**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(**Mark One)

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

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

**OR**

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

**Forthe transition period from                  to                  **

**COMMISSIONFILE NUMBER 001-32363**

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

(Exact name of registrantas specified in its charter)

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

 

**135 North Church Street**Spartanburg, South Carolina 29306

(Address of principalexecutive 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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange 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 August 5, 2005** |
|-----------------------------------------|------------|--------------------------------------|
| Common Stock, par  value $.01 per share |       | 83,587,737 shares                    |

 

 

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**ADVANCEAMERICA, CASH ADVANCE CENTERS, INC.**

**Form 10-Q**

**Forthe three months and six months ended June 30, 2005**
|                                             | ** ** | ** **                                                                                  | ** **                                                                                                                    | **Page** |
|---------------------------------------------|------------|---------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING  STATEMENTS**             | ** ** | 3                                                                                           |                                                                                                                          |
| **PART I—FINANCIAL  INFORMATION** | ** ** | 4                                                                                           |                                                                                                                          |
| Item 1.                                     |       | Financial  Statements                                                                       |                                                                                                                          | 4        |   |
|                                        |       |                                                                                        | Unaudited  Consolidated Balance Sheets December 31, 2004 and June 30, 2005                                          |     | 4 |   |
|                                        |       |                                                                                        | Interim  Unaudited Consolidated Statements of Income Three Months and Six Months Ended  June 30, 2004 and 2005           |     | 5 |   |
|                                        |       |                                                                                        | Interim  Unaudited Consolidated Statement of Stockholders’ Equity Six Months Ended  June 30, 2005    |     | 6 |   |
|                                        |       |                                                                                        | Interim  Unaudited Consolidated Statements of Cash Flows Six Months Ended  June 30, 2004 and 2005              |     | 7 |   |
|                                        |       |                                                                                        | Notes to Interim Unaudited  Consolidated Financial Statements                                                                 |     | 8 |   |
| Item  2.                                    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                          | 21       |   |
| Item  3.                                    |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                                                                                          | 66       |   |
| Item  4.                                    |       | Controls  and Procedures                                                                    |                                                                                                                          | 67       |   |
| **PART II—OTHER  INFORMATION**    | ** ** | 68                                                                                          | ** **                                                                                                                    |
| Item 1.                                     |       | Legal  Proceedings                                                                          |                                                                                                                          | 68       |   |
| Item  2.                                    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                                                                                          | 68       |   |
| Item  4.                                    |       | Submission  of Matters to a Vote of Security Holders                                        |                                                                                                                          | 68       |   |
| Item 6.                                     |       | Exhibits                                                                                    |                                                                                                                          | 69       |   |
| **SIGNATURES**                              | ** ** | ** **                                                                                  | ** **                                                                                                                    |
| **INDEX TO  EXHIBITS**                      | ** ** | ** **                                                                                  | ** **                                                                                                                    |

 

2

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**FORWARD-LOOKINGSTATEMENTS**

The matters discussed in this Quarterly Report on Form 10-Qthat 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 beidentified by the fact that they do not relate strictly to historical orcurrent 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 a discussionof future operating or financial performance. You should read statements thatcontain these words carefully, because they discuss our future expectations,contain projections of our future results of operations or of our financialposition 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-Item2. 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 do not have any intention, and do not undertake, to update anyforward-looking statements to reflect events or circumstances arising after thedate of this Quarterly Report, whether as a result of new information, futureevents or otherwise. As a result of these risks and uncertainties, readers arecautioned not to place undue reliance on the forward-looking statementsincluded in this Quarterly Report or that may be made elsewhere from time totime by, or on behalf of, us. All forward-looking statements attributable to usare expressly qualified by these cautionary statements.

3

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**PART I—FINANCIALINFORMATION**

**ITEM1.**                FINANCIALSTATEMENTS.

**Advance America, Cash Advance Centers, Inc.Unaudited ConsolidatedBalance SheetsDecember 31, 2004 and June 30, 2005(in thousands, except per share data)**
| ** **                                                                                                                                                                                                           | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                                                                                           |       |                        |       |                    |       |   |   |
| Current assets                                                                                                                                                                                                       |       |                        |       |                    |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                           |       |                        | $          | 18,224                  |       |   | $ | 9,187 |   |
| Advances and fees  receivable, net                                                                                                                                                                                   |       |                        | 155,009    |                    |       | 173,127 |   |
| Deferred income  taxes                                                                                                                                                                                               |       |                        | 3,141      |                    |       | 3,221 |   |
| Other current  assets                                                                                                                                                                                                |       |                        | 9,887      |                    |       | 4,919 |   |
| Total current  assets                                                                                                                                                                                                |       |                        | 186,261    |                    |       | 190,454 |   |
| Restricted cash                                                                                                                                                                                                      |       |                        | 9,110      |                    |       | 9,285 |   |
| Property and equipment,  net                                                                                                                                                                                         |       |                        | 72,247     |                    |       | 71,214 |   |
| Goodwill                                                                                                                                                                                                             |       |                        | 122,324    |                    |       | 122,324 |   |
| Other assets                                                                                                                                                                                                         |       |                        | 7,597      |                    |       | 7,167 |   |
| Total assets                                                                                                                                                                                                         |       |                        | $          | 397,539                 |       |   | $ | 400,444 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                        |       |                        |       |                    |       |   |   |
| Current liabilities                                                                                                                                                                                                  |       |                        |       |                    |       |   |   |
| Accounts payable                                                                                                                                                                                                     |       |                        | $          | 13,911                  |       |   | $ | 9,416 |   |
| Accrued  liabilities                                                                                                                                                                                                 |       |                        | 23,027     |                    |       | 27,732 |   |
| Income taxes  payable                                                                                                                                                                                                |       |                        | 2,169      |                    |       | 1,407 |   |
| Accrual for excess  bank losses                                                                                                                                                                                      |       |                        | 3,219      |                    |       | 5,337 |   |
| Current portion of  long-term debt                                                                                                                                                                                   |       |                        | 471        |                    |       | 459 |   |
| Total current  liabilities                                                                                                                                                                                           |       |                        | 42,797     |                    |       | 44,351 |   |
| Revolving credit facility                                                                                                                                                                                            |       |                        | 39,506     |                    |       | 27,511 |   |
| Long-term debt                                                                                                                                                                                                       |       |                        | 6,660      |                    |       | 6,426 |   |
| Deferred income taxes                                                                                                                                                                                                |       |                        | 12,286     |                    |       | 14,515 |   |
| Other liabilities                                                                                                                                                                                                    |       |                        | —     |                    |       | 28 |   |
| Total liabilities                                                                                                                                                                                                    |       |                        | 101,249    |                    |       | 92,831 |   |
| Commitments and  contingencies (Note 7)                                                                                                                                                                              |       |                        |       |                    |       |   |   |
| Stockholders’ equity                                                                                                                                                                                            |       |                        |       |                    |       |   |   |
| Preferred stock,  par value $.01 per share, 25,000 shares authorized; no shares issued and  outstanding                                                                                                              |       |                        | —     |                    |       | — |   |
| Common stock, par  value $.01 per share, 250,000 shares authorized; 96,821 shares issued and  83,958 outstanding as of December 31, 2004 and 96,821 shares issued and  83,588 outstanding at June 30, 2005 |       |                        | 968        |                    |       | 968 |   |
| Paid in capital                                                                                                                                                                                                      |       |                        | 284,004    |                    |       | 283,835 |   |
| Paid in capital—unearned  compensation                                                                                                                                                                          |       |                        | (3,451     | )                       |       | (2,827 | ) |
| Retained earnings                                                                                                                                                                                                    |       |                        | 52,492     |                    |       | 67,864 |   |
| Common stock in treasury  (12,863 and 13,234 shares at cost at December 31, 2004 and June 30,  2005, respectively)                                                                                         |       |                        | (37,723    | )                       |       | (42,227 | ) |
| Total  stockholders’ equity                                                                                                                                                                                     |       |                        | 296,290    |                    |       | 307,613 |   |
| Total liabilities and  stockholders’ equity                                                                                                                                                                     |       |                        | $          | 397,539                 |       |   | $ | 400,444 |   |

 

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

4

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**Advance America, Cash Advance Centers, Inc.Interim UnauditedConsolidated Statements of IncomeThree Months and Six Months Ended June 30, 2004 and 2005(in thousands, except per share data)**
| ** **                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                                        | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Revenues:**                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Fees and interest charged to customers                                           |       | $                                               | 100,437    |                                          | $          | 114,693 |   | $ | 195,752 |   | $ | 219,849 |   |
| Marketing, processing and servicing fees                                         |       | 30,038                                          |       | 35,624                                        |       | 62,883 |   | 68,851 |   |
| Total revenues                                                                   |       | 130,475                                         |       | 150,317                                       |       | 258,635 |   | 288,700 |   |
| Provision for doubtful accounts and agency bank  losses                          |       | (19,093                                         | )          | (30,567                                       | )          | (30,053 | ) | (40,658 | ) |
| Net revenues                                                                     |       | 111,382                                         |       | 119,750                                       |       | 228,582 |   | 248,042 |   |
| **Center Expenses:**                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Salaries and related payroll costs                                               |       | 38,651                                          |       | 42,541                                        |       | 78,527 |   | 84,589 |   |
| Occupancy costs                                                                  |       | 16,100                                          |       | 19,153                                        |       | 31,380 |   | 38,280 |   |
| Center depreciation expense                                                      |       | 3,447                                           |       | 3,595                                         |       | 6,611 |   | 7,132 |   |
| Advertising expense                                                              |       | 7,377                                           |       | 7,611                                         |       | 14,201 |   | 12,856 |   |
| Other center expenses                                                            |       | 11,025                                          |       | 12,612                                        |       | 22,665 |   | 25,049 |   |
| Total center expenses                                                            |       | 76,600                                          |       | 85,512                                        |       | 153,384 |   | 167,906 |   |
| Center gross profit                                                              |       | 34,782                                          |       | 34,238                                        |       | 75,198 |   | 80,136 |   |
| **Corporate and Other Expenses  (Income):**                                      |       |                                            |       |                                          |       |   |   |   |   |
| General and  administrative expenses                                             |       | 10,401                                          |       | 13,244                                        |       | 20,525 |   | 24,982 |   |
| General and  administrative expenses with related parties                        |       | 533                                             |       | 101                                           |       | 1,130 |   | 164 |   |
| Corporate  depreciation expense                                                  |       | 1,002                                           |       | 1,072                                         |       | 2,001 |   | 2,149 |   |
| Interest expense                                                                 |       | 1,412                                           |       | 732                                           |       | 2,824 |   | 1,558 |   |
| Interest expense  with related parties                                           |       | 2,601                                           |       | —                                        |       | 5,201 |   | — |   |
| Interest income                                                                  |       | (54                                             | )          | (67                                           | )          | (90 | ) | (158 | ) |
| Loss on disposal  of property and equipment                                      |       | 109                                             |       | 27                                            |       | 269 |   | 123 |   |
| Income before income taxes                                                       |       | 18,778                                          |       | 19,129                                        |       | 43,338 |   | 51,318 |   |
| Income tax expense                                                               |       | 703                                             |       | 8,384                                         |       | 1,522 |   | 20,835 |   |
| Net income                                                                       |       | $                                               | 18,075     |                                          | $          | 10,745 |   | $ | 41,816 |   | $ | 30,483 |   |
| Net income per common share—basic and diluted                               |       | $                                               | 0.26       |                                          | $          | 0.13 |   | $ | 0.61 |   | $ | 0.36 |   |
| Dividends declared per common share                                              |       | $                                               | 0.09       |                                          | $          | 0.09 |   | $ | 0.32 |   | $ | 0.18 |   |
| Weighted average number of shares outstanding—basic  and diluted       |       | 68,667                                          |       | 83,878                                        |       | 68,667 |   | 83,918 |   |
| **Pro Forma Data**                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Historical income before taxes                                                   |       | $                                               | 18,778     |                                          |       |   | $ | 43,338 |   |   |   |
| Pro forma income tax expense                                                     |       | 7,624                                           |       |                                          |       | 17,595 |   |   |   |
| Net income adjusted for pro forma income tax expense                             |       | $                                               | 11,154     |                                          |       |   | $ | 25,743 |   |   |   |
| Pro forma net income per common share—basic  and diluted                    |       | $                                               | 0.16       |                                          |       |   | $ | 0.37 |   |   |   |
| Weighted average  pro forma number of shares outstanding—basic  and diluted |       | 68,667                                          |       |                                          |       | 68,667 |   |   |   |

 

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

5

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**Advance America, Cash Advance Centers, Inc.Interim UnauditedConsolidated Statement of Stockholders’ EquitySix Months Ended June 30, 2005(in thousands, except per share data)**
| ** **                            | ** ** | ** **            | ** ** | ** ** | ** ** | **Paid-In**  | ** ** | ** **       | ** ** | ** **            | ** ** | ** **           | ** ** |
|---------------------------------------|------------|-----------------------|------------|------------|------------|--------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Capital-** | ** ** | ** **       | ** ** | **Common Stock** | ** ** | ** **           | ** ** |
| ** **                            | ** ** | ** **            | ** ** | **Par**    | ** ** | **Paid-In**  | ** ** | **Unearned**     | ** ** | **Retained**          | ** ** | **In Treasury** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Shares**            | ** ** | **Value**  | ** ** | **Capital**  | ** ** | **Compensation** | ** ** | **Earnings**          | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Balances, December 31,  2004     |       | 96,821                |       | $          | 968        |         | $          | 284,004          |       |                  | $          | (3,451               | )          |   | $ | 52,492 |   | (12,863 | ) | $ | (37,723 | ) | $ | 296,290 |   |
| Amortization of restricted stock      |       | —                |       | —     |       | —       |       |             | 574        |                  |       | —               |       | — |   | — |   | 574 |   |
| Forfeitures of restricted stock       |       | —                |       | —     |       | —       |       |             | 50         |                  |       | —               |       | (3 | ) | (50 | ) | — |   |
| Dividends paid ($0.18 per share) |       | —                |       | —     |       | —       |       |             | —     |                  |       | (15,070              | )          | — |   | — |   | (15,070 | ) |
| Dividends payable                     |       | —                |       | —     |       | —       |       |             | —     |                  |       | (41                  | )          | — |   | — |   | (41 | ) |
| Common stock issuance costs      |       | —                |       | —     |       | (169         | )          |             | —     |                  |       | —               |       | — |   | — |   | (169 | ) |
| Purchases of treasury  stock          |       | —                |       | —     |       | —       |       |             | —     |                  |       | —               |       | (368 | ) | (4,454 | ) | (4,454 | ) |
| Net Income                            |       | —                |       | —     |       | —       |       |             | —     |                  |       | 30,483               |       | — |   | — |   | 30,483 |   |
| Balances, June 30,  2005         |       | 96,821                |       | $          | 968        |         | $          | 283,835          |       |                  | $          | (2,827               | )          |   | $ | 67,864 |   | (13,234 | ) | $ | (42,227 | ) | $ | 307,613 |   |

 

