia are resolved. We estimate that our net revenues are negatively impactedby approximately $1.7 million for each month that our Georgia operations aresuspended and that the cost to keep the Georgia centers open under theselimited operating conditions will be approximately $0.3 million per month.Additionally, if necessary, we estimate that, as of March 31, 2005, itwill cost approximately $1.0 million (including lease cancellation costs ofapproximately $0.6 million) to shut down the Georgia operations completely. See“Item 1. Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 7—Commitments and Contingencies.” In addition, if we wererequired to cease operations in North Carolina, we estimate that our netrevenues would be negatively impacted by approximately $2.2 million for eachmonth our North Carolina operations are shut down or suspended. Additionally,we estimate that, as of March 31, 2005, it would cost approximately $7.8million (including lease cancellation costs of approximately $0.7 million, thecharge-off of accounts receivable of $3.5 million, the charge-off ofundepreciated cost of assets of approximately $1.4 million and other shut-downcosts of approximately $2.2 million) to shut down our North Carolinaoperations completely. See “Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 7—Commitments andContingencies.”

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.

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***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 only business activityis offering payday cash advance services. If we are unable to maintain and growour payday cash advance services business, our future revenues and earningscould decline. Our lack of product and business diversification could inhibitour opportunities for growth, reduce our revenues and profits and make us moresusceptible to earnings fluctuations than many of our competitors who are morediversified and provide other services such as check cashing, 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***fund our liquidityneeds.

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 March 31, 2005, we had approximately$253.2 million available for future borrowings under this facility. Due tothe seasonal 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.

***Our relationshipswith the lending banks under the agency business model are based on commercialrelationships, key personnel and internal bank policies. These relationshipswith the lending banks can be terminated at any time, which could have amaterial adverse effect on our business, results of operations and financialcondition.***

As of March 31, 2005,we were party to agreements with four of the 12 FDIC insured, state-charteredbanks that we believe were then offering payday cash advances in the UnitedStates. Our processing, marketing and servicing agreements with these fourlending banks have largely been the result of the relationships that havedeveloped between bank personnel and key members of our management team. If thekey members of our management team, who negotiate and maintain theserelationships, are no longer employed by us, these relationships could beadversely affected and the lending banks could terminate or choose not to renewour processing, marketing and servicing agreements. We cannot assure you thatwe would be able to enter into new bank agency relationships on terms asfavorable as our current relationships if these agreements were terminated ornot renewed. In addition, other factors, such as changes in state or federallaws, regulations or guidelines, regulatory examinations and changes in lendingbank policies and strategies, could lead to the termination of thesecontractual relationships. The termination or non-renewal of our processing,marketing and servicing agreements with lending banks could have a materialadverse effect on our business, results of operations and financial conditionby preventing us from operating under the agency business model.

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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.

***We are notpermitted to process, market or service loans for lending bank customers whoalready have an outstanding payday cash advance that is processed, marketed andserviced by another company. As a result, our revenues and earnings potentialmay be adversely affected.***

In Texas, Republic alsohas a payday cash advance processing, marketing and servicing agencyrelationship with one of our competitors, ACE Cash Express, Inc., who hasoperated in Texas longer than we have and has more payday cash advance centersin Texas than we do. Because FDIC guidelines provide that a lending bank mayonly have one outstanding payday cash advance with an individual at a time,even if different agents are involved, we are not permitted to process, marketor service outstanding payday cash advances that are provided by Republic andprocessed, marketed and serviced by ACE Cash Express, Inc. Our inabilityto expand our business in Texas or to compete effectively there could adverselyaffect our revenues and earnings potential. In addition, it is possible thatthe other lending banks may also have relationships with other processing,marketing and servicing agents, which could adversely affect our ability tooperate in other jurisdictions, thereby adversely affecting our revenues andearnings potential.

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

Our cash advance centers operatein 34 states and, for the three months ended March 31, 2004 and 2005, ourfive largest states (measured by total revenues) accounted for approximately 42%and 41%, respectively, of our total revenues, with California, our largeststate (measured by total revenues), representing approximately 11% of our totalrevenues during both periods. While we believe we have a diverse geographicpresence, for the near term we expect that significant revenues will continueto be generated by certain states, largely due to the currently prevailingeconomic, demographic, regulatory, competitive and other conditions in thosestates. Furthermore, our five largest states, as measured by revenues, are notin all instances our five largest states as measured by the number of paydaycash advance centers operated. Changes to prevailing economic, demographic,regulatory or any other conditions in the markets in which we operate couldlead to a reduction in demand for our payday cash advance services, a declinein our revenues or an increase in our provision for doubtful accounts andagency bank losses that could result in a deterioration of our financialcondition.