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

6

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**Advance America, Cash Advance Centers, Inc.Interim UnauditedConsolidated Statements of Cash FlowsSix Months Ended June 30, 2004 and 2005(in thousands)**
| ** **                                                                                | ** ** | **      2004      ** | ** ** | **      2005      ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Cash flows from operating  activities**                                                 |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Net income                                                                                |       |                                                                             | $          | 41,816                                                                           |       |   |   | $ | 30,483 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities         |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Depreciation                                                                              |       |                                                                             | 8,612      |                                                                             |       |   | 9,281 |   |   |
| Non-cash interest expense                                                                 |       |                                                                             | 418        |                                                                             |       |   | 490 |   |   |
| Provisions for doubtful  accounts and agency bank losses                                  |       |                                                                             | 30,053     |                                                                             |       |   | 40,658 |   |   |
| Deferred income taxes                                                                     |       |                                                                             | 275        |                                                                             |       |   | 2,149 |   |   |
| Loss on disposal of  property and equipment                                               |       |                                                                             | 269        |                                                                             |       |   | 123 |   |   |
| Amortization of  restricted stock                                                         |       |                                                                             | —     |                                                                             |       |   | 574 |   |   |
| Changes in operating  assets and liabilities                                              |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Other current assets                                                                      |       |                                                                             | (171       | )                                                                                |       |   | 4,968 |   |   |
| Other assets                                                                              |       |                                                                             | (2,414     | )                                                                                |       |   | (50 | ) |   |
| Accounts payable                                                                          |       |                                                                             | 616        |                                                                             |       |   | (3,189 | ) |   |
| Accrued liabilities                                                                       |       |                                                                             | 3,018      |                                                                             |       |   | 3,215 |   |   |
| Income taxes payable                                                                      |       |                                                                             | 17         |                                                                             |       |   | (762 | ) |   |
| Accrual for excess bank  losses                                                           |       |                                                                             | (7,207     | )                                                                                |       |   | (8,674 | ) |   |
| Net cash provided by  operating activities                                                |       |                                                                             | 75,302     |                                                                             |       |   | 79,266 |   |   |
| **Cash  flows from investing activities**                                                 |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Changes in advances and  fees receivable, net                                             |       |                                                                             | (28,156    | )                                                                                |       |   | (47,984 | ) |   |
| Changes in restricted  cash                                                               |       |                                                                             | 1,214      |                                                                             |       |   | (175 | ) |   |
| Proceeds from sale of  property and equipment                                             |       |                                                                             | 18         |                                                                             |       |   | 184 |   |   |
| Purchases of property and  equipment                                                      |       |                                                                             | (15,707    | )                                                                                |       |   | (7,078 | ) |   |
| Net cash used in  investing activities                                                    |       |                                                                             | (42,631    | )                                                                                |       |   | (55,053 | ) |   |
| **Cash  flows from financing activities**                                                 |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Payments on revolving  credit facility, net                                               |       |                                                                             | (13,642    | )                                                                                |       |   | (11,995 | ) |   |
| Common stock issuance  costs                                                              |       |                                                                             | —     |                                                                             |       |   | (169 | ) |   |
| Payments on mortgage  payable                                                             |       |                                                                             | (152       | )                                                                                |       |   | (164 | ) |   |
| Payments on note payable                                                                  |       |                                                                             | —     |                                                                             |       |   | (82 | ) |   |
| Payments of financing  costs                                                              |       |                                                                             | —     |                                                                             |       |   | (10 | ) |   |
| Purchases of treasury  stock                                                              |       |                                                                             | —     |                                                                             |       |   | (4,454 | ) |   |
| Payments of dividends                                                                     |       |                                                                             | (21,783    | )                                                                                |       |   | (15,070 | ) |   |
| Changes in book  overdrafts                                                               |       |                                                                             | (1,051     | )                                                                                |       |   | (1,306 | ) |   |
| Net cash used in  financing activities                                                    |       |                                                                             | (36,628    | )                                                                                |       |   | (33,250 | ) |   |
| Net decrease in cash and  cash equivalents                                                |       |                                                                             | (3,957     | )                                                                                |       |   | (9,037 | ) |   |
| Cash and cash  equivalents, beginning of period                                           |       |                                                                             | 10,484     |                                                                             |       |   | 18,224 |   |   |
| Cash and cash  equivalents, end of period                                                 |       |                                                                             | $          | 6,527                                                                            |       |   |   | $ | 9,187 |   |   |
| Supplemental disclosures  of cash flow information:                                       |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Cash paid during the  period for:                                                         |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Interest, net of amounts  capitalized                                                     |       |                                                                             | $          | 7,727                                                                            |       |   |   | $ | 1,070 |   |   |
| Income taxes                                                                              |       |                                                                             | 1,229      |                                                                             |       |   | 19,448 |   |   |
| Supplemental schedule of  non-cash investing and financing activity:                      |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Property and equipment  purchases included in accounts payable and accrued expenses  |       |                                                                             | 1,018      |                                                                             |       |   | 1,477 |   |   |
| Restricted stock dividends payable                                                        |       |                                                                             | —     |                                                                             |       |   | 41 |   |   |

 

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

7

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

**1.   Summary ofSignificant Accounting Policies**

**Basis ofPresentation**

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 unauditedconsolidated financial statements should be read in conjunction with theCompany’s audited financial statements in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004 filed with the SEC. In the opinion ofthe Company’s management, all adjustments, consisting of normal recurringaccruals considered necessary for a fair statement, have been included. Theresults of operations for the three and six months ended June 30, 2005 arenot necessarily indicative of the results that may be expected for futureinterim periods or the entire year ended December 31, 2005.

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

**Revenue Recognition**

Revenues on payday cashadvances (and as of July 2005, installment loans under the agency businessmodel) can be characterized as fees and/or interest depending upon variousstate laws. Revenue is recognized on payday cash advances made by the Companyunder the standard business model on a 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 marketing, processing and servicing feespayable to the Company by the lending banks. Prior to July 2005, these feesincluded the losses for which the lending banks were contractually obligated ineach of the five states where the Company operated its agency business model. Asof July 2005, these fees include the losses for which the lending bank operatingin Pennsylvania is contractually obligated. The Company recognizes revenueunder the agency business model on a constant-yield basis ratably overthe term of each payday cash advance.

**Concentration ofRisk**

The Company originated,marketed and serviced payday cash advances, under either the standard or agencybusiness model, to a broad base of individuals in 35 states in the UnitedStates. For the three months ended June 30, 2004 and 2005, total revenueswithin five states accounted for approximately 42.2% and 40.6%, respectively,of the Company’s total revenues. For the six months ended June 30, 2004and 2005, total revenues within five states accounted for approximately 42.3%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 these 

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elections on December 21,2004. For the three and six months ended June 30,2004, approximately 95% and 96%, respectively, of total revenues wereattributable to companies that had elected Subchapter S status.

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

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

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

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

b)              submitting 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.

In Pennsylvania, North Carolina and Arkansas, theCompany is compensated under these MP&S Agreements by the lendingbanks for marketing, processing and servicing the payday cash advances and, asof July 2005, installment loans the lending banks make to their customers.The Company was previously a party to MP&S Agreements with lending banksoffering payday cash advances in Texas and Michigan, which agreements wereterminated in June 2005, and the Company no longer operates in Texas orMichigan under the agency business model. Although the Company markets,processes and services payday cash advances and, now, installment loans made bythe lending banks under the agency business model, each lending bank isresponsible for evaluating each of its customers’ applications and determiningwhether the payday cash advance and/or installment loan is approved. TheCompany is not involved in the lending banks’ payday cash advance orinstallment loan approval process or the determination of their approval proceduresor criteria, and the Company does not fund or acquire any payday cash advancesor installment loans from the lending banks. The payday cash advances andinstallment loans are repayable solely to the lending banks and are assets ofthe lending banks; accordingly, they are not included in the Company’s balancesheet.

Prior to July 2005, each lending bank wascontractually obligated for the losses on payday cash advances in an amountestablished as a percentage of the interest and/or fees charged by the banks totheir customers. The Company’s marketing, processing and servicing fee increasedby the lending bank’s contractual obligation for losses. If the amount of thelending bank’s uncollected payday cash advances and 

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installment loans exceedthe lending bank’s contractual obligations, the Company would likely beobligated to pay the lending bank the outstanding amount of the advances andloans plus the lending bank’s fees and/or interest receivable on the advances,less the lending bank’s contractually obligated portion of the losses. Theoutstanding balances of the lending bank advances and fees receivable servicedby the Company were approximately $61.8 million and $52.7 million at December 31,2004 and June 30, 2005, respectively. This amount represents solely paydaycash advances, as no installment loans were offered by lending banks until July 2005.Beginning in July 2005, the lending bank offering payday cash advances andinstallment loans in North Carolina and Arkansas is responsible for any and alllosses associated with its payday cash advances and installment loans, whilethe lending bank offering payday cash advances and installment loans inPennsylvania is only contractually obligated for losses in an amountestablished as a percentage of the interest and/or fees charged by the bank toits customers.

On March 1, 2005, the Federal Deposit InsuranceCorporation (“FDIC”) issued revised Payday Lending Guidance (the “RevisedGuidance”) to FDIC insured institutions that offer payday cash advances,including the lending banks for which the Company acts as an agent. The RevisedGuidance limits the frequency of customer usage of payday cash advances andlimits the period a customer may have payday cash advances outstanding from anylender to an aggregate of three months during the previous 12-monthperiod. Based on an average term of approximately 15 days, this effectivelylimits the number of payday cash advances that may be made to any customer tosix during any 12-month period. Pursuant to the Revised Guidance, lending banksmay offer alternative longer-term credit products, which have taken the form ofthe installment loans referred to above.

Each of the lending banksoffering payday cash advances in Pennsylvania, North Carolina and Arkansas thatare marketed, processed and serviced by the Company has submitted to the FDICits plan to make payday cash advances and installment loans in compliance withthe Revised Guidance, which plans have not been rejected or approved by theFDIC. Because these plans did not take effect until July 2005, the Companycannot yet determine the extent to which the Revised Guidance will financiallyor otherwise effect the agency business model. However, the cap on the numberof payday cash advances will likely reduce the Company’s revenues in thesestates, where the Company continues to market, process and service payday cashadvances and, now, installment loans under the agency business model. Thesedevelopments could have a material adverse effect on the Company’s business,results of operations and financial condition.

**3.   Advancesand Fees Receivable, Net**

Advancesand fees receivable, net, consisted of (in thousands):
| ** **                         | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Payday advances  receivable        |       |                        | $          | 137,309                 |       |   | $ | 149,591 |   |
| Fees and interest  receivable      |       |                        | 21,942     |                    |       | 23,151 |   |
| Returned items receivable          |       |                        | 25,705     |                    |       | 28,618 |   |
| Lending bank  receivable           |       |                        | 10,762     |                    |       | 14,169 |   |
| Other                              |       |                        | 1,833      |                    |       | 1,710 |   |
| Allowance for  doubtful accounts   |       |                        | (29,221    | )                       |       | (33,875 | ) |
| Unearned revenues                  |       |                        | (13,321    | )                       |       | (10,237 | ) |
| Advances and fees  receivable, net |       |                        | $          | 155,009                 |       |   | $ | 173,127 |   |

 

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

Changesin the allowance for doubtful accounts for the three and six months ended June 30,2004 and 2005 were as follows (in thousands):
| ** **                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                        | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Beginning balance                |       | $                                               | 20,629     |                                          | $          | 23,598 |   | $ | 23,021 |   | $ | 29,221 |   |
| Provision for  doubtful accounts |       | 14,928                                          |       | 23,260                                        |       | 22,492 |   | 29,866 |   |
| Charge-offs                      |       | (13,136                                         | )          | (16,035                                       | )          | (28,229 | ) | (35,521 | ) |
| Recoveries                       |       | 2,489                                           |       | 3,052                                         |       | 7,626 |   | 10,309 |   |
| Ending balance                   |       | $                                               | 24,910     |                                          | $          | 33,875 |   | $ | 24,910 |   | $ | 33,875 |   |

 

Changesin the accrual for excess bank losses for the three and six months ended June 30,2004 and 2005 were as follows (in thousands):
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                        | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Beginning balance                 |       | $                                               | 2,929      |                                          | $          | 2,330 |   | $ | 3,623 |   | $ | 3,219 |   |
| Provision for  agency bank losses |       | 4,165                                           |       | 7,307                                         |       | 7,561 |   | 10,792 |   |
| Charge-offs                       |       | (4,307                                          | )          | (5,570                                        | )          | (11,282 | ) | (13,373 | ) |
| Recoveries                        |       | 1,190                                           |       | 1,270                                         |       | 4,075 |   | 4,699 |   |
| Ending balance                    |       | $                                               | 3,977      |                                          | $          | 5,337 |   | $ | 3,977 |   | $ | 5,337 |   |

 

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

**5.**   AccruedLiabilities

Accruedliabilities were as follows (in thousands):
| ** **                        | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Employee  compensation            |       |                        | $          | 9,678                   |       |   | $ | 9,369 |   |
| Health and dental  insurance      |       |                        | 3,364      |                    |       | 3,417 |   |
| Workers’  compensation       |       |                        | 3,521      |                    |       | 3,887 |   |
| Advertising                       |       |                        | 261        |                    |       | 1,151 |   |
| Legal                             |       |                        | 827        |                    |       | 1,220 |   |
| Accrued  construction in progress |       |                        | 1,818      |                    |       | 1,477 |   |
| Payable to  lending bank          |       |                        | —     |                    |       | 3,175 |   |
| Other                             |       |                        | 3,558      |                    |       | 4,036 |   |
| Total                             |       |                        | $          | 23,027                  |       |   | $ | 27,732 |   |

 

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**6.   Income Taxes**

Incometax expense for the three and six months ended June 30, 2004 and 2005consisted of the following (in thousands):
| ** ** | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** ** | ** ** | **2004**                                        | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Current    |       |                                            |       |                                          |       |   |   |   |   |
| Federal    |       | $                                               | —     |                                          | $          | 6,277 |   | $ | — |   | $ | 15,589 |   |
| State      |       | (566                                            | )          | 1,247                                         |       | 1,246 |   | 3,097 |   |
|       |       | (566                                            | )          | 7,524                                         |       | 1,246 |   | 18,686 |   |
| Deferred   |       | 1,269                                           |       | 860                                           |       | 276 |   | 2,149 |   |
| Total      |       | $                                               | 703        |                                          | $          | 8,384 |   | $ | 1,522 |   | $ | 20,835 |   |

 

Areconciliation of the statutory federal income tax rate and the Company’s effectiveincome tax rate for the three and six months ended June 30, 2004 and 2005follows: 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **   2004   **    | ** ** | **   2005   **  | ** ** | **   2004   ** | ** ** | **   2005   ** | ** ** |
| Statutory income  tax rate               |       |                                            | 35.0       | %                                             |       |   | 35.0 | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| S corporation  income not subject to tax |       |                                            | (29.8      | )                                             |       |   | 2.0 |   |   |   | (31.9 | ) |   |   | (0.3 | ) |   |
| State income  taxes, net                 |       |                                            | 2.0        |                                          |       |   | 4.6 |   |   |   | 0.4 |   |   |   | 4.4 |   |   |
| Other                                    |       |                                            | (3.5       | )                                             |       |   | 2.2 |   |   |   | — |   |   |   | 1.5 |   |   |
| Effective income  tax rate               |       |                                            | 3.7        | %                                             |       |   | 43.8 | % |   |   | 3.5 | % |   |   | 40.6 | % |   |

 

Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and deferred tax liabilities are (in thousands): 
| ** **                                    | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Deferred tax assets                           |       |                        |       |                    |       |   |   |
| Accrued expenses                              |       |                        | $          | 2,762                   |       |   | $ | 3,266 |   |
| Bad debts                                     |       |                        | 1,819      |                    |       | 2,116 |   |
| Net operating loss carryforwards              |       |                        | 845        |                    |       | 40 |   |
| Other                                         |       |                        | 35         |                    |       | 12 |   |
| Total deferred tax assets                     |       |                        | 5,461      |                    |       | 5,434 |   |
| Deferred tax liabilities                      |       |                        |       |                    |       |   |   |
| Goodwill                                      |       |                        | (7,877     | )                       |       | (9,310 | ) |
| Depreciation                                  |       |                        | (1,882     | )                       |       | (2,071 | ) |
| Prepaid expenses                              |       |                        | (1,590     | )                       |       | (2,104 | ) |
| Book versus tax basis difference for aircraft |       |                        | (3,257     | )                       |       | (3,243 | ) |
| Total deferred tax liabilities                |       |                        | (14,606    | )                       |       | (16,728 | ) |
| Net deferred tax  liability                   |       |                        | $          | (9,145                  | )          |   | $ | (11,294 | ) |

 

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

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the termination of theSubchapter S Companies’ S corporation status, the Company recorded a netdeferred tax liability and corresponding income tax expense on the terminationdate of $8.4 million.

As of December 31,2004 and June 30, 2005, the Company had net operating loss carryforwardsfor federal and state income tax purposes totaling approximately $3.4 millionand $0.7 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 marketing, processing 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 Georgia Court of Appeals. TheCompany filed a Petition for Certiorari to the Georgia Supreme Court, which wasdenied 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 operations and financial condition by possibly forcing theCompany to permanently cease operations in Georgia. On July 29, 2005, theCompany received an order setting a hearing for September 23, 2005regarding whether certain documents provided by the Company to the Commissionerand placed under seal by the trial court should remain sealed.

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 marketing, processing 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”),seeking declaratory and injunctive relief. The relief sought was a declarationthat 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 extended 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 $1.2 million, or 1.1% of the Company’snet revenues, for the three months ended June 30, 2004 and approximately$5.6 million, or 2.5% of the Company’s net revenues, for the six months ended June 30,2004. The Georgia operations have not generated revenue since operations wereceased in May 2004. 

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Subsequent to June 2005,the Company permanently closed 32 centers in Georgia. The lease cancellationand other closing costs were approximately $0.3 million. The Company estimatesthat the cost to keep the remaining 54 Georgia centers open under limitedoperating conditions will be approximately $0.2 million per month.Additionally, if necessary, the Company estimates that it will costapproximately $0.7 million (which includes lease cancellation costs ofapproximately $0.4 million) to shut down the Georgia operations completely. TheCompany appealed the District Court’s order to the U.S. Court of Appeals forthe Eleventh Circuit. On June 10, 2005, the Eleventh Circuit issued itsopinion affirming the District Court’s order by a 2-1 majority opinion. TheCompany, together with certain co-petitioners, filed a petition for rehearingen banc with the Eleventh Circuit on July 1, 2005 and the parties areawaiting a response to this petition.

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 whom wasa customer of Republic Bank & Trust Company (“Republic”), the lendingbank for whom the Company marketed, processed and serviced payday cash advancesin North Carolina, filed a putative class action lawsuit in the General Courtof Justice for the Superior Court Division for New Hanover County, NorthCarolina against the Company, its subsidiary that operates in North Carolinaand William M. Webster, IV, the Company’s Chief Executive Officer, alleging,among other things, that the relationship between the Company’s subsidiary thatoperates in North Carolina and Republic was a “rent a charter” relationship andtherefore the bank was not the “true lender” on the payday cash advances. Thelawsuit also claims that the payday cash advances were made, administered andcollected in violation of numerous North Carolina consumer protection laws. Thelawsuit seeks an injunction barring the Company from continuing to do businessin North Carolina, the return of the principal amount of the payday cashadvances made to the plaintiff class since August 2001, the return of anyinterest or fees associated with those advances, treble damages, attorneys’fees and other unspecified costs. The case is in its preliminary stages. Thusfar the only substantive motions the Company has filed are motions to (1) dismissor stay proceedings and (2) compel arbitration. On November 19, 2004,plaintiffs filed a motion seeking class certification. On November 16,2004, the North Carolina Superior Court denied the Company’s motion to have thecase designated as a complex business case and assign it to the North CarolinaBusiness Court and instead granted the plaintiffs’ motion to designate the caseas exceptional and assign it to a special Superior Court Judge. The ruling doesnot express any opinion on the merits of the case. Plaintiffs’ counselindicated at the hearing held prior to the ruling, and in papers filed insupport of their motion for class certification (which has not yet been fullybriefed or set for a hearing), that the distributions to the Company’sstockholders of substantially all of the net income earned by the Company inthe form of cash dividends may be the subject of a fraudulent conveyance claim.At the hearing, plaintiffs’ counsel indicated that they might seek injunctiverelief to return such payments or to hold them in escrow pending a judgment inthis lawsuit. Plaintiffs’ complaint contains a fraudulent conveyance claim butseeks no specific relief with respect to that claim. On December 1, 2004,the North Carolina Supreme Court appointed a Special Superior Judge to hear thecase. On March 10, 2005, that Judge heard arguments on the motions to staydiscovery pending a decision on arbitrability, and, on May 11, 2005,issued a ruling allowing limited discovery on the issues of arbitration,personal jurisdiction and class certification and then stated his intent to seta date to hear these motions together. An adverse ruling in this case couldhave 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 

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an action in federal courtin North Carolina against the three plaintiffs who have sued the Company,seeking a declaratory judgment that all disputes their customers have shall besubmitted to arbitration and an injunction preventing the plaintiffs frompursuing disputes in a non-arbitral forum. A motion to dismiss Republic’slawsuit was granted on February 10, 2005, on grounds that Republic lacksstanding. On February 18, 2005, Republic filed a motion to alter or amendthe judgment and for reconsideration, which was denied. Republic has filed anappeal of these orders to the U.S. Court of Appeals for the Fourth Circuit.

·       OnAugust 6, 2004, Tahisha King and James E. Strong, who were customers ofBankWest, the lending bank for whom the Company marketed, processed andserviced payday cash advances in Georgia, filed a putative class action lawsuitin the State Court of Cobb County, Georgia against the Company, its subsidiaryin Georgia, William M. Webster, IV and several of the Company’s unnamedofficers, directors, owners and “stakeholders,” alleging many different causesof action, most notably that the Company made illegal payday loans in Georgiain violation of Georgia’s usury law, the Georgia Industrial Loan Act andGeorgia’s Racketeer Influenced and Corrupt Organizations Act. The complaintalleges that BankWest was not the “true lender” on the loans that the Companymarketed, processed and serviced for BankWest in Georgia and that the Companywas the “de facto” lender. The complaint seeks compensatory damages, attorneys’fees, punitive damages and the trebling of any compensatory damages. TheCompany has removed the case to 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 plaintiffs seeking a declaratory judgment thatall disputes relating to the loans by BankWest shall be submitted toarbitration and plaintiffs shall be prohibited from pursuing loan related disputesin a non-arbitral forum. A hearing was held on December 14, 2004. Whileno formal opinion was issued, the court indicated its intention to place thecases on hold until the Eleventh Circuit issued its ruling in BankWest vs.Baker, which challenges the constitutionality of Georgia’s payday cashadvance law and Jenkins vs. First American, which involves the enforceabilityof an arbitration clause similar to the one at issue in the Company’s Georgiacase. On February 18, 2005, the Eleventh Circuit held in the Jenkins casethat the arbitration clause was enforceable and binding on the plaintiffs. On March 24,2005, the court issued a formal opinion indicating that it was staying the Kingand Strong case until the Eleventh Circuit issued its decision in BankWestvs. Baker. After the Eleventh Circuit issued its ruling upholding theDistrict Court’s order in BankWest vs. Baker, the court in the King andStrong case issued a scheduling order asking that briefs be filed with thecourt by August 10, 2005, regarding the Eleventh Circuit’s opinion. Thecourt has yet to schedule a hearing with respect to these briefs.

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 the BankWestvs. 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 

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February 2001 in theCircuit Court of Palm Beach County against the Company’s subsidiary, McKenzieCheck Advance of Florida, LLC and certain other parties. The first lawsuitalleges that the Company engaged in unfair and deceptive trade practices andviolated the Florida criminal usury statute, the Florida Consumer Finance Act,and Florida’s Racketeer Influenced and Corrupt Organizations Act. The Companysuccessfully moved to have Ms. Reuter’s case sent to arbitration and was awardedsummary judgment as to Ms. Betts’ claims. The arbitration order in Ms. Reuter’scase is currently on appeal to the Florida Supreme Court and the summaryjudgment order in Ms. Betts’ case was reversed on August 11, 2004 byFlorida’s Fourth District Court of Appeals. The Company is appealing the FourthDistrict Court of Appeals’ ruling. The suit seeks unspecified damages, and theCompany could be required to refund fees and/or interest collected, refund theprincipal amount of payday cash advances, pay multiple damages and pay othermonetary penalties. On May 9, 2005, the Florida Supreme Court issued anorder requesting briefing as to whether the Florida Supreme Court shouldsummarily quash the decision ordering arbitration in light of another Florida SupremeCourt decision on arbitration entitled Cardegna v. Buckeye Check Cashing, Inc.,which held that a substantially similar arbitration agreement was unenforceable.The Company initially filed, on May 20, 2005, a response that such anorder should be issued. However, on June 20, 2005, the United StatesSupreme Court granted a writ of certorari in the Cardegna case, and will reviewthe case in its 2005-06 term. Consequently on June 21, 2005, the Companyfiled a supplemental response requesting that the case be stayed in light ofthe pending U.S. Supreme Court review of the Florida Supreme Court’s decisionin this case. The Florida Supreme Court has not issued a ruling on thisrequest.

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 parties jointlymoved for a stay of the proceedings in light of the appeal of the originalBetts and Rueter case against the Company pending before the Florida SupremeCourt, which stay was granted on July 28, 2005.

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 lawsuit. The Sellers settled the lawsuit in April 2005and paid all amounts required under the settlement 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. Most 

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recently, the Commissionerhas issued an order establishing schedules for discovery, the exchange ofdocuments and setting deadlines of September 2, 2005 for the submission ofevidence and arguments thereof and September 12, 2005 for the submissionof briefs. The Attorney General for North Carolina as well as the class actionplaintiffs in the North Carolina class action case have moved to intervene andparticipate in this matter. The Attorney General was granted the right tointervene and participate. The class action plaintiffs were granted the rightto 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 $6.2 million, or 5.6% of theCompany’s net revenues, and $6.9 million, or 5.7% of the Company’s netrevenues, for the three months ended June 30, 2004 and 2005, respectively.Net revenues from the Company’s North Carolina operations were $12.7 million,or 5.5% of the Company’s net revenues, and $13.4 million, or 5.4% of theCompany’s net revenues, for the six months ended June 30, 2004 and 2005,respectively. The Company estimates that it would cost, as of June 30,2005, 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 the Company is required to shut down its North Carolinaoperations completely as a result of this investigation.

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.

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

**8.   Capital Stock**

On May 4, 2005, the Company announced that itsBoard of Directors had approved a program authorizing the repurchase by theCompany of up to $50 million of its currently outstanding common stock. TheCompany’s Board of Directors determined that the stock repurchase program willserve 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.

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 

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and Exchange Commission Rule 10b-18and Regulation M. The program does not require the Company to purchase anyspecific number of shares. Any purchases under the program will depend onmarket conditions. The Company’s Board of Directors may suspend or cancel thestock repurchase program at any time.

During the three months ended June 30, 2005, theCompany repurchased 367,200 shares of its common stock at a cost of approximately$4.5 million.

During the three monthsended June 30, 2005, the Company cancelled 3,333 shares of unvestedrestricted stock.

**9.   Subsequent Events**

On July 26, 2005 the Company’s Board of Directorsdeclared a cash dividend of $0.09 per share of common stock, payable on September 9,2005 to shareholders of record on August 30, 2005.

In late June and early July 2005, theCompany underwent several operational changes in the five states where it hashistorically conducted business under the agency business model as a result ofthe Revised Guidance on payday lending issued by the FDIC in March 2005. Thesechanges affected the Company’s operations in Arkansas, Michigan, NorthCarolina, Pennsylvania and Texas.

The Company has historically operated in Pennsylvaniaas a marketing, processing and servicing agent for BankWest, Inc., a SouthDakota bank (“BankWest”), in Arkansas as a marketing, processing and servicingagent for Venture Bank, a Washington bank (“Venture”), and in North Carolina asa marketing, processing and servicing agent for Republic Bank & Trust,a Kentucky bank (“Republic”). Effective July 1, 2005, the Company amendedits MP&S Agreement with BankWest regarding Pennsylvania, primarily to allowthe Company to also act as a marketing, processing and servicing agent for anew installment loan product offered by BankWest in the Company’s 101 paydaycash centers in Pennsylvania. On June 30, 2005, the Company terminated itsMP&S Agreement with Venture, and the Company entered into a new MP&SAgreement with First Fidelity Bank, a South Dakota bank (“First Fidelity Bank”),to operate as a marketing, processing and servicing agent for payday cashadvances and installment loans made by First Fidelity Bank in the Company’s 30payday cash advance centers in Arkansas. Effective July 6, 2005, theCompany terminated its MP&S Agreement with Republic and entered into a newMP&S Agreement with First Fidelity Bank to operate as a marketing,processing and servicing agent for payday cash advances and installment loansmade by First Fidelity Bank in the Company’s 117 payday cash advance centers inNorth Carolina.

Pursuant to the Company’s MP&S Agreements withFirst Fidelity Bank, First Fidelity Bank is contractually obligated for alllosses on payday cash advances and installment loans to its customers inArkansas and North Carolina. Under the Company’s terminated MP&S Agreementswith Venture and Republic, those lending banks were contractually obligated forthe losses on their payday cash advances in an amount established as apercentage of the fees and interest charged by the lending banks to theircustomers. Therefore, under the terminated agreements with Venture andRepublic, the Company was obligated if actual payday cash advance losses exceededthe lending bank’s contractual obligation. The Company remains obligated inNorth Carolina and Arkansas for the existing advances and fees receivable inexcess of the prior lending bank’s contractual obligations. Accordingly, at June 30,2005, the Company recorded a related net increase in the accrual for excessbank losses of approximately $1.7 million.

The lending banks intend to offer payday cash advancesin Pennsylvania, Arkansas and North Carolina within the limits of the FDIC’sRevised Guidance, which limits the frequency of customer usage of payday cashadvances and limits the period a customer may have payday cash advancesoutstanding from any lender to an aggregate of three months during the previous12-month period. In response to the FDIC’s Revised Guidance, the lending banksalso offer installment loans to their customers for which the 

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Company also acts asmarketing, processing and servicing agent. The installment loans generally havebi-weekly payments amortized over a three- or four-month period. Thelending banks establish all of the underwriting criteria and utilizethird-party credit scores to determine whether to approve an installment loanfor a customer. All of the terms, conditions and features of the installmentloan agreements between the lending banks and their customers are determined bythe lending banks. The lending banks fund all loans, and the Company does notexpect to purchase or participate in the loans. The Company deposits, on behalfof the lending banks, all repayments of installment loans, interest and fees inthe lending banks’ accounts, and the lending banks pay to the Company itsmarketing, processing and servicing fees for the installment loans.

The Company has historically operated in Michigan asmarketing, processing and servicing agent for First Fidelity Bank. Effective June 26,2005, the Company terminated its MP&S Agreement with First Fidelity Bankregarding Michigan. Under the terminated agreement, First Fidelity Bank was thelender and recorded advances and fees receivable on its balance sheet, andFirst Fidelity Bank was contractually obligated for uncollectible accounts inamounts determined as a percentage of fees and interest charged by FirstFidelity Bank to its customers. The amount by which losses exceeded FirstFidelity Bank’s contractual obligation was included on the Company’s balancesheet as an accrual for excess bank losses. In connection with terminating theMP&S Agreement with First Fidelity Bank, the Company purchased from FirstFidelity Bank its payday cash advance accounts receivable for Michigan, forapproximately $7.7 million, and First Fidelity Bank no longer has anyobligations for losses with respect to those accounts. The Company hasreflected those accounts receivable on its balance sheet at June 30, 2005,and recorded a related net increase in the allowance for doubtful accounts and accrualfor excess bank losses of approximately $0.6 million.

In late June 2005, the Company began offeringcheck-cashing and deferred presentment services directly to customers in its 86centers in Michigan. The approval process for the Company to provide customerswith check-cashing services in Michigan is substantially similar to the processthe Company uses to provide payday cash advances under its standard businessmodel. However, instead of providing its customer with a short-term advancethat is to be repaid by its customer and is secured by the customer’s personalcheck, the Company delivers to its customer cash in the amount of the checkpresented by the customer to it, less the amount of the fee charged by theCompany for cashing the check. The amount of the fee varies based on whetherthe check cashed is a government check, a payroll check or a personal check,and the Company charges interest for the period of time that its agrees withthe customer to hold the check before depositing it. Customers also have theopportunity to repurchase the check from the Company. Following this change inoperations, the Company includes its Michigan centers and its check-cashingbusiness in its standard business model.

Beginning in July 2005, the Company ceasedconducting business under the agency business model in its 208 centers inTexas, and began conducting business in those centers through a wholly ownedsubsidiary that has registered as a credit services organization (“CSO”) underTexas law. As a CSO, the Company offers a fee-based credit services package toassist customers in trying to improve their credit and in obtaining anextension of consumer credit through a third-party lender. In connection withcommencing operations as a CSO in Texas, the Company has entered into a creditservices agreement (“CSO Agreement”) with a third-party lender. The CSOAgreement governs the terms by which the Company refers customers in Texas tothat lender, on a non-exclusive basis, for a possible extension of credit,processes loan applications and commits to reimburse the lender for any loans orrelated fees that are not collected from such customers.

The process by which the Company assists customers incompleting a loan application and documentation with the third-party lender issimilar to how the Company previously operated in Texas. The lender stilldetermines whether to approve the loan utilizing third-party credit scores toevaluate a customer and establishes all of the loan underwriting criteria. Allof the terms, conditions and features of 

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the loan agreementsbetween the lender and the customers are determined by the lender. The customeralso writes a personal check payable to the lender in the amount of the loan,including interest for the anticipated duration of the loan, which the Companyholds on behalf of the lender pending repayment of the loan. The Company assistscustomers by agreeing to reimburse the lender for the full amount of the loansand all related fees that are not paid by the customers.

When the loan becomes due, the customer returns to theCSO center to repay the loan and pay the Company’s credit services fee (“CSOFee”), the Company returns the customer’s two checks and the Company depositsthe loan payment in the lender’s account and the CSO Fee in the Company’saccount. If the customer does not return to the CSO center to repay the loanand pay the CSO Fee, the Company may then begin collection efforts to obtainfrom the customer payment of the loan, the CSO Fee and any late and non-sufficientfunds (“NSF”) fees. If the Company is unsuccessful in collecting any paymentsfor the lender, the Company will reimburse the lender, and then may continueits collection efforts with respect to all amounts due by the customer.

Under the Company’s prior MP&S Agreement with thelending bank in Texas for payday cash advances, the lending bank wascontractually obligated for uncollectible payday cash advance accounts inamounts determined as a percentage of fees and interest charged by the lendingbank to its customers, which historically have been sufficient to cover alllosses incurred. Under the CSO Agreement, the Company is contractuallyobligated for all losses incurred by the lender with respect to loans it makesto customers referred by the Company. Accordingly, at June 30, 2005, theCompany recorded a related net increase in the allowance for doubtful accountsand accrual for excess bank losses of approximately $1.9 million. Followingthis change in operations, the Company includes its Texas centers and its CSOservices in its standard business model.