***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 andcertain media reports have advocated with increasing frequency governmental andregulatory action to prohibit or severely restrict payday cash advances. Theconsumer groups and media reports typically focus on the cost to a consumer fora payday cash advance. The consumer groups and media reports typicallycharacterize these payday cash advances as predatory or abusive towardconsumers. If this negative characterization of payday cash advances 

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becomes widely accepted byconsumers, demand for payday cash advance services could significantlydecrease, which could materially adversely affect our business, results ofoperations and financial condition. Negative perception of payday cash advancesor other activities could also result in increased regulatory scrutiny andincreased litigation, and encourage restrictive local zoning rules andmake it more difficult to obtain government approvals necessary to open newpayday cash advance centers. These trends could materially adversely affect ourbusiness, results of operations and financial condition.

Prior to our initialpublic offering, we became aware that the CBS 60 Minutes II program wasdeveloping an investigative journalism segment on the payday cash advanceindustry. The story may give prominence to various employee claims, the currentlitigation against us and the investigation of us currently underway by theNorth Carolina Attorney General’s office. We have been told that the story willair the week of May 16, 2005, although CBS may choose to air the story at adifferent time. We have provided 60 Minutes II with a written statement, buthave not otherwise participated in the development of the program. We areunable to predict what impact any such story may have on perceptions of ourcompany and industry, consumer demand for payday cash advances or the level ofregulatory and legal scrutiny of our business. A negative impact in any or allof these areas could materially adversely affect our business, results ofoperations and financial condition.

***If the lendingbanks’ payday cash advance approval processes are flawed and more payday cashadvances go uncollected, our provision for doubtful accounts and agency banklosses could increase because we may bear a significant amount of the paydaycash advance losses under the agency business model. This would result in adecline in our future revenues and earnings, which could have a materialadverse effect on our stock price.***

Our agreements withlending banks provide for us to process, market and service the lending banks’payday cash advances. The banks are responsible for evaluating each of theircustomers’ applications and determining whether the payday cash advance isapproved. We are not involved in the lending banks’ payday cash advanceapproval process, are not involved in determining the approval procedures orcriteria of the lending banks and do not fund or acquire any payday cashadvances from the lending banks. Consequently, the lending banks’ payday cashadvances are not included in our payday cash advance portfolio nor are theyreflected on our balance sheet within our advances and fees receivable, net.Under our processing, marketing and servicing agreements with the lendingbanks, the lending banks are contractually obligated for the losses on paydaycash advances in an amount established as a percentage of the fees and/orinterest charged by the lending banks to their customers on their payday cashadvances. Depending upon the lending bank, this percentage currently rangesfrom 8.0% to 20.0%. In aggregate, this percentage was 14.3% and 15.4% for thethree months ended March 31, 2004 and 2005, respectively. If actual paydaycash advance losses exceed the percentage specified in a lending bank’sprocessing, marketing and servicing agreement with us, our processing,marketing and servicing fees are reduced by the excess through the provisionfor doubtful accounts and agency bank losses. If actual payday cash advancelosses are less than the loss percentage specified in such agreement, ourprocessing, marketing and servicing fees are increased by the differencethrough the provision for doubtful accounts and agency bank losses. As aresult, if the amount of uncollected payday cash advances exceeds the lendingbank’s contractual obligation, we would likely be obligated to pay the lendingbank the outstanding amount of the advances plus its fees and/or interestreceivable on the advances, less its contractually obligated portion of thelosses. As of March 31, 2005, this aggregate contingent liability amountedto $46.3 million and was not included on our balance sheet. If the banks’payday cash advance approval processes are flawed and the number of uncollectedpayday cash advances increases, our provision for doubtful accounts and agencybank losses could increase. This would result in a decline in our future revenuesand earnings, which could have a material adverse effect on our stock price.