In July 2005, the Company decided to permanentlyclose 32 centers in Georgia. The Company continues to explore its options withregards to the remaining centers in Georgia and is awaiting the EleventhCircuit Court of Appeals’ response to the petition for rehearing en banc filedin the BankWest vs. Baker case. (See “Note 7—Commitments and Contingencies”).

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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 “—Risk Factors” and“—Forward-Looking Statements” for discussions of the uncertainties, risks andassumptions associated 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 the customers’next payday. As of June 30, 2005, we operated 2,520 payday cash advancecenters in 35 states.

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

We ceased conducting business under the agencybusiness model in our 208 payday cash advance centers in Texas in the beginningof July 2005 and our 86 payday cash advance centers in Michigan at the endof June 2005, and began conducting business in our Texas centers as aCredit Services Organization (“CSO”), and in our Michigan centers as a providerof check-cashing and deferred presentment services. As a CSO, we offer afee-based credit services package to assist customers in trying to improvetheir credit and in obtaining an extension of consumer credit through anunaffiliated third-party lender. Our operations as a provider of check-cashingservices are substantially similar to our operations under our standardbusiness model, except that instead of providing our customers with ashort-term advance that is to be repaid by the customer and is secured by thecustomer’s personal check, we deliver to our customers cash in the amount ofthe check presented by the customer to us, less the amount of the fee chargedby us for cashing the check, which fee varies based on whether the check cashedis a government check, a payroll check or a personal check, and we chargeinterest for the period of time that we agree with the customer to hold thecheck before we deposit it. As of June 30, 2005, we have included ourMichigan centers, in which we now offer check-cashing services, in our standardbusiness model. Going forward, we also expect to include all of our Texascenters, in which we now operate as a CSO, in our standard business model.

As of June 30, 2005, we were making payday cashadvances directly to customers under the standard business model in 2,064 ofour 2,520 payday cash advance centers in 31 states, including our 86 centers inMichigan, and serving as agent for the lending banks under the agency businessmodel in our 456 payday cash advance centers located in Arkansas, NorthCarolina, 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, including,beginning in July 2005, in our capacity as a CSO, and (2) marketing,processing 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 marketed, processed and serviced by usunder the agency business model, all payments of principal and fees and/orinterest paid by customers are deposited directly to the account of the respectivelending 

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bank. We are in turn paid a marketing, processing andservicing fee by the lending bank after we send it an invoice. Our totalrevenues for the three and six month periods ended June 30, 2004 and 2005consisted of (in millions):
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                        | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **Dollars**                                     | ** ** | **%**                                         | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest  charged to customers   |       | $                                               | 100.5      |                                          | 77.0       |   | $ | 114.7 |   | 76.3 |   | $ | 195.7 |   | 75.7 |   | $ | 219.8 |   | 76.2 |   |
| Marketing,  processing and servicing fees |       | 30.0                                            |       | 23.0                                          |       | 35.6 |   | 23.7 |   | 62.9 |   | 24.3 |   | 68.9 |   | 23.8 |   |
| Total revenues                            |       | $                                               | 130.5      |                                          | 100.0      |   | $ | 150.3 |   | 100.0 |   | $ | 258.6 |   | 100.0 |   | $ | 288.7 |   | 100.0 |   |

 

Our expenses relate primarily to the operation of ourpayday cash advance centers. These expenses include salaries and relatedpayroll costs, occupancy expense related to our leased payday cash advancecenters, center depreciation expense, advertising expense and other payday cashadvance center expenses that consist principally of costs related to paydaycash advance 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 June 30,2005:
| **State**             | ** ** | ** ** | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|-----------------------|------------|------------|------------|-----------------------------|------------|-------------------------|------------|
| Alabama               |       |       | 127        |                        |       |                    | 134        |   |   |
| Arkansas(1)           |       |       | 30         |                        |       |                    | 30         |   |   |
| Arizona               |       |       | 49         |                        |       |                    | 49         |   |   |
| California            |       |       | 290        |                        |       |                    | 294        |   |   |
| Colorado              |       |       | 56         |                        |       |                    | 60         |   |   |
| Delaware              |       |       | 10         |                        |       |                    | 12         |   |   |
| Florida               |       |       | 173        |                        |       |                    | 180        |   |   |
| Georgia(1)(2)         |       |       | —     |                        |       |                    | —     |   |   |
| Iowa                  |       |       | 21         |                        |       |                    | 22         |   |   |
| Idaho                 |       |       | 8          |                        |       |                    | 12         |   |   |
| Illinois              |       |       | 61         |                        |       |                    | 61         |   |   |
| Indiana               |       |       | 91         |                        |       |                    | 109        |   |   |
| Kansas                |       |       | —     |                        |       |                    | 10         |   |   |
| Kentucky              |       |       | 33         |                        |       |                    | 34         |   |   |
| Louisiana             |       |       | 64         |                        |       |                    | 69         |   |   |
| Michigan(1)           |       |       | 87         |                        |       |                    | 86         |   |   |
| Missouri              |       |       | 62         |                        |       |                    | 64         |   |   |
| Mississippi           |       |       | 51         |                        |       |                    | 52         |   |   |
| Montana               |       |       | 8          |                        |       |                    | 8          |   |   |
| North  Carolina(1)(3) |       |       | 118        |                        |       |                    | 117        |   |   |
| Nebraska              |       |       | 25         |                        |       |                    | 27         |   |   |
| New Hampshire         |       |       | 15         |                        |       |                    | 16         |   |   |
| New Mexico            |       |       | 12         |                        |       |                    | 12         |   |   |
| Nevada                |       |       | 10         |                        |       |                    | 9          |   |   |
| Ohio                  |       |       | 178        |                        |       |                    | 189        |   |   |
| Oklahoma              |       |       | 68         |                        |       |                    | 69         |   |   |
| Oregon                |       |       | 42         |                        |       |                    | 50         |   |   |
| Pennsylvania(1)       |       |       | 101        |                        |       |                    | 101        |   |   |
| South Carolina        |       |       | 105        |                        |       |                    | 107        |   |   |
| South Dakota          |       |       | 10         |                        |       |                    | 10         |   |   |
| Tennessee             |       |       | 59         |                        |       |                    | 59         |   |   |
| Texas(1)              |       |       | 204        |                        |       |                    | 208        |   |   |
| Virginia              |       |       | 109        |                        |       |                    | 112        |   |   |
| Washington            |       |       | 90         |                        |       |                    | 105        |   |   |
| Wisconsin             |       |       | 37         |                        |       |                    | 39         |   |   |
| Wyoming               |       |       | 4          |                        |       |                    | 4          |   |   |
| Total                 |       |       | 2,408      |                        |       |                    | 2,520      |   |   |

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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, weoperated in Arkansas and North Carolina under the standard business model. Wehave operated in Georgia and Pennsylvania only under the agency business model.We operated in Texas under the agency business model until July 2005, whenwe started operating as a CSO. We have operated in Michigan under the standardbusiness model since June 27, 2005. Prior to this date, we operated inMichigan under the agency business model.

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(2)          In May 2004, aGeorgia law became effective that prohibits payday cash advance services in thestate and restricts our ability to act as marketing, processing and servicingagent for a lending bank in the state. As a result, we suspended operations atour 89 payday cash advance centers (35 of which were subsequently closed) inGeorgia.

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

*New payday cash advance centers.  *Weopened 141 and 104 new payday cash advance centers during the three monthsended June 30, 2004 and 2005, respectively. We opened 259 and 126 newpayday cash advance centers during the six months ended June 30, 2004 and2005, respectively.

*Closed payday cash advance centers.  *Nopayday cash advance centers were closed during the three months ended June 30,2004. We closed 8 payday cash advance centers during the three months ended June 30,2005. We closed 1 and 14 payday cash advance centers during the six monthsended June 30, 2004 and 2005, respectively. The expenses related toclosing centers typically include the undepreciated costs of fixtures andsignage that cannot be moved and reused at another center, moving costs,severance payments and any lease cancellation costs. We recorded expensesrelated to closed payday cash advance centers of approximately $0.2 million inthe three months ended June 30, 2005, and approximately $11.0 thousand and$0.2 million in the six months ended June 30, 2004 and 2005, respectively.

In May 2004, a Georgia law became effective thatprohibits payday cash advance services in the state and restricts our abilityto act as marketing, processing and servicing agent for a lending bank in thestate See “Item 1. Financial Statements—Notes to Interim Unaudited ConsolidatedFinancial Statements—Note 7—Commitments and Contingencies.” Accordingly,we suspended operations at our 89 (35 of which were subsequently closed) paydaycash advance centers in Georgia. Net revenues from our Georgia operations were$1.2 million, or 1.1%, of our net revenues for the three months ended June 30,2004 and approximately $5.6 million, or 2.5% of the Company’s net revenues, forthe six months ended June 30, 2004. Our Georgia operations have notgenerated revenue since operations were ceased in May 2004. Subsequent to June 2005,we permanently closed 32 centers in Georgia. The lease cancellation and otherclosing costs were approximately $0.3 million. We estimate that the cost tokeep the remaining 54 Georgia centers open under limited operating conditionswill be approximately $0.2 million per month. Additionally, if necessary, weestimate that it will cost approximately $0.7 million (which includeslease cancellation costs of approximately $0.4 million) to shut down theGeorgia operations completely.

Thefollowing is a summary of the financial information for our operations inGeorgia for the three and six months ended June 30, 2004 and 2005 (inthousands):
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **   2004   **    | ** ** | **   2005   **  | ** ** | **   2004   ** | ** ** | **   2005   ** | ** ** |
| **Georgia Revenues:**                    |       |                                            |       |                                          |       |   |   |   |   |   |   |
| Marketing, processing and servicing fees |       | $                                               | 2,035      |                                          |       | $ | — |   |   | $ | 7,102 |   | $ | — |   |
| Provision for agency bank losses         |       | (831                                            | )          |                                          | —     |   |   | (1,463 | ) | — |   |
| Net revenues                             |       | 1,204                                           |       |                                          | —     |   |   | 5,639 |   | — |   |
| **Georgia Center Expenses:**             |       |                                            |       |                                          |       |   |   |   |   |   |   |
| Salaries and related payroll costs       |       | 1,585                                           |       |                                          | 94         |   |   | 3,092 |   | 173 |   |
| Occupancy costs                          |       | 591                                             |       |                                          | 534        |   |   | 1,199 |   | 1,073 |   |
| Center depreciation expense              |       | 163                                             |       |                                          | —     |   |   | 324 |   | — |   |
| Advertising expense                      |       | 253                                             |       |                                          | —     |   |   | 523 |   | — |   |
| Other center expenses                    |       | 328                                             |       |                                          | 102        |   |   | 795 |   | 219 |   |
| Total center expenses                    |       | 2,920                                           |       |                                          | 730        |   |   | 5,933 |   | 1,465 |   |
| **Georgia Center Gross Profit/(Loss)**   |       | $                                               | (1,716     | )                                             |       | $ | (730 | ) |   | $ | (294 | ) | $ | (1,465 | ) |

 

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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 acted as marketing, processing and servicing agent inNorth Carolina and has since commenced a Notice of Hearing to determine if theCompany’s activities in North Carolina are in contravention to North Carolina law.See “Item 1. Financial Statements—Notes to Interim Unaudited ConsolidatedFinancial Statements—Note 7—Commitments and Contingencies.” All NorthCarolina payday cash advance centers currently operate under the agencybusiness model. Net revenues from our North Carolina operations were $6.2million, or 5.6% of the Company’s net revenues, and $6.9 million, or 5.7% ofthe Company’s net revenues, for the three months ended June 30, 2004 and2005, respectively. Net revenues from the Company’s North Carolina operationswere $12.7 million, or 5.5% of the Company’s net revenues, and $13.4 million,or 5.4% of the Company’s net revenues, for the six months ended June 30,2004 and 2005, respectively. We estimate that it would cost, as of June 30,2005, 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.

Thefollowing is a summary of financial information for our operations in NorthCarolina for the three and six months ended June 30, 2004 and 2005 (inthousands):
| ** **                                | ** ** | **Three Months Ended  June 30,**          | ** ** | **Six Months Ended  June 30,**            | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **2004** | ** ** | **2005** | ** ** |
| **North Carolina Revenues:**              |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Marketing, processing  and servicing fees |       |                                                     | $          | 6,952                                                    |       |   |   | $ | 7,676 |   |   | $ | 14,129 |   | $ | 14,880 |   |
| Provision for agency  bank losses         |       |                                                     | (742       | )                                                        |       |   | (821 | ) |   | (1,452 | ) | (1,512 | ) |
| Net revenues                              |       |                                                     | 6,210      |                                                     |       |   | 6,855 |   |   | 12,677 |   | 13,368 |   |
| **North Carolina Center Expenses:**       |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs       |       |                                                     | 2,380      |                                                     |       |   | 2,374 |   |   | 4,487 |   | 4,469 |   |
| Occupancy costs                           |       |                                                     | 833        |                                                     |       |   | 828 |   |   | 1,693 |   | 1,680 |   |
| Center depreciation  expense              |       |                                                     | 116        |                                                     |       |   | 108 |   |   | 249 |   | 234 |   |
| Advertising expense                       |       |                                                     | 290        |                                                     |       |   | 305 |   |   | 586 |   | 573 |   |
| Other center expenses                     |       |                                                     | 416        |                                                     |       |   | 432 |   |   | 914 |   | 848 |   |
| Total center expenses                     |       |                                                     | 4,035      |                                                     |       |   | 4,047 |   |   | 7,929 |   | 7,804 |   |
| **North Carolina Center Gross Profit**    |       |                                                     | $          | 2,175                                                    |       |   |   | $ | 2,808 |   |   | $ | 4,748 |   | $ | 5,564 |   |

 

**Revised FDICGuidance**

On March 1, 2005, the FDIC issued RevisedGuidance to FDIC insured institutions that offer payday cash advances,including the lending banks for which we then acted as an agent. The RevisedGuidance limits the frequency of customer usage of payday cash advances andlimits the period a customer may have payday cash advances outstanding from anylender to an aggregate of three months during the previous 12-monthperiod. Based on an average term ofapproximately 15 days, this effectively limits the number of payday cashadvances that may be made to any customer to six during any 12-month period.All payday cash advances made from any lender would count against this limit. Pursuantto the Revised Guidance, lending banks may offer alternative longer-term creditproducts, which have generally taken the form of installment loans.

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

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We have historically operated in Pennsylvania as amarketing, processing and servicing agent for BankWest, Inc., a SouthDakota bank (“BankWest”), in Arkansas as a marketing, processing and servicingagent for Venture Bank, a Washington bank (“Venture”), and in North Carolina asa marketing, processing and servicing agent for Republic Bank & Trust,a Kentucky bank (“Republic”). Effective July 1, 2005, we amended ourmarketing, processing and servicing agreement (“MP&S Agreement”) withBankWest with respect to Pennsylvania, primarily to allow us to also act as a marketing,processing and servicing agent for a new installment loan product offered by BankWestin our 101 payday cash advance centers in Pennsylvania. On June 30, 2005,we terminated our MP&S Agreement with Venture and we entered into a newMP&S Agreement with First Fidelity Bank, a South Dakota bank (“FirstFidelity Bank”), to operate as a marketing, processing and servicing agent forpayday cash advances and installment loans made by First Fidelity Bank in our30 payday cash advance centers in Arkansas. Effective July 6, 2005, weterminated our MP&S Agreement with Republic and entered into a new MP&SAgreement with First Fidelity Bank to operate as a marketing, processing andservicing agent for payday cash advances and installment loans made by FirstFidelity Bank in our 117 payday cash advance centers in North Carolina.

Pursuant to our MP&S Agreements with FirstFidelity Bank, First Fidelity Bank is contractually obligated for all losses onpayday cash advances and installment loans to its customers in Arkansas andNorth Carolina. Under our terminated MP&S Agreements with Venture andRepublic, those lending banks were contractually obligated for the losses ontheir payday cash advances in an amount established as a percentage of the feesand interest charged by the lending banks to their customers. Therefore, underthe terminated agreements with Venture and Republic, we were obligated ifactual payday cash advance losses exceeded the lending bank’s contractualobligations. We remain obligated in North Carolina and Arkansas for theexisting advances and fees receivable in excess of the prior lending bank’scontractual obligations. Accordingly, at June 30, 2005, we recorded a relatednet increase in the accrual for excess bank losses of approximately$1.7 million.

Under the terms of the new MP&S Agreements withBankWest and First Fidelity Bank, payday cash advances are offered inPennsylvania, Arkansas and North Carolina by the lending banks within thelimits of the Revised Guidance, which effectively limits customers to sixpayday cash advances during any 12-month period. In response to the Revised Guidance,the lending banks also offer installment loans to their customers for which wealso act as marketing, processing and servicing agent. The installment loansgenerally have bi-weekly payments amortized over a three- or four-month period.The lending banks establish all of the underwriting criteria and utilizethird-party credit scores to determine whether to approve an installment loanfor a customer. All of the terms, conditions and features of the installmentloan agreements between the lending banks and their customers are determined bythe lending banks. The lending banks fund all loans, and we do not expect topurchase or participate in the loans. We deposit, on behalf of the lendingbanks, all repayments of installment loans, interest and fees in the lendingbanks’ accounts, and the lending banks pay to us our marketing, processing andservicing fees for the installment loans.

We expect that the fee paid to us by the lending banksfor acting as the marketing, processing and servicing agent for an installmentloan will be greater per loan than the fee paid to us with respect to a paydaycash advance. However, we expect that our total revenue for our operations underthe agency business model will be reduced because (1) the Revised Guidancelimits the number of payday cash advances that may be made, (2) the morestringent underwriting standards that we expect the lending banks to apply forinstallment loans will likely reduce the number of eligible customers and (3) thelonger duration of installment loans will likely result in fewer installmentloan transactions than payday cash advances that would have been made in thesame period. As a result, we expect that we will retain approximately 60-80% ofour revenue in the states where we will continue to act as a marketing,processing and servicing agent for lending banks under the agency businessmodel. It is difficult for us to predict, 

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however, what thoserevenues may be given the numerous uncertainties associated with predictingconsumer demand for a new product; with anticipating the effect of newunderwriting standards for that product by the lending banks; and withmarketing, processing, and servicing a new product. Arkansas, North Carolina and Pennsylvania,the states in which we continue to operate under the agency business model,represented an aggregate of approximately 14% of our total revenues for thethree and six month periods ended June 30, 2005. Going forward, we expectthat approximately 10% of our revenues will be derived from the agency businessmodel in these three states.

Informationfor our payday cash advance centers operating under the agency business modelfor the three and six months ended and as of June 30, 2004 and 2005 was asfollows (in thousands, except payday cash advance centers):
| ** **                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **  2004(1)(2)  **     | ** ** | **2005(2)**                             | ** ** | **  2004**(1)(2)   | ** ** | **2005(2)** | ** ** |
| **Agency  Business Model Revenues:**        |       |                                       |       |                                    |       |   |   |   |   |   |   |   |   |
| Marketing, processing and servicing fees    |       |                                       | $          | 30,038                                  |       |   | $ | 35,624 |   |   | $ | 62,883 |   |   | $ | 68,851 |   |
| Provision for agency bank losses            |       |                                       | (4,165     | )                                       |       | (5,611 | ) |   | (7,560 | ) |   | (9,096 | ) |
| Net revenues                                |       |                                       | 25,873     |                                    |       | 30,013 |   |   | 55,323 |   |   | 59,755 |   |
| **Agency  Business Model Center Expenses:** |       |                                       |       |                                    |       |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs          |       |                                       | 10,439     |                                    |       | 9,839 |   |   | 21,556 |   |   | 19,689 |   |
| Occupancy costs                             |       |                                       | 4,467      |                                    |       | 4,777 |   |   | 8,910 |   |   | 9,602 |   |
| Center depreciation expense                 |       |                                       | 966        |                                    |       | 894 |   |   | 1,908 |   |   | 1,760 |   |
| Advertising expense                         |       |                                       | 1,699      |                                    |       | 1,632 |   |   | 3,539 |   |   | 2,826 |   |
| Other center expenses                       |       |                                       | 2,364      |                                    |       | 2,314 |   |   | 4,992 |   |   | 4,558 |   |
| Total center expenses                       |       |                                       | 19,935     |                                    |       | 19,456 |   |   | 40,905 |   |   | 38,435 |   |
| **Agency Business Model Gross  Profit**     |       |                                       | $          | 5,938                                   |       |   | $ | 10,557 |   |   | $ | 14,418 |   |   | $ | 21,320 |   |

 
| ** **                                | ** ** | **June 30,**                      | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **  2004(1)(2)  ** | ** ** | **2005(3)** | ** ** |
| **Payday  cash advance centers**          |       |                                   | 610        |   |   | 456 |   |
| **Assets:**                               |       |                                   |       |   |   |   |   |
| Cash                                      |       |                                   | $          | 335 |   |   | $ | 5 |   |
| Accounts receivable from lending banks    |       |                                   | 6,103      |   |   | 9,971 |   |
| Restricted cash                           |       |                                   | 5,016      |   |   | 5,312 |   |
| Property and equipment, net               |       |                                   | 11,832     |   |   | 7,938 |   |
| Goodwill                                  |       |                                   | 26,314     |   |   | 26,314 |   |
| All other                                 |       |                                   | 1,781      |   |   | 805 |   |
| **Total assets**                          |       |                                   | $          | 51,381 |   |   | $ | 50,345 |   |
| **Contingent liability to lending banks** |       |                                   | $          | 51,182 |   |   | $ | 49,531 |   |

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(1)          Includes the 89 Georgiapayday cash advance centers.

(2)          Includes Michigan paydayadvance centers that were converted to the standard business model on June 27,2005 and Texas payday advance centers that were converted to the standardbusiness model on July 7, 2005.

(3)          Excludes Michigan paydayadvance centers that were converted to the standard business model on June 27,2005, and includes Texas payday advance centers that were converted to thestandard business model on July 7, 2005.

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We have historically operated in Michigan asmarketing, processing and servicing agent for First Fidelity Bank. Effective June 26,2005, we terminated our MP&S Agreement with First Fidelity Bank regardingMichigan. Under the terminated agreement, First Fidelity Bank was the lenderand recorded advances and fees receivable on its balance sheet, and FirstFidelity Bank was contractually obligated for uncollectible accounts in amountsdetermined as a percentage of fees and interest charged by First Fidelity Bankto its customers. The amount by which losses exceeded First Fidelity Bank’scontractual obligation was included on our balance sheet as an accrual forexcess bank losses. In connection with terminating the MP&S Agreement withFirst Fidelity Bank, we purchased from First Fidelity Bank its payday cashadvance accounts receivable for Michigan, for approximately $7.7 million, and FirstFidelity Bank no longer has any obligations for losses with respect to thoseaccounts. We have reflected those accounts receivable on our balance sheet at June 30,2005, and recorded a related net increase in the allowance for doubtfulaccounts and accrual for excess bank losses of approximately $0.6 million.

In late June 2005, we began offeringcheck-cashing and deferred presentment services directly to customers in our 86centers in Michigan. The approval process for us to provide customers withcheck-cashing services in Michigan is substantially similar to the process weuse to provide payday cash advances under our standard business model. However,instead of providing our customer with a short-term advance that is to berepaid by our customer and is secured by the customer’s personal check, wedeliver to our customer cash in the amount of the check presented by thecustomer to us, less the amount of the fee charged by us for cashing the check.The amount of the fee varies based on whether the check cashed is a governmentcheck, a payroll check or a personal check, and we charge interest for theperiod of time that we agree with the customer to hold the check beforedepositing it. Customers also have the opportunity to repurchase the check fromus. We expect that the profitability of our check-cashing business and averagefees, check amounts, and duration for which we hold checks will be similar tothe corresponding amounts under our standard business model. Following thischange in operations, we include our Michigan centers and our check-cashingbusiness under our standard business model.

Beginning in July 2005, we ceased conductingbusiness under the agency business model in our 208 centers in Texas, andbegan conducting business in those centers through a wholly owned subsidiarythat has registered as a credit services organization (“CSO”) under Texas law.As a CSO, we offer a fee-based credit services package to assistcustomers in trying to improve their credit and in obtaining an extension ofconsumer credit through a third-party lender. In connection with commencingoperations as a CSO in Texas, we have entered into a credit services agreement(“CSO Agreement”) with a third-party lender. The CSO Agreement governs theterms by which we refer customers in Texas to that lender, on a non-exclusivebasis, for a possible extension of credit, process loan applications and committo reimburse the lender for any loans or related fees that are not collectedfrom such customers.

The process by which we assist customers in completinga loan application and documentation with the third-party lender is similar tohow we previously operated in Texas. The lender still determines whether toapprove the loan utilizing third-party credit scores to evaluate a customer andestablishes all of the loan underwriting criteria. All of the terms,conditions, and features of the loan agreements between the lender and itscustomers are determined by the lender. The customer also writes a personalcheck payable to the lender in the amount of the loan, including interest forthe anticipated duration of the loan, which we hold on behalf of the lenderpending repayment of the loan. However, other aspects of being a CSO aresubstantially different from how we previously operated in Texas. For example,we also assist customers by agreeing to reimburse the lender for the fullamount of the loan and all related fees that are not collected from thecustomers. In addition, if the customer has chosen the consumer-reportingoption, we report the repayment information from the lender to PaymentReporting Builds Credit, Inc. (“PRBC”), a consumer credit reporting agency.Reporting to PRBC may assist the customer in improving his or her credit if thecustomer repays the loan in accordance with its terms and if that positiverepayment is viewed 

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favorably by users of thePRBC report. We also provide access to free financial tools, services, andinformation to help customers with their personal finances, budgets, and creditratings.

When the loan becomes due, the customer returns to theCSO center to repay the loan and pay our credit services fee (“CSO Fee”), wereturn the customer’s two checks, and we deposit the loan payment in the lender’saccount and the CSO Fee in our account. If the customer does not return to theCSO center to repay the loan and pay the CSO Fee, we may then begin collectionefforts to obtain from the customer payment of the loan, the CSO Fee, and anylate and non-sufficient funds (“NSF”) fees. If we are unsuccessful incollecting the payments for the lender, we will reimburse the lender and wethen may continue our collection efforts with respect to all amounts due by thecustomer.

Under our prior MP&S Agreement with the lendingbank in Texas for payday cash advances, the lending bank was contractuallyobligated for uncollectible payday cash advance accounts in amounts determinedas a percentage of fees and interest charged by the lending bank to itscustomers, which historically have been sufficient to cover all lossesincurred. Under the CSO Agreement, we are contractually obligated for alllosses incurred by the lender with respect to loans it makes to customersreferred by us. Accordingly, at June 30, 2005, we recorded a related netincrease in the allowance for doubtful accounts and accrual for excess banklosses of approximately $1.9 million.

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

**Prior S Corporation Status**

From October 1, 2001 through December 20,2004, Advance America, Cash Advance Centers, Inc. (“AACACI”) andsubstantially all of its subsidiaries (the “Subchapter S Companies”) weretreated for federal and most state income tax purposes as an S corporationunder the Internal Revenue Code and comparable state laws. As a result, 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 terminatedtheir status as S Corporations and are now taxed as C corporations. As a resultof the 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 paying incometax on our earnings will cease. We believe the combination of these two itemswill increase our cash flow because the corporate tax payments should be lessthan the distributions historically made to enable our stockholders to paytheir income tax on our earnings.

**CriticalAccounting Policies and Use of Estimates**

In the ordinary course of business, we have made anumber of estimates and assumptions relating to the reporting of our results ofoperations and financial condition in the preparation of our financialstatements in conformity with generally accepted accounting principles in theUnited States (“GAAP”). We evaluate these estimates on an ongoing basis,including those related to provision for doubtful accounts and agency banklosses, allowance for doubtful accounts, accrual for excess bank losses and 

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intangible assets. We basethese estimates on the information currently available to us and on variousother assumptions that we believe are reasonable under the circumstances.Actual results could vary from these estimates under different assumptions orconditions.

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 and installment loans we market,process and service for the lending banks under the agency business model(which is reported as a current liability on our balance sheet in our accrualfor excess bank losses).

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

The payday cashadvances 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. Historically, all the lending banks for which weacted as an agent were contractually obligated for the losses on payday cashadvances in an amount established as a percentage of the fees and/or interestcharged by the banks to their customers on their payday cash advances. Prior toJuly 2005, depending upon the lending bank, this percentage ranged from8.0% to 20.0%. In aggregate, this percentage was 13.3% and 13.9% for the three monthsended June 30, 2004 and 2005, respectively, and 13.0% and 13.7% for thesix months ended June 30, 2004 and 2005, respectively. Under the agencybusiness 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 June 30, 2004 and 2005, the provisionfor excess bank losses was a reduction of expense of approximately $0.5 millionand an increase in expense of approximately $1.7 million, respectively. For thesix months ended June 30, 2004 and 2005, the provision for excess banklosses was a reduction of expense of approximately $1.8 million and an increasein expense of approximately $0.1 million, respectively.

We expect this will continue to be our policy goingforward with respect to our estimate of excess losses under our MP&SAgreement with BankWest for Pennsylvania. However, under its new MP&SAgreements, the lending bank offering payday cash advances and installmentloans in North Carolina and Arkansas is responsible for any and all lossesassociated with its payday cash advances and installment 

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loans and therefore no such estimate of excess lossesshould be necessary with respect to our future operations in North Carolina andArkansas.

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

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

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

·       weconsider the potential impact of (i) new payday cash advance centerswithin the state and (ii) specific economic and regulatory conditions oncollections 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 June 30, 2005, if averagedefault rates were 5% higher or lower, the allowance for doubtful accounts andaccrual for excess bank losses would change by approximately $2.0 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 

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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 June 30,2005 financial statements include accruals of approximately $3.4 million forthe self-insured portion of our health and dental insurance andapproximately $3.5 million and $3.9 million, respectively, for workers’compensation. We recognize our obligations associated with those benefits inthe period the claim is incurred. The costs of both reported claims and claimsincurred but not reported, up to specified deductible limits, are estimatedbased on historical data, current enrollment, employee statistics and otherinformation. Our estimates and the resulting reserves are reviewed and updatedperiodically and any necessary adjustments are reflected in earnings currently.To the extent historical claim history is not indicative of future claimhistory, there are changes in enrollment or employee history, workers’compensation loss development factors change or other assumptions used bymanagement do not prevail, our expense and related accrued liabilities couldincrease or decrease.

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**Results of Operations**

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

Thefollowing table sets forth our results of operations for the three months endedJune 30, 2004 compared to the three months ended June 30, 2005(dollars in thousands, except center information):
| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **Variance** | ** ** |
| ** **                                              | ** ** | **Dollars**                                         | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                 |       | $                                                   | 100,437    |   |   | 90.1 | % |   | $ | 114,693 |   |   | 95.8 | % |   | $ | 14,256 |   | 14.2 | % |
| Marketing,  processing and servicing  fees              |       | 30,038                                              |       |   | 27.0 | % |   | 35,624 |   |   | 29.7 | % |   | 5,586 |   | 18.6 | % |
| Total revenues                                          |       | 130,475                                             |       |   | 117.1 | % |   | 150,317 |   |   | 125.5 | % |   | 19,842 |   | 15.2 | % |
| Provision for  doubtful accounts and agency bank losses |       | (19,093                                             | )          |   | (17.1 | )% |   | (30,567 | ) |   | (25.5 | )% |   | (11,474 | ) | (60.1 | )% |
| Net revenues                                            |       | 111,382                                             |       |   | 100.0 | % |   | 119,750 |   |   | 100.0 | % |   | 8,368 |   | 7.5 | % |
| **Center  Expenses:**                                   |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and  related payroll costs                     |       | 38,651                                              |       |   | 34.7 | % |   | 42,541 |   |   | 35.5 | % |   | 3,890 |   | 10.1 | % |
| Occupancy costs                                         |       | 16,100                                              |       |   | 14.5 | % |   | 19,153 |   |   | 16.0 | % |   | 3,053 |   | 19.0 | % |
| Center  depreciation expense                            |       | 3,447                                               |       |   | 3.1 | % |   | 3,595 |   |   | 3.0 | % |   | 148 |   | 4.3 | % |
| Advertising  expense                                    |       | 7,377                                               |       |   | 6.6 | % |   | 7,611 |   |   | 6.4 | % |   | 234 |   | 3.2 | % |
| Other center  expenses                                  |       | 11,025                                              |       |   | 9.9 | % |   | 12,612 |   |   | 10.5 | % |   | 1,587 |   | 14.4 | % |
| Total center expenses                                   |       | 76,600                                              |       |   | 68.8 | % |   | 85,512 |   |   | 71.4 | % |   | 8,912 |   | 11.6 | % |
| Center gross  profit                                    |       | 34,782                                              |       |   | 31.2 | % |   | 34,238 |   |   | 28.6 | % |   | (544 | ) | (1.6 | )% |
| **Corporate  and Other Expenses (Income):**             |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses                    |       | 10,934                                              |       |   | 9.8 | % |   | 13,345 |   |   | 11.2 | % |   | 2,411 |   | 22.1 | % |
| Corporate  depreciation expense                         |       | 1,002                                               |       |   | 0.9 | % |   | 1,072 |   |   | 0.9 | % |   | 70 |   | 7.0 | % |
| Interest expense                                        |       | 4,013                                               |       |   | 3.6 | % |   | 732 |   |   | 0.6 | % |   | (3,281 | ) | (81.8 | )% |
| Interest income                                         |       | (54                                                 | )          |   | (0.0 | )% |   | (67 | ) |   | (0.1 | )% |   | (13 | ) | (24.1 | )% |
| Loss on disposal  of property and equipment             |       | 109                                                 |       |   | 0.1 | % |   | 27 |   |   | 0.0 | % |   | (82 | ) | (75.2 | )% |
| Total corporate  and other expenses                     |       | 16,004                                              |       |   | 14.4 | % |   | 15,109 |   |   | 12.6 | % |   | (895 | ) | (5.6 | )% |
| Income before  income taxes                             |       | 18,778                                              |       |   | 16.8 | % |   | 19,129 |   |   | 16.0 | % |   | 351 |   | 1.9 | % |
| Income tax expense                                      |       | 703                                                 |       |   | 0.6 | % |   | 8,384 |   |   | 7.0 | % |   | 7,681 |   | 1,092.6 | % |
| Net income                                              |       | $                                                   | 18,075     |   |   | 16.2 | % |   | $ | 10,745 |   |   | 9.0 | % |   | $ | (7,330 | ) | (40.6 | )% |