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***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 endedMarch 31, 2004 and 2005, we deposited approximately 3.9% and 4.3%,respectively, of all the customer checks we received and approximately 78.5%and 71.1%, respectively, of these deposited customer checks were returnedunpaid because of non-sufficient funds in the customers’ bank accounts orbecause of closed accounts or stop-payment orders. Total charge-offs, net ofrecoveries, for the three months ended March 31, 2004 and 2005 wereapproximately $14.0 million and $16.6 million, respectively. If the number ofcustomer 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 conditions.***

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 thelending bank for the processing, marketing and servicing fees payable to us bysuch bank. In addition, each lending bank is responsible for making payments tous if actual payday cash advances losses are less than the bank’s contractuallyobligated portion of the losses. We are subject to the risk that the lendingbanks may fail to pay all or a portion of the amounts due to us or that theyfail 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 losses are not adequate to absorb losses, our provision fordoubtful accounts and agency bank losses would increase. This would result in adecline in our future revenues and earnings, which could have a materialadverse effect on our stock price.***

We maintain an allowancefor doubtful accounts for estimated losses for payday cash advances we makedirectly to consumers under the standard business model and an accrual forexcess bank losses for our share of losses on payday cash advances we process,market and service for lending banks under the agency business model. Toestimate the appropriate allowance for doubtful accounts and accrual for excessbank losses, we consider the amount of outstanding payday cash advances owed tous, the amount of payday cash advances owed to the lending banks and servicedby us, historical payday cash advances we have charged off, our currentcollection patterns and the current economic trends in the markets we serve. Asof March 31, 2005, our allowance for doubtful accounts was $23.6 millionand our accrual for excess bank losses was $2.3 million. These amounts, however,are estimates, and if our actual payday cash advance losses are greater thanour allowance for doubtful accounts or if the actual losses on the advancesmade by the lending banks are greater than our accrual for excess bank losses,our provision for doubtful accounts and agency bank losses would increase. Thiswould result in a decline in our future revenues and earnings, which could havea material adverse effect on our stock price.

With respect to the paydaycash advances that we process, market and service for the lending banks, as of March 31,2005, our aggregate contingent liability was $46.3 million and this amount wasnot included on our balance sheet. We could be obligated to pay this amount tothe lending banks if the lending banks’ payday cash advances were to becomeuncollectible. The accrual for excess bank losses that was reported in ouraccrued liabilities in our balance sheet was $2.3 million as of March 31,2005. Our accrual for excess bank losses is, however, an estimate. If actualpayday cash advance losses are greater than our recorded accrual for excessbank losses, 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.

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

We have experiencedsubstantial growth in recent years. Our growth strategy, which is based on rapidlyopening a large number of payday cash advance centers in existing and newmarkets, is subject to significant risks. We cannot assure you that we will beable to expand our market presence in our current markets or successfully enternew markets through the opening of new payday cash advance centers oracquisitions. Moreover, the start-up costs and the losses from initialoperations attributable to each newly opened payday cash advance center placedemands upon our liquidity and cash flow, and we cannot assure you that we willbe able to satisfy these demands.

Inaddition, our ability to execute our growth strategy will depend on a number ofother factors, 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;

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

·       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 ourmanagement, financial and other resources. Our future results of operationswill substantially depend on the ability of our officers and key employees tomanage changing 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 mayincur substantial additional debt in the future. As of March 31, 2005, ourtotal debt was approximately $7.0 million and our stockholders’ equity wasapproximately $308.6 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;

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·       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 debtlimit our ability to incur additional debt but do not prohibit us fromincurring additional debt. When current debt levels increase, the related risksthat we now face will also increase.

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 order to meet our obligationswith respect to our indebtedness. We cannot assure you that we will be able torefinance any of our indebtedness or obtain additional financing on satisfactoryterms 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.***

Ourrevolving credit facility contains a number of significant covenants that couldadversely affect our business. These covenants restrict our ability, and theability of our 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 

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couldcause all amounts outstanding there under to be due and payable, subject toapplicable grace periods. This could trigger cross-defaults under our otherexisting or future debt instruments. As a result, our ability to respond tochanging business and economic conditions and to secure additional financing,if needed, may be significantly restricted, and we may be prevented fromengaging in transactions that might further our growth strategy. If we areunable to repay, refinance or restructure our indebtedness under our revolvingcredit facility, the lenders under that facility could proceed against thecollateral securing that indebtedness. Our obligations under the revolvingcredit facility are guaranteed by each of our existing and future subsidiaries.The borrowings under the revolving credit facility and the subsidiaryguarantees are secured by substantially all of our assets and the assets of thesubsidiary guarantors. In addition, borrowings under the revolving creditfacility are secured by a pledge of substantially all of the capital stock, orsimilar equity interests, of the subsidiary guarantors. In the event of ourinsolvency, liquidation, dissolution or reorganization, the lenders under ourrevolving credit facility and any other existing or future debt of ours wouldbe entitled to payment in full from our 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 payday cashadvance centers we operate in the state and other factors. These requirementsmay restrict our subsidiaries’ ability to pay dividends or make otherdistributions to us. In order to comply with these requirements, we wererequired to maintain cash and cash equivalents at our subsidiaries in anaggregate amount of $9.1 million as of March 31, 2005. In addition, if weundertake additional expansion efforts in the future, our cash requirements mayincrease significantly. Because of this, we may not have enough cash flow tomeet our future liquidity needs, which may have a material adverse effect onour business, results of operations and financial 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 each year.This seasonality requires us to manage our cash flows over the course of theyear. If our revenues or collections were to fall substantially below what wewould normally expect during certain periods, our ability to service our debt,pay dividends on our common stock and meet our other liquidity requirements maybe adversely affected, which could have a material adverse effect on ourresults of operations and stock price.

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In addition, our quarterly results have fluctuated inthe past and are likely to continue to fluctuate in the future because of theseseasonal fluctuations. If they do so, our quarterly revenues and results ofoperations may be difficult to forecast. This difficulty in forecasting couldcause our future quarterly results of operations to not meet the expectationsof securities analysts or investors. Our failure to meet quarterly expectationscould cause a material drop in the market price of our common stock.

***Because we maintaina significant supply of cash in our payday cash advance centers, we may besubject to cash shortages due to employee and third-party theft and errors. Wealso may be subject to liability as a result of crimes at our centers.***

Because our businessrequires us to maintain a significant supply of cash in each of our payday cashadvance centers, we are subject to the risk of cash shortages resulting fromemployee and third-party theft and errors. Although we have implemented variousprograms to reduce these risks, maintain insurance coverage for theft andprovide security for our employees and facilities, we cannot assure you thatemployee and third-party theft and errors will not occur. Cash shortages fromemployee and third-party theft and errors were approximately $0.3 million(0.25% of total revenues) and $0.2 million (0.18% of total revenues) in the threemonths ended March 31, 2004 and 2005, respectively. Theft and errors couldlead to cash shortages and could adversely affect our business, results ofoperations and financial condition. It is also possible that crimes such asarmed robberies may be committed at our payday cash advance centers. We couldexperience liability or adverse publicity arising out of such crimes. Forexample, we may be liable if an employee, customer or bystander suffers bodilyinjury, emotional distress or death. Any such event may have a material adverseeffect on our business, results of operations and financial condition.

***Any disruption inthe availability of our information systems could adversely affect operationsat our payday cash advance centers.***

We rely upon ourinformation systems to manage and operate our payday cash advance centers andbusiness. Each payday cash advance center is part of an information networkthat is designed to permit us to maintain adequate cash inventory, reconcilecash balances on a daily basis and report revenues and expenses to ourheadquarters. Our back-up systems and security measures could fail to prevent adisruption in our information systems. Any disruption in our informationsystems could adversely affect our business, results of operations andfinancial condition.

***Our auditorsconcluded that, as of June 30, 2004, there was a significant deficiency inour internal controls.***

Under standardsestablished by the Public Company Accounting Oversight Board, we had asignificant deficiency 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. We have beenoperating as a private company since inception. To address this deficiency andin connection with becoming a public company, we hired a 

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directorof accounting and reporting. In addition, we are enhancing our financialreporting capability by investing in additional personnel and creating aninternal audit department, all of which will increase our costs. We cannotassure you that these measures or any future measures will enable us to remedythis significant deficiency or avoid other significant deficiencies in thefuture.

***If we fail tomaintain an effective system of internal controls, we may not be able toaccurately report our financial results and comply with the Sarbanes-Oxley Actof 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 and financialcondition could be materially adversely affected.

***Our centralizedheadquarters functions are susceptible to disruption by catastrophic events,which could have a material adverse effect on our business, results ofoperations 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 payday cash advance centers from thiscentralized location, and they could be disrupted if a catastrophic event, suchas a tornado, power outage or act of terror, destroyed or severely damaged ourheadquarters. Any of these catastrophic events could have a material adverseeffect on our business, results of operations and financial condition.

***Potential futureacquisitions could be difficult to integrate, divert the attention of keymanagement personnel, disrupt our business, dilute stockholder value andadversely affect our business, results of operations and financial condition.***

We may consideracquisitions of companies, technologies and products that we feel couldaccelerate 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.