 
| ** **                                                            | ** ** | **Three Months Ended  June 30,**                      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **     2004     ** | ** ** | **     2005     ** | ** ** |
| **Center Information:**                                               |       |                                                                 |       |   |   |   |   |   |   |
| Number of centers  open at beginning of period                        |       |                                                                 | 2,156      |   |   |   | 2,424 |   |   |
| Opened                                                                |       |                                                                 | 141        |   |   |   | 104 |   |   |
| Closed                                                                |       |                                                                 | —     |   |   |   | (8 | ) |   |
| Suspended                                                             |       |                                                                 | (89        | ) |   |   | — |   |   |
| Number of centers  open at end of period                              |       |                                                                 | 2,208      |   |   |   | 2,520 |   |   |
| Weighted average  number of centers open during the period            |       |                                                                 | 2,220      |   |   |   | 2,485 |   |   |
| Number of payday  cash advances provided and processed (in thousands) |       |                                                                 | 2,780      |   |   |   | 2,977 |   |   |
| Amount of average payday  cash advance provided and processed         |       |                                                                 | $          | 325 |   |   |   | $ | 334 |   |   |
|                                                                       |            |                                                                      |            |  |  |  |  |  |  |  |  |

 

33

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| ** **                                                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | ** Dollars **                             | ** ** | **% Net  Revenues** | ** ** | ** Dollars ** | ** ** | **% Net  Revenues** | ** ** | **  Dollars  ** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       |                                                | $          | 50.2 |   |   |   | 100.0 | % |   |   | $ | 48.2 |   |   |   | 100.0 | % |   |   | $ | (2.0 | ) |   | (4.0 | )% |
| Center expenses:                                                                      |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       |                                                | 17.4       |   |   |   | 34.7 | % |   |   | 17.1 |   |   |   | 35.5 | % |   |   | (0.3 | ) |   | (1.7 | )% |
| Occupancy costs                                                                       |       |                                                | 7.2        |   |   |   | 14.5 | % |   |   | 7.7 |   |   |   | 16.0 | % |   |   | 0.5 |   |   | 6.3 | % |
| Center depreciation expense                                                           |       |                                                | 1.6        |   |   |   | 3.1 | % |   |   | 1.4 |   |   |   | 3.0 | % |   |   | (0.2 | ) |   | (6.9 | )% |
| Advertising expense                                                                   |       |                                                | 3.3        |   |   |   | 6.6 | % |   |   | 3.1 |   |   |   | 6.4 | % |   |   | (0.2 | ) |   | (7.8 | )% |
| Other center expenses                                                                 |       |                                                | 5.0        |   |   |   | 9.9 | % |   |   | 5.1 |   |   |   | 10.5 | % |   |   | 0.1 |   |   | 2.2 | % |
| Total center expenses                                                                 |       |                                                | 34.5       |   |   |   | 68.8 | % |   |   | 34.4 |   |   |   | 71.4 | % |   |   | (0.1 | ) |   | (0.3 | )% |
| Center gross profit                                                                   |       |                                                | $          | 15.7 |   |   |   | 31.2 | % |   |   | $ | 13.8 |   |   |   | 28.6 | % |   |   | $ | (1.9 | ) |   | (12.1 | )% |

 

***Revenue Analysis***

Total revenuesincreased $19.8 million, or 15.2%, during the three months ended June 30,2005 to $150.3 million compared to $130.5 million for the same period in 2004. Theincrease was primarily due to:

·       An$18.6 million increase in total revenues from payday cash advance centersopened in 2002 and thereafter (excluding payday cash advance centers closed orsuspended in 2004 and 2005).

·       Anincrease in the total number of payday cash advances made. The number of paydaycash advances made increased by approximately 0.2 million to approximately 3.0million in 2005 compared to approximately 2.8 million in 2004. Excluding paydaycash advances made in our Georgia payday cash advance centers during the threemonths ended June 30, 2004, the number of payday cash advances madeincreased approximately 0.3 million to approximately 3.0 million in 2005compared to approximately 2.7 million in 2004.

·       Anincrease in the amount of the average payday cash advance provided andprocessed. The average fee per payday cash advance provided and processed wasapproximately $50 and $54 during the three months ended June 30, 2004 and2005, respectively.

Total revenues for the three months ended June 30,2005 were impacted by the loss of revenues from the 89 Georgia payday cashadvance centers for which operations were suspended in May 2004. Georgiatotal revenues for the three months ended June 30, 2004 were approximately$2.0 million. Excluding our Georgia payday cash advance centers and payday cashadvance centers closed in 2004 and 2005, total revenues for the three monthsended June 30, 2005 increased $22.5 million, or 17.6%, to $150.2 millioncompared to $127.7 million for the same period in 2004.

Total revenues for the 2,047 payday cash advancecenters opened prior to April 1, 2004 (excluding payday cash advancecenters closed or suspended in 2004 and 2005) increased $14.1 million, or11.1%, to $141.5 million for the three months ended June 30, 2005 comparedto $127.4 million for the same period in 2004. Payday cash advance centersopened prior to April 1, 2004 were at least three months and fifteenmonths old at the end of the three-month periods ended June 30, 2004 and2005, respectively. Total revenues for the 473 payday cash advance centersopened after April 1, 2004 (excluding payday cash advance centers closedor suspended in 2004 and 2005) increased $8.4 million to $8.7 million for thethree months ended June 30, 2005 compared to $0.3 million for the same periodin 2004. Total revenues for the 

34

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remaining 112 payday cashadvance centers closed or suspended represented a decrease of approximately$2.7 million for the three months ended June 30, 2005 compared to the sameperiod in 2004.

Of our 2,408 payday cash advance centers open at December 31,2004, we operated 540 centers under the agency business model in the states ofArkansas, Michigan, North Carolina, Pennsylvania and Texas. At June 30,2005, of our 2,520 payday cash advance centers, we operated 456 payday cashadvance centers under the agency business model in the states of Arkansas,North Carolina, Pennsylvania and Texas. The 84 center decrease in the number ofpayday cash advance centers operated under the agency business model at June 30,2005 compared to December 31, 2004 primarily resulted from our conversionof our Michigan payday cash advance centers to the standard business modeleffective June 27, 2005.

The provision for doubtfulaccounts and agency bank losses increased $11.5 million, or 60.1%, to $30.6million for the three months ended June 30, 2005 compared to $19.1 millionfor the same period in 2004. This provision included a net expense ofapproximately $4.2 million related to the contractual changes in Texas, Michigan,North Carolina and Arkansas. In addition to the impact of the contractualchanges, this provision increased due to increased loss rates. As a percentageof total revenues, this provision increased to 20.3% in 2005 from 14.6% in2004.

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

*Salaries and related payroll costs.  *2005salaries and related payroll costs increased $3.9 million, or 10.1%, to $42.5million compared to $38.6 million in 2004. The increase was due primarily to(dollars in millions):
| New centers  opened in 2004 and 2005       |   | $    | 4.5 |   |
|--------------------------------------------|--------|------|-----|--------|
| Lower costs in  centers opened before 2004 |   | (0.6 | )   |
| 2005 increase                              |   | $    | 3.9 |   |

 

2005 salaries andrelated payroll costs as a percentage of net revenues increased to 35.5%compared to 34.7% in 2004 and 2005 salaries and related payroll costs percenter decreased to approximately $17,100 compared to $17,400 in 2004 dueprimarily to lower salaries and related payroll taxes, lower bonus expense andlower health insurance expense. We averaged approximately 2.12 and 2.30full-time equivalent field employees, including district directors, for eachcenter in 2005 and 2004, respectively.

*Occupancy costs.  *2005occupancy costs increased $3.1 million, or 19.0%, to $19.2 million compared to$16.1 million in 2004. The increase was due primarily to a full quarter ofoccupancy costs for centers opened in 2004 and occupancy costs related to 2005center openings. 2005 occupancy costs as a percentage of net revenues were16.0% compared to 14.5% in 2004 and 2005 occupancy costs per center increasedto approximately $7,700 compared to approximately $7,200 in 2004, due primarilyto higher rent and common area maintenance expense.

*Center depreciation expense.  *2005center depreciation expense increased $0.1 million, or 4.3%, to $3.6million compared to $3.5 million in 2004. The increase was due primarily to thenew centers opened in 2004 and 2005. 2005 center depreciation expense percenter decreased approximately $200, or 6.9%, to $1,400 compared to $1,600 in2004.

*Advertising expense.  *2005advertising expense increased $0.2 million, or 3.2%, to $7.6 million comparedto $7.4 million in 2004. 2005 advertising expense as a percentage of netrevenues decreased to 6.4% compared to 6.6% in 2004. 2005 advertising expenseper center was approximately $3,100 compared to approximately $3,300 in 2004. Thedecrease was due primarily to opening fewer centers during the three monthsended June 30, 2005 compared to the same period in 2004.

35

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*Other center expenses.  *2005other center expenses increased $1.6 million, or 14.4%, to $12.6 millioncompared to $11.0 million in 2004. This increase was due primarily to theaddition of new centers in 2004 and 2005. Other center expenses as a percentageof net revenues increased from 9.9% in 2004 to 10.5% in 2005. Other centerexpenses per center increased to approximately $5,100 in 2005 compared toapproximately $5,000 in 2004.

*Totalcenter expenses.  *Total center expenses increased $8.9million, or 11.6%, to $85.5 million compared to $76.6 million in 2004. Totalcenter expenses as a percent of net revenues increased to 71.4% for the threemonths ended June 30, 2005 compared to 68.8% in the same period in 2004. Theincrease in total center expenses compared to 2004 was due primarily to(dollars in millions):
| New centers  opened in 2004 and 2005                                    |   | $    | 8.0    |   |
|-------------------------------------------------------------------------|--------|------|--------|--------|
| Lower salaries  and related payroll costs in centers opened before 2004 |   | (0.6 | )      |
| Higher  advertising expense                                             |   | 0.2  |   |
| All other                                                               |   | 1.3  |   |
| Total center  expenses increase                                         |   | $    | 8.9    |   |

 

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

*General and administrative expenses.  *2005general and administrative expenses increased $2.4 million, or 22.1% to$13.3 million compared to $10.9 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—$0.4, and insurance expense—$0.4                                            |     | $    | 0.8    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|------|--------|--------|
| Higher  compensation expense related to annual compensation increases and additional  staff due primarily to center growth—$0.2, and restricted stock grant  amortization expense—$0.3 |     | 0.5  |   |
| Higher legal fees                                                                                                                                                                                |     | 1.3  |   |
| Lower airplane  operating expenses                                                                                                                                                               | * * | (0.2 | )      |
| Total general and  administrative expenses increase                                                                                                                                              |     | $    | 2.4    |   |

 

2005 general and administrative expenses as apercentage of net revenues increased to 11.2% compared to 9.8% in 2004.

*Corporate depreciation expense.  *2005corporate depreciation expense increased $0.1 million, or 7.0%, to $1.1 millioncompared to $1.0 million in 2004. Corporate depreciation expense was 0.9%of net revenues in 2004 and 2005.

*Interest expense.  *2005interest expense decreased $3.3 million, or 81.8%, to $0.7 million compared to$4.0 million in 2004 due to the repayment in the fourth quarter of 2004 of alllong-term debt with related parties and the reduction of advances under ourrevolving credit facility.

*Incometax expense*.   As a result of the increase in theanticipated annual effective tax rate from 38.7% in the first quarter of 2005to 40.6% during the second quarter of 2005, the effective tax rate for thethree months ended June 30, 2005 was 43.8%, resulting in an effective ratefor the six months ended June 30, 2005 of 40.6%. 2005 income tax expenseincreased $7.7 million to $8.4 million compared to $0.7 million in 2004. Theincrease is due primarily to our conversion to a C Corporation for income taxpurposes. See —“Prior S Corporation Status.”

36

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**Results of Operations**

***Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2005***

Thefollowing table sets forth our results of operations for the six months ended June 30,2004 compared to the six months ended June 30, 2005 (dollars in thousands,except center information):
| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **Variance** | ** ** |
| ** **                                              | ** ** | **Dollars**                                       | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                           |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                 |       | $                                                 | 195,752    |   |   | 85.6 | % |   | $ | 219,849 |   |   | 88.6 | % |   | $ | 24,097 |   | 12.3 | % |
| Marketing,  processing and servicing  fees              |       | 62,883                                            |       |   | 27.5 | % |   | 68,851 |   |   | 27.8 | % |   | 5,968 |   | 9.5 | % |
| Total revenues                                          |       | 258,635                                           |       |   | 113.1 | % |   | 288,700 |   |   | 116.4 | % |   | 30,065 |   | 11.6 | % |
| Provision for  doubtful accounts and agency bank losses |       | (30,053                                           | )          |   | (13.1 | )% |   | (40,658 | ) |   | (16.4 | )% |   | (10,605 | ) | (35.3 | )% |
| Net revenues                                            |       | 228,582                                           |       |   | 100.0 | % |   | 248,042 |   |   | 100.0 | % |   | 19,460 |   | 8.5 | % |
| **Center Expenses:**                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and  related payroll costs                     |       | 78,527                                            |       |   | 34.4 | % |   | 84,589 |   |   | 34.1 | % |   | 6,062 |   | 7.7 | % |
| Occupancy costs                                         |       | 31,380                                            |       |   | 13.7 | % |   | 38,280 |   |   | 15.4 | % |   | 6,900 |   | 22.0 | % |
| Center  depreciation expense                            |       | 6,611                                             |       |   | 2.9 | % |   | 7,132 |   |   | 2.9 | % |   | 521 |   | 7.9 | % |
| Advertising  expense                                    |       | 14,201                                            |       |   | 6.2 | % |   | 12,856 |   |   | 5.2 | % |   | (1,345 | ) | (9.5 | )% |
| Other center  expenses                                  |       | 22,665                                            |       |   | 9.9 | % |   | 25,049 |   |   | 10.1 | % |   | 2,384 |   | 10.5 | % |
| Total center expenses                                   |       | 153,384                                           |       |   | 67.1 | % |   | 167,906 |   |   | 67.7 | % |   | 14,522 |   | 9.5 | % |
| Center gross  profit                                    |       | 75,198                                            |       |   | 32.9 | % |   | 80,136 |   |   | 32.3 | % |   | 4,938 |   | 6.6 | % |
| **Corporate and Other Expenses  (Income):**             |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses                    |       | 21,655                                            |       |   | 9.4 | % |   | 25,146 |   |   | 10.2 | % |   | 3,491 |   | 16.1 | % |
| Corporate  depreciation expense                         |       | 2,001                                             |       |   | 0.9 | % |   | 2,149 |   |   | 0.9 | % |   | 148 |   | 7.4 | % |
| Interest expense                                        |       | 8,025                                             |       |   | 3.5 | % |   | 1,558 |   |   | 0.6 | % |   | (6,467 | ) | (80.6 | )% |
| Interest income                                         |       | (90                                               | )          |   | 0.0 | % |   | (158 | ) |   | (0.1 | )% |   | (68 | ) | (75.6 | )% |
| Loss on disposal  of property and equipment             |       | 269                                               |       |   | 0.1 | % |   | 123 |   |   | 0.0 | % |   | (146 | ) | (54.3 | )% |
| Total corporate and other expenses                      |       | 31,860                                            |       |   | 13.9 | % |   | 28,818 |   |   | 11.6 | % |   | (3,042 | ) | (9.5 | )% |
| Income before  income taxes                             |       | 43,338                                            |       |   | 19.0 | % |   | 51,318 |   |   | 20.7 | % |   | 7,980 |   | 18.4 | % |
| Income tax  expense                                     |       | 1,522                                             |       |   | 0.7 | % |   | 20,835 |   |   | 8.4 | % |   | 19,313 |   | 1,268.9 | % |
| Net income                                              |       | $                                                 | 41,816     |   |   | 18.3 | % |   | $ | 30,483 |   |   | 12.3 | % |   | $ | (11,333 | ) | (27.1 | )% |

 
| ** **                                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                      | ** ** | **2005** | ** ** |
| **Center Information:**                                               |       |                                          |       |   |   |
| Number of centers  open at beginning of period                        |       | 2,039                                         |       | 2,408 |   |
| Opened                                                                |       | 259                                           |       | 126 |   |
| Closed                                                                |       | (1                                            | )          | (14 | ) |
| Suspended                                                             |       | (89                                           | )          | — |   |
| Number of centers  open at end of period                              |       | 2,208                                         |       | 2,520 |   |
| Weighted average  number of centers open during the period            |       | 2,146                                         |       | 2,436 |   |
| Number of payday  cash advances provided and processed (in thousands) |       | 5,318                                         |       | 5,600 |   |
| Amount of average payday  cash advance provided and processed         |       | $                                             | 325        |   | $ | 333 |   |
|                                                                       |            |                                               |            |  |  |  |  |