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***If we lose keymanagement or are unable to attract and retain the talent required for ourbusiness, our business, results of operations and financial condition couldsuffer.***

Our future success dependsto a significant degree upon the members of our senior management, particularlyWilliam M. Webster IV, our Chief Executive Officer, John T. Egeland, ourPresident, and John I. Hill, our Executive Vice President and Chief FinancialOfficer. Mr. Webster is our co-founder and has been instrumental in thedevelopment of the regulatory and legislative framework in which we operate. Messrs. Egelandand Hill have been instrumental in procuring capital and executing our growthstrategies and in providing expertise in managing our operations. The loss ofthe services of one or more members of senior management could harm ourbusiness and development. None of Messrs. Webster, Egeland or Hill has anemployment agreement with us, and we do not maintain key man life insurancepolicies with respect to any of our employees. Our continued growth also willdepend upon our ability to attract and retain additional skilled managementpersonnel. If we are unable to attract and retain personnel as needed in thefuture, our business, results of operations and financial condition couldsuffer.

***Regular turnoveramong our managers and employees at our payday cash advance centers makes itmore difficult for us to operate our payday cash advance centers and increasesour costs of operations, which could have an adverse effect on our business,results of operations and financial condition.***

The annual turnover as ofMarch 31, 2005 among our payday cash advance center managers was approximately43% and among our other payday cash advance center employees was approximately79%. Approximately 50% of the turnover has traditionally occurred in the firstsix months following the hire date of our payday cash advance center managersand employees. This turnover increases our cost of operations and makes it moredifficult to operate our payday cash advance centers. If we are unable toretain our employees in the future, our business, results of operations andfinancial condition could be adversely affected.

***We used to be taxedas an S corporation under Subchapter S of the Internal Revenue Code and claimsof taxing authorities related to our prior status as an S corporation couldharm us.***

Between October 1,2001, and the closing of our initial public offering on December 21, 2004,we were taxed as a “pass-through” entity under Subchapter S of the InternalRevenue Code. Currently, we are taxed as a C corporation under Subchapter C ofthe Internal Revenue Code, which is applicable to most corporations and treatsthe 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.

***Unauthorized use ofour 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.

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**Risks Related to Our Common Stock**

***Our executiveofficers, directors and pre-IPO stockholders may be able to exert significantcontrol 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 practical matter, all matters requiringour stockholders’ approval, including the election of directors and approval ofsignificant corporate transactions. As a result, this concentration ofownership may delay, prevent or deter a change in control, could deprive ourstockholders of an opportunity to receive a premium for their common stock aspart of a sale of our company or its assets and might reduce the market priceof our common stock.

***The use of ourcommon 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.

***Applicable laws andour certificate of incorporation and bylaws may discourage takeovers andbusiness combinations that our stockholders might consider in their bestinterest.***

State laws and our certificate of incorporation andbylaws may delay, defer, prevent or render more difficult a takeover attemptthat our stockholders might consider in their best interests. For instance,they may prevent our stockholders from receiving the benefit from any premiumto the market price of our common stock offered by a bidder in a takeovercontext. Even in the absence of a takeover attempt, the existence of theseprovisions may adversely affect the prevailing market price of our common stockif they are viewed as discouraging takeover attempts in the future.

State laws and our certificate of incorporation andbylaws may also make it difficult for stockholders to replace or remove ourdirectors. These provisions may facilitate entrenchment of directors that maydelay, defer or prevent a change in our control, which may not be in the bestinterests of our stockholders.

The followingprovisions that are included in our certificate of incorporation and bylawshave anti-takeover effects and may delay, defer or prevent a takeover attemptthat our stockholders might consider in their best interests. In particular,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 

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certificate ofincorporation described in the second through fourth bullet points above and inthis bullet point.

In addition, many of our subsidiaries are licensed by,and subject to, the regulatory and supervisory jurisdiction of the states wherethey do business. Under change in control statutes of some of these states, anyperson, acting alone or with others, who is seeking to acquire, directly orindirectly, 5% or more of our outstanding common stock may need to be approvedby the authorities within those states. As a result, prospective investors whointend to acquire a substantial portion of our common stock may need to beaware of and to comply with those state requirements, to the extent applicable.

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 can redeem yourcommon 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 of asubstantial 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 ofMay 11, 2005, there were approximately 84 million shares of our common stockoutstanding. All of the 24,725,000 shares of common stock sold in our initialpublic offering are freely tradable in the public market, except for any sharessold to our “affiliates,” as that term is defined in Rule 144 under theSecurities Act of 1933, as amended (the “Securities Act”), and any sharespurchased through our directed share program, if the purchaser acquired inexcess of 100 shares, which are subject to 180-day lock-up agreements andrestrictions imposed by the National Association of Securities Dealers, Inc.,or NASD. The approximately 58 million shares of our common stock outstandingprior to our initial public offering that were not sold in the offering and the724,947 shares issued in connection with our acquisition of two aircraft thatwe use and the entity that owns our headquarters building, will also besaleable to the public under Rule 144. In addition, our certificate ofincorporation permits the issuance of up to approximately 166 millionadditional shares of common stock after this offering. Thus, we have theability to issue substantial amounts of common stock in the future, which woulddilute the percentage ownership held by the investors who purchase our sharesin this offering.