 

37

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| ** **                                                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **  Dollars  **               | ** ** | **% Net  Revenues** | ** ** | **  Dollars  ** | ** ** | **% Net  Revenues** | ** ** | **  Dollars  ** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**              | ** ** |
| **Per Center (based on weighted average number of  centers open during the period):** |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net revenues                                                                   |       |                                              | $          | 106.5 |   |   |   | 100.0 | % |   |   | $ | 101.8 |   |   |   | 100.0 | % |   |   | $ | (4.7 | ) |   | (4.4 | )% |
| Center expenses:                                                                      |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                                                   |       |                                              | 36.6       |   |   |   | 34.4 | % |   |   | 34.7 |   |   |   | 34.1 | % |   |   | (1.9 | ) |   | (5.1 | )% |
| Occupancy costs                                                                       |       |                                              | 14.6       |   |   |   | 13.7 | % |   |   | 15.7 |   |   |   | 15.4 | % |   |   | 1.1 |   |   | 7.5 | % |
| Center depreciation  expense                                                          |       |                                              | 3.1        |   |   |   | 2.9 | % |   |   | 2.9 |   |   |   | 2.9 | % |   |   | (0.2 | ) |   | (5.0 | )% |
| Advertising expense                                                                   |       |                                              | 6.6        |   |   |   | 6.2 | % |   |   | 5.3 |   |   |   | 5.2 | % |   |   | (1.3 | ) |   | (20.3 | )% |
| Other center expenses                                                                 |       |                                              | 10.6       |   |   |   | 9.9 | % |   |   | 10.3 |   |   |   | 10.1 | % |   |   | (0.3 | ) |   | (2.6 | )% |
| Total center expenses                                                                 |       |                                              | 71.5       |   |   |   | 67.1 | % |   |   | 68.9 |   |   |   | 67.7 | % |   |   | (2.6 | ) |   | (3.6 | )% |
| Center gross profit                                                                   |       |                                              | $          | 35.0 |   |   |   | 32.9 | % |   |   | $ | 32.9 |   |   |   | 32.3 | % |   |   | $ | (2.1 | ) |   | (6.1 | )% |

 

***Revenue Analysis***

Total revenuesincreased $30.1 million, or 11.6%, during the six months ended June 30,2005 to $288.7 million compared to $258.6 million for the same period in 2004. Theincrease was primarily due to:

·       A$35.1 million increase in total revenues from payday cash advance centersopened in 2002 and thereafter (excluding payday cash advance centers closed orsuspended in 2004 and 2005).

·       Anincrease in the total number of payday cash advances made. The number of paydaycash advances made increased by approximately 0.3 million to approximately 5.6million in 2005 compared to approximately 5.3 million in 2004. Excluding paydaycash advances made in our Georgia payday cash advance centers during the sixmonths ended June 30, 2004, the number of payday cash advances madeincreased approximately 0.4 million to approximately 5.6 million in 2005compared to approximately 5.2 million in 2004.

·       Anincrease in the amount of the average payday cash advance provided andprocessed. The average fee per payday cash advance provided and processed wasapproximately $51 and $53 during the six months ended June 30, 2004 and2005, respectively.

Total revenues for the six months ended June 30,2005 were impacted by the loss of revenues from the 89 Georgia payday cashadvance centers for which operations were suspended in May 2004. Georgiatotal revenues for the six months ended June 30, 2004 were approximately$7.0 million. Excluding our Georgia payday cash advance centers and payday cashadvance centers closed in 2004 and 2005, total revenues for the six monthsended June 30, 2005 increased $38.2 million, or 15.3%, to $288.3 millioncompared to $250.1 million for the same period in 2004.

Total revenues for the 1,930 payday cash advancecenters opened prior to January 1, 2004 (excluding payday cash advancecenters closed or suspended in 2004 and 2005) increased $18.2 million, or 7.3%,to $266.8 million for the six months ended June 30, 2005 compared to$248.6 million for the same period in 2004. Payday cash advance centers openedprior to January 1, 2004 were at least six and eighteen months old at theend of the six-month periods ended June 30, 2004 and 2005, respectively. Totalrevenues for the 590 payday cash advance centers opened after January 1,2004 (excluding payday cash advance centers closed or suspended in 2004 and2005) increased $19.9 million to $21.4 million for the six months ended June 30,2005 compared to $1.5 million for the same period in 2004. Total revenues forthe remaining 113 payday cash advance centers closed or suspendedrepresented a decrease of approximately $8.2 million for the six months ended June 30,2005 compared to the same periods in 2004.

38

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Of our 2,408 payday cash advance centers open at December 31,2004, we operated 540 centers under the agency business model in the states ofArkansas, Michigan, North Carolina, Pennsylvania and Texas. At June 30,2005, of our 2,520 payday cash advance centers, we operated 456 payday cashadvance centers under the agency business model in the states of Arkansas,North Carolina, Pennsylvania and Texas. The 84 center decrease in the number ofpayday cash advance centers operated under the agency business model at June 30,2005 compared to December 31, 2004 primarily resulted from our conversionof our Michigan payday cash advance centers to the standard business modeleffective June 27, 2005

The provision for doubtfulaccounts and agency bank losses increased $10.6 million, or 35.3%, to$40.7 million for the six months ended June 30, 2005 compared to$30.1 million for the same period in 2004. As a percentage of totalrevenues, this provision increased to 14.1% in 2005 from 11.6% in 2004. This provisionincluded a net expense of approximately $4.2 million related to thecontractual changes in Texas, Michigan, North Carolina and Arkansas. Inaddition to the impact of the contractual changes, this provision increased dueto increased loss rates. The provision for the comparable period in 2004 includedan expense of approximately $1.3 million related to the expected lossesrelated to the suspension of operations at our 89 Georgia payday cashadvance centers.

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

*Salariesand related payroll costs.  *2005 salaries and relatedpayroll costs increased $6.1 million, or 7.7%, to $84.6 millioncompared to $78.5 million in 2004. The increase was due primarily to(dollars in millions):
| New centers  opened in 2004 and 2005       |   | $    | 9.2 |   |
|--------------------------------------------|--------|------|-----|--------|
| Lower costs in  centers opened before 2004 |   | (3.1 | )   |
| 2005 increase                              |   | $    | 6.1 |   |

 

2005 salaries and related payroll costs as apercentage of net revenues decreased to 34.1% compared to 34.4% in 2004 and2005 salaries and related payroll costs per center decreased to approximately$34,700 compared to $36,600 in 2004 due primarily to lower salaries and relatedpayroll taxes, lower bonus expense and lower health insurance expense. Weaveraged approximately 2.13 and 2.28 full-time equivalent field employees,including district directors, for each center in 2005 and 2004, respectively.

*Occupancy costs.  *2005occupancy costs increased $6.9 million, or 22.0%, to $38.3 millioncompared to $31.4 million in 2004. The increase was due primarily to sixmonths of occupancy costs for centers opened in 2004 and occupancy costsrelated to 2005 center openings. 2005 occupancy costs as a percentage of netrevenues were 15.4% compared to 13.7% in 2004 and 2005 occupancy costs percenter increased to approximately $15,700 compared to approximately $14,600 in2004, due primarily to higher rent and common area maintenance expense.

*Center depreciation expense.  *2005center depreciation expense increased $0.5 million, or 7.9%, to $7.1 millioncompared to $6.6 million in 2004. The increase was due primarily to thenew centers opened in 2004 and 2005. 2004 and 2005 center depreciation expenseper center was approximately $2,900 and $3,100, respectively, or 2.9% of netrevenues during both periods.

*Advertising expense.  *2005advertising expense decreased $1.3 million, or 9.5%, to $12.9 millioncompared to $14.2 million in 2004. 2005 advertising expense as apercentage of net revenues decreased to 5.2% compared to 6.2% in 2004. 2005advertising expense per center was approximately $5,300 compared toapproximately $6,600 in 2004. The decrease was due primarily to opening fewercenters during the six months ended June 30, 2005 compared to the sameperiod in 2004 and a decision to conduct less advertising during our seasonalslowdown in February and March.

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*Other center expenses.  *2005other center expenses increased $2.4 million, or 10.5%, to $25.1 millioncompared to $22.7 million in 2004. This increase was due primarily to theaddition of new centers in 2004 and 2005. Other center expenses as a percentageof net revenues increased from 9.9% in 2004 to 10.1% in 2005. Other centerexpenses per center decreased to approximately $10,300 in 2005 compared toapproximately $10,600 in 2004 due primarily to lower office supplies expenseand a decrease in travel expense.

*Totalcenter expenses.  *Total center expenses increased $14.5 million,or 9.5%, to $167.9 million compared to $153.4 million in 2004. Totalcenter expenses as a percent of net revenues increased to 67.7% for the sixmonths ended June 30, 2005 compared to 67.1% in the same period in 2004. Theincrease in total center expenses compared to 2004 was due primarily to(dollars in millions):
| New centers  opened in 2004 and 2005                                    |   | $    | 19.3 |   |
|-------------------------------------------------------------------------|--------|------|------|--------|
| Lower salaries  and related payroll costs in centers opened before 2004 |   | (3.1 | )    |
| Lower advertising  expense                                              |   | (1.3 | )    |
| All other                                                               |   | (0.4 | )    |
| Total center  expenses increase                                         |   | $    | 14.5 |   |

 

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

*Generaland administrative expenses.  *2005 general andadministrative expenses increased $3.5 million, or 16.1% to $25.1 millioncompared to $21.6 million in 2004. This increase was due primarily to(dollars in millions):
| Higher expense  due to being a public company, including audit fees, legal fees and  filing fees—$0.6, and insurance expense—$0.8                                                 |   | $    | 1.4    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Higher  compensation expense related to annual compensation increases and additional  staff due primarily to center growth—$0.4, and restricted stock grant  amortization expense—$0.6 |   | 1.0  |   |
| Higher legal fees                                                                                                                                                                                |   | 1.6  |   |
| Lower airplane  operating expenses                                                                                                                                                               |   | (0.8 | )      |
| Net increase in  all other                                                                                                                                                                       |   | 0.3  |   |
| Total general and  administrative expenses increase                                                                                                                                              |   | $    | 3.5    |   |

 

2005 general and administrative expenses as apercentage of net revenues increased to 10.2% compared to 9.4% in 2004.

*Corporate depreciation expense.  *2005corporate depreciation expense increased $0.1 million, or 7.4%, to$2.1 million compared to $2.0 million in 2004. Corporate depreciationexpense was 0.9% of net revenues in both 2004 and 2005.

*Interest expense.  *2005interest expense decreased $6.4 million, or 80.6%, to $1.6 millioncompared to $8.0 million in 2004 due to the repayment in the fourthquarter of 2004 of all long-term debt with related parties and the reduction ofadvances under our revolving credit facility.

*Incometax expense*.   As a result of the increase in theanticipated annual effective tax rate from 38.7% in the first quarter of 2005to 40.6% during the second quarter of 2005, the effective tax rate for thethree months ended June 30, 2005 was 43.8%, resulting in an effective ratefor the six months ended June 30, 2005 of 40.6%. 2005 income tax expenseincreased $19.3 million to $20.8 million compared to $1.5 millionin 2004. The increase is due primarily to our conversion to a C Corporation forincome tax purposes. See —“Prior S Corporation Status.”

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**Liquidity and Capital Resources**

The following tablepresents a summary of cash flows for the six months ended June 30, 2004and 2005 (dollars in thousands):
| ** **                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows  provided by (used in):              |       |     |       |     |       |
| Operating activities                            |       | $        | 75,302     |     | $          | 79,266 |   |
| Investing activities                            |       | (42,631  | )          | (55,053  | )          |
| Financing activities                            |       | (36,628  | )          | (33,250  | )          |
| Net decrease in  cash and cash equivalents      |       | (3,957   | )          | (9,037   | )          |
| Cash and cash  equivalents, beginning of period |       | 10,484   |       | 18,224   |       |
| Cash and cash  equivalents, end of period       |       | $        | 6,527      |     | $          | 9,187 |   |

 

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 typical payday, our borrowings and our cashbalances will be high compared to a month that does not end on a payday. Thisis because a substantial portion of the payday cash advances will be repaid incash on that day but sufficient time will not yet have passed for the cash toreduce the outstanding borrowings under our revolving credit facility. Ourborrowings under our revolving credit facility will also increase as the demandfor payday cash advances increases during our peak periods, such as theback-to-school and holiday seasons. Conversely, our borrowings typicallydecrease during the tax refund season when cash receipts from customers peak orthe customer demand for new payday cash advances decreases. Advance and feesreceivable, net increased approximately $29.2 million, or 20.3%, to $173.1 millionat June 30, 2005 compared to $143.9 million at June 30, 2004,due primarily to an increase in the number of new payday cash advance centersand an increase in the average advance. Advances and fees receivable, net at June 30,2005 increased approximately $18.1 million, or 11.7%, to $173.1 millioncompared to $155.0 million at December 31, 2004. In addition, cashand cash equivalents at June 30, 2005 decreased approximately $9.0 million,or 49.6%, to approximately $9.2 million compared to approximately $18.2 millionat December 31, 2004, and increased approximately $2.7 million, or 40.8%,compared to approximately $6.5 million at June 30, 2004.

On May 4, 2005, we announced that our Board ofDirectors had approved a program authorizing the repurchase of up to $50 millionof our currently outstanding common stock. Our Board of Directors determinedthat the stock repurchase program will serve the best interest of the Companyand its stockholders by returning capital to our stockholders, by providing anattractive investment opportunity for our funds, and by reducing the dilutiveimpact of employee stock incentive programs and potential acquisitions.

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

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During the three months ended June 30, 2005, werepurchased 367,200 shares of our common stock at a cost of approximately $4.5 million.

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 increased $4.0 million, or 5.3%, to$79.3 million for the six months ended June 30, 2005 compared to$75.3 million for the same period in 2004. The increase was due primarilyto:

·       An$11.3 million decrease in net income. Income before income taxes increased$8.0 million, or 18.4%, for the six months ended June 30, 2005compared to the same period in 2004. This was offset by a $19.3 millionincrease in income tax expense due to our conversion from an S Corporationto a C Corporation for income tax purposes. See “—Prior S Corporation Status.”

·       A$1.9 million increase in deferred income taxes due to our conversion froman S Corporation to a C Corporation for income tax purposes. See “—Prior SCorporation Status.”

·       Anincrease of approximately $13.4 million in non-cash expenses and otherchanges in operating assets and liabilities due primarily to a $10.6 millionincrease in the provision for doubtful accounts and agency bank losses.

***Cash Flows from Investing Activities***

Net cash used in investingactivities increased $12.5 million, or 29.1%, to $55.1 million forthe six months ended June 30, 2005 compared to $42.6 million for thesame period in 2004. This increase is primarily due to a $19.8 millionincrease in cash invested in advances and fees receivable, net. This increasewas partially offset by lower cash payments for purchases of property andequipment of approximately $8.6 million due primarily to opening fewer newcenters in 2005 compared to 2004.