We, each of our directors and senior officers, and ourpre-IPO stockholders have agreed, with limited exceptions, that we and theywill not, without the prior written consent of Morgan Stanley & Co.Incorporated on behalf of the underwriters, during the period ending June 13,2005 (180 days after our initial public offering), among other things, directlyor indirectly, offer to sell, sell or otherwise dispose of 

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any shares of our commonstock or file a registration statement with the SEC relating to the offering ofany shares of our common stock.

On December 21, 2004, certain of our existingstockholders entered into a registration rights agreement with us. Pursuant tothat registration rights agreement, and after the lock-up agreements pertainingto our initial public offering expire, these stockholders may demand that weregister under the Securities Act for resale all or a portion of theapproximately 36 million shares of our common stock held by the stockholderswho are a party to that agreement. Registration of the sale of these shares ofour common stock would facilitate their sale into the public market. If, uponthe expiration of the 180-day lock-up period, any of our pre-IPOstockholders sell a large number of shares, the market price of our commonstock could decline.

Immediately after the lock-up agreements expire or areearlier waived by Morgan Stanley & Co. Incorporated, up toapproximately 59 million of the shares outstanding prior to our initial publicoffering will be eligible for future sale in the public market at prescribedtimes pursuant to Rule 144 under the Securities Act, or otherwise. Salesof a significant number of these shares of common stock in the public marketcould reduce the market price of the common stock.

Additionally, sharesregistered under the registration statement on Form S-8 filed by uson December 16, 2004 will be available for sale into the public markets,subject to the vesting of restricted stock and to the exercise of future issuedoptions, if any.

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

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:

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

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

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

·       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 Georgia andNorth Carolina;

·       theftand employee errors;

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·       theavailability of adequate financing, suitable payday cash advance centers andexperienced management employees to implement our growth strategy;

·       theaccuracy of our estimates of payday cash advance losses;

·       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;

·       customerdemand and response to services offered at our payday cash advance centers;

·       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.We make no prediction or statement about the performance of our shares ofcommon stock.

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 “—RiskFactors” and in this Item.

**ITEM 3.**                QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

***Interest Rate 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 March 31, 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%. We had nooutstanding borrowings on our revolving credit facility at March 31, 2005.

We had total interestexpense of $4.0 million and $0.8 million for the three months ended March 31,2004 and 2005, respectively. The estimated change in interest expense from ahypothetical 200 basis-point change in applicable variable interest rateswould have been approximately $0.5 million and $0.1 million for the threemonths ended March 31, 2004 and 2005, respectively.

***Credit Risk***

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 processing, marketing and servicing fees payable to us by such bank. Inaddition, lending banks are responsible for making payments to us if actualpayday cash advances losses are less than the payday cash advance lossesretained by the lending banks. We are subject to the risk that the lendingbanks will fail to pay all or a portion of the amounts due to us or that theywill 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.

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**ITEM 4.**                CONTROLS ANDPROCEDURES

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we have evaluated the effectiveness of the designand operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, asof the end of the period covered by this Report. Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that thosedisclosure controls and procedures are effective. There were no changes in ourinternal control over financial reporting during the quarter ended March 31,2005, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II**—OTHER INFORMATION

**ITEM 1.**                LEGAL PROCEEDINGS.

See “Part I—Item 1.Financial Statements—Notes to the Interim Unaudited Consolidated FinancialStatements—Note 7—Commitments and Contingencies,” which is incorporated hereinby reference.

**ITEM 2.**                UNREGISTRED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

None.

**ITEM 3.**                DEFAULTS UPONSENIOR SECURITIES

None.

**ITEM 4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

None.

**ITEM 5.**                OTHER INFORMATION

None.

**ITEM 6.**                EXHIBITS
| ExhibitNumber | ** ** | **Description**                                                                                                                                                                                             |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1          |       | Certification of Chief 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 Chief  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.** |
|-------------------------|--------------------------------------------------|
| May 16, 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 Chief 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 Chief  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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