***Cash Flows from Financing Activities***

Net cash used in financingactivities decreased $3.4 million, or 9.2%, to $33.2 million for thesix months ended June 30, 2005 compared to $36.6 million for the sameperiod in 2004. The decrease is due primarily to the decrease in dividends paidto stockholders during the six months ended June 30, 2005 compared to thesame period in 2004. As a result of our conversion from an S Corporation to a C Corporationfor income tax purposes, our distributions to stockholders for the purpose ofpaying income tax on our earnings ceased. See “—Prior S CorporationStatus.” The decrease in dividends paid was partially offset by approximately$4.5 million of repurchases of our common stock during the six monthsended June 30, 2005.

**Capital Expenditures**

For the six months ended June 30,2004 and 2005, we spent $15.7 million and $7.1 million, respectively,on capital expenditures. Capital expenditures included expenditures (1) fornew centers, (2) center remodels and (3) computer equipmentreplacements in our payday cash advance centers and at our corporateheadquarters. Capital expenditures decreased approximately $8.6 million,or 54.9%, due primarily to fewer center openings during the six months ended June 30,2005 compared to the same period in 2004.

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

On June 30, 2005, we operated as marketing,processing and servicing agent for payday cash advances offered, made, andfunded by FDIC insured, state-chartered banks through 456 of our payday cashadvance centers located in four states. Prior to July 2005, pursuant toour MP&S Agreements with the lending banks, we were the marketing,processing and servicing agent for payday cash advances offered, made, andfunded by Venture in Arkansas, Republic in North Carolina and Texas, andBankWest in Pennsylvania. Under our MP&S Agreements with the variouslending banks, the lending banks were contractually obligated for the losses ontheir payday cash advances in an amount established as a percentage of the feesand interest charged by the lending banks to their customers. Therefore, under ourMP&S Agreements, our marketing, processing and servicing fee increased by thelending bank’s contractual obligation for losses. If actual payday cash advancelosses by the lending bank exceeded the percentage specified in its MP&SAgreement with us, we would likely be obligated to pay the lending bank theoutstanding amount of the advances and loans plus the lending bank’s feesand/or interest receivable on the advances, less the lending bank’scontractually obligated portion of the losses.

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

Beginning in July 2005, we ceased conductingbusiness under the agency business model in our 208 centers in Texas, and beganconducting business in those centers as a CSO. Under our prior MP&SAgreement with the lending bank in Texas for payday cash advances made underthe agency business model, the lending bank was contractually obligated foruncollectible payday cash advance accounts in amounts determined as apercentage of fees and interest charged by the lending bank to its customers,which historically have been sufficient to cover all losses incurred. Under ourCSO Agreement with an unaffiliated, third-party lender, we are contractuallyobligated for all losses incurred by the lender with respect to loans it makesto customers that are referred by us.

Approximately 23.0% and 23.7% of our total revenuesand 17.1% and 30.8% of our total center gross profit, in the three months endedJune 30, 2004 and 2005, respectively, were derived from marketing,processing and servicing fees paid to us by the lending banks. Approximately24.3% and 23.8% of our total revenues and 19.2% and 26.6% of our total centergross profit, in the six months ended June 30, 2004 and 2005,respectively, were derived from marketing, processing and servicing fees paidto us by these lending banks.

Thenumber of payday cash advance centers at which the lending banks were offeringtheir payday cash advances at June 30, 2004 and 2005 and the marketing,processing and servicing fees paid to us by 

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each of the lending banks in the three months ended June 30,2004 and 2005 (including our centers in Michigan and Texas, in which we nolonger operate under the agency business model), 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        |        |       |   | $ | 11.9 |   |   |   | 9.1 | % |   |   | 101 |   |   |   | $ | 11.1 |   |   |   | 7.4 | % |   |
| Republic              |       |       | 303        |        |       |   | 12.0 |   |   |   | 9.2 | % |   |   | 325 |   |   |   | 16.2 |   |   |   | 10.8 | % |   |
| First Fidelity  Bank  |       |       | 87         |        |       |   | 4.4 |   |   |   | 3.4 | % |   |   | — |   |   |   | 6.3 |   |   |   | 4.2 | % |   |
| Venture Bank          |       |       | 30         |        |       |   | 1.7 |   |   |   | 1.3 | % |   |   | 30 |   |   |   | 2.0 |   |   |   | 1.3 | % |   |
| Total                 |       |       | 610        |        |       |   | $ | 30.0 |   |   |   | 23.0 | % |   |   | 456 |   |   |   | $ | 35.6 |   |   |   | 23.7 | % |   |
|                       |            |            |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          2004 includes the 89Georgia payday cash advance centers that were operating during the three monthsended June 30, 2004. 2005 does not include any Georgia payday cash advancecenters.

Thenumber of payday cash advance centers at which the lending banks were offeringtheir payday cash advances at June 30, 2004 and 2005 and the marketing,processing and servicing fees paid to us by each of the lending banks in thesix months ended June 30, 2004 and 2005 (including our centers in Michiganand Texas, in which we no longer operate under the agency business model), indollars and as a percent of total revenues were (dollars in millions):
| ** **            | ** ** | **2004**   | ** ** | **2005**    | ** ** |
|-----------------------|------------|------------|------------|-------------|------------|
| **Lending Bank** | ** ** | ** ** | ** ** | **Centers** | ** ** | ** Dollars ** | ** ** | **Percent** | ** ** | **Centers** | ** ** | ** Dollars ** | ** ** | **Percent** | ** ** |
| BankWest(1)           |       |       | 190        |        |       |   | $ | 27.1 |   |   |   | 10.5 | % |   |   | 101 |   |   |   | $ | 21.9 |   |   |   | 7.5 | % |   |
| Republic              |       |       | 303        |        |       |   | 23.8 |   |   |   | 9.2 | % |   |   | 325 |   |   |   | 31.1 |   |   |   | 10.8 | % |   |
| First Fidelity  Bank  |       |       | 87         |        |       |   | 8.6 |   |   |   | 3.3 | % |   |   | — |   |   |   | 12.2 |   |   |   | 4.2 | % |   |
| Venture Bank          |       |       | 30         |        |       |   | 3.4 |   |   |   | 1.3 | % |   |   | 30 |   |   |   | 3.7 |   |   |   | 1.3 | % |   |
| Total                 |       |       | 610        |        |       |   | $ | 62.9 |   |   |   | 24.3 | % |   |   | 456 |   |   |   | $ | 68.9 |   |   |   | 23.8 | % |   |
|                       |            |            |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(2)          2004 includes the 89Georgia payday cash advance centers that were operating during the six monthsended June 30, 2004. 2005 does notinclude any Georgia payday cash advance centers.

Although we market, process and service payday cash advancesand, as of July 2005, installment loans offered, made and funded 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 and/or installment loan is approved. The lending banks forwhich we act as agent, utilize an automated third-party credit scoringsystem to evaluate and approve each customer application. We are not involvedin the lending banks’ payday cash advance or installment loan approval process,are not involved in determining the approval procedures or criteria of thelending banks and do not fund or acquire any payday cash advances orinstallment loans from the lending banks. The payday cash advances and installmentloans are repayable solely to the lending banks and are assets of the lendingbanks. Consequently, the lending banks’ payday cash advances are not includedin our payday cash advance portfolio nor are they reflected on our balancesheet within our advances and fees receivable, net. Under our recentlyterminated MP&S Agreements with lending banks that were offering paydaycash advances in Michigan, Texas, North Carolina and Arkansas, the lending bankswere contractually obligated for the losses on payday cash advances in anamount established as a percentage of the fees and/or interest charged by thebanks to their customers. This continues to be the case under our amendedMP&S Agreement with the lending bank offering payday cash advances and installmentloans in Pennsylvania, but not under our MP&S Agreements for North Carolinaand Arkansas. The contractual percentages were negotiated by us, in part, basedon our historical data regarding our loss history and serve as an incentive forus to diligently pursue collection efforts for the lending bank. In aggregate,this percentage was 13.3% 

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and 13.9% for the threemonths ended June 30, 2004 and 2005, and was 13.0% and 13.7% for the sixmonths ended June 30, 2004 and 2005, respectively. 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 or installment loan plus its fees and/or interestreceivable, less its contractually obligated portion of the losses. As of June 30,2005, our aggregate contingent liability to the lending banks amounted to$49.5 million.****Thiscontingent 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.

Under the new MP&S Agreements recently enteredinto with the lending bank offering payday advances and installment loans inNorth Carolina and Arkansas, the lending bank is responsible for any and alllosses associated with its payday cash advances and installment loans.

Because of our economicexposure for excess bank losses related to the lending banks’ payday cashadvances, we have established an accrual for excess bank losses, to reflect ourprobable losses related to uncollected lending bank payday cash advances. Theaccrual for excess bank losses that was reported in our balance sheet was $3.2 millionand $5.3 million as of December 31, 2004 and June 30, 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. If the lending banks’ payday cash advance lossesare materially 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 June 30,2005, excluding periodic interest payments, included the following (dollars inthousands):
| ** **                                 | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**                                           | ** ** | **2005** | ** ** | **2006 and  2007** | ** ** | **2008 and  2009** | ** ** | **2010 and  thereafter** | ** ** |
| Long-term  debt obligations:               |       |       |       |                                                |       |   |   |   |   |   |   |   |   |
| Revolving credit facility                  |       | $          | 27,511     |                                                | $          | — |   | $ | — |   | $ | 27,511 |   |   | $ | — |   |   |
| Mortgage payable                           |       | 6,357      |       | 170                                                 |       | 740 |   | 856 |   |   | 4,591 |   |   |
| Note payable                               |       | 528        |       | 57                                                  |       | 240 |   | 231 |   |   | — |   |   |
| Operating lease  obligations(1)            |       | 139,131    |       | 30,955                                              |       | 87,892 |   | 19,788 |   |   | 496 |   |   |
| Purchase  obligations                      |       | 2,158      |       | 2,158                                               |       | — |   | — |   |   | — |   |   |
| Total                                      |       | $          | 175,685    |                                                | $          | 33,340 |   | $ | 88,872 |   | $ | 48,386 |   |   | $ | 5,087 |   |   |
|                                            |            |            |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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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 June 30, 2005 decreasedapproximately $12.2 million, or 26.2%, to approximately $34.4 millioncompared to approximately $46.6 million at December 31, 2004, anddecreased approximately $171.1 million, or 83.3%, compared to total debtof approximately $205.5 million at June 30, 2004. The decrease from December 31,2004 compared to June 30, 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 from June 30,2004 compared to June 30, 2005 is due primarily to the payment of ourlong-term debt from the proceeds of our initial public offering in December 2004.

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*Revolving Credit Facility.  *Asof June 30, 2005, we had $27.5 million outstanding on our revolvingcredit facility and approximately $11.8 million of letters of creditoutstanding, leaving approximately $225.7 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 ourrevolving credit facility to allow the repurchase of up to $50 million ofour outstanding common stock. At June 30, 2005 we had $27.5 millionoutstanding 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 debtoutstanding under our prior credit facility to a fixed rate of 4.78% plus amargin. The swap notional amount amortized by $2.5 million per month andmatured on May 7, 2004. Under the interest rate swap agreement, we wereexposed to losses in the event of nonperformance by the counterparty.

In general, our borrowings under our revolving creditfacility bear interest, at our option, at either a base rate plus an applicablemargin or a LIBOR-based rate plus an applicable margin. The base rateequals the greater of (i) the prime rate announced by Bank of America, theadministrative agent under the 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 June 30, 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 June 30, 2005.

We borrow under our $265.0 million revolvingcredit facility to fund our payday cash advances and to fund our otherliquidity needs. Our day-to-day balances under our revolving credit facility,as well as our 

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cash balances, varybecause of seasonal and day-to-day requirements resulting from making andcollecting payday cash advances. For example, if a month ends on a typical payday,our borrowings and our cash balances will be higher compared to a month thatdoes not end on a payday. This is because a substantial portion of the paydaycash advances will be repaid in cash on that day but sufficient time will notyet have passed for the cash to reduce the outstanding borrowings under ourrevolving credit facility. Our borrowings under our revolving credit facilitywill also increase as the demand for payday cash advances increases during ourpeak periods such as the back-to-school and holiday seasons. Conversely, ourborrowings typically decrease during the tax refund season when cash receiptsfrom customers peak or the customer demand for new payday cash advancesdecreases.

*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, 2004and June 30, 2005, respectively. The mortgage is payable to an insurancecompany and is secured by our corporate headquarters building and related land.The mortgage is payable in 180 monthly installments of approximately $66,400,including principal and interest, and bears interest at a fixed rate of 7.30%over its term. The mortgage matures on June 10, 2017. The carrying amountof our corporate headquarters (land, land improvements and building) wasapproximately $5.6 million and $5.5 million at December 31, 2004and June 30, 2005, respectively.

***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 June 30, 2005, our purchase obligations totaledapproximately $2.2 million.

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

The preparation of our financial statements in conformitywith GAAP requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand 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 availableinformation and experience. Because of the use of estimates inherent in thefinancial reporting process, actual results could differ from those estimates.

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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.

**RISK FACTORS**

**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 marketing, processing and servicing agent to exportthe interest rates permitted by the states in which they are located into the statesin which we act as their agent. Currently, only state-chartered banks can belending banks for payday cash advances, because the federal regulators fornational banks and federal savings associations have effectively prohibitedsuch banks and associations from participating in the payday cash advanceservices industry with agents.

The two lending banks for which, as of July 2005,we act as marketing, processing and servicing agent are subject to extensivefederal and state banking regulations and are subject to regular examination bystate and federal regulatory authorities such as the FDIC. Because of ourrelationships with the lending banks, our own activities relating to theservices we offer the lending banks are also subject to examination by regulatoryauthorities. For example, we are examined annually by the FDIC. In connection with any regulatory examination, the FDICor other regulatory authority may require us to provide information, grantaccess to our centers, personnel and records or alter our business practices,perhaps materially, or may prevent the lending banks from using us as an agent,which could preclude us from conducting business under the agency businessmodel. Any of these actions could have a material adverse impact on our business,results of operations and financial condition, especially if we are required tomaterially modify our business practices or terminate our use of the agencybusiness model.

A director of the FDIC has publicly questioned whetherpayday cash advances are predatory and abusive to consumers. The FDIC directoralso questioned whether agents for lending banks are entitled to the benefit ofthe federal banking law that permits a lending bank to “export” the lendinginterest rates permitted by the state in which it is located to consumers inother states. If agent-assisted payday cash 

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advances and installmentloans made by the lending banks were no longer entitled to the benefit of thefederal banking laws permitting the exportation of interest rates, we would nolonger be able to conduct business under the agency bank model and theresulting decline in our net revenues would have a material adverse effect onour business, results of operations and financial condition.

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

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

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

In response to the RevisedGuidance, in July 2005, we began marketing, servicing and processinginstallment loans offered by the lending banks in Pennsylvania, North Carolinaand Arkansas, offering check-cashing and deferred presentment services directlyto customers in Michigan and offering additional credit services as a CreditServices Organization to customers in Texas. See “—Revised FDIC Guidance” for amore detailed description of these developments. Each of these changes is subjectto risks and uncertainty and requires significant investment in time andcapital. Due to our lack of experience in offering these services, we cannotassure you that we will be able to successfully implement any of these changes.Furthermore, we cannot anticipate the demand for any of these new services. Nordo we know if we will be able to offer these new services in an efficientmanner or on a profitable basis. Our failure to do so, or low customer demandfor any of these new services, could have a material adverse effect on ourbusiness, results of operations and financial condition.

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

Revenues under our agencybusiness model will likely decrease because (1) the Revised Guidancelimits the number of payday cash advances that may be made, (2) the morestringent underwriting standards that we expect the lending banks to apply forinstallment loans will likely reduce the number of eligible customers, and (3) thelonger duration of installment loans will likely result in fewer installmentloan transactions than payday cash advances that would have been made in thesame period. Additionally, due to the fixed nature of some of our expenses andthe incremental cost of marketing, processing and servicing a new product, ourmargins under the agency business model will likely erode. A reduction inrevenues or a decrease in margins under the agency business model could have amaterial adverse effect on our business, results of operations and financialcondition.

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

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

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

If the FDIC’s implementation of the revised FDICGuidelines or the promulgation of any additional guidelines were to ultimatelyrestrict the ability of all or certain state-chartered banks (including thelending banks for whom we act as marketing, processing and servicing agent) tomaintain relationships with payday cash advance marketers, processors andservicers (such as us), it would have a material adverse impact on ourbusiness, results of operations and financial condition. In addition, if statebanking regulators were to take action to restrict the ability of all orcertain state-chartered banks, including the lending banks for whom we act asmarketing, processing and servicing agent, to provide payday cash advances orinstallment loans, our distribution opportunities in those states where weoperate as an agent for a lending bank would be limited and we could have topermanently cease our operations in those states.

If, as a result of changesin laws or regulations, an adverse result in litigation or regulatory proceedingsor otherwise, we could no longer market, process and service payday cashadvances or installment loans made and funded by the lending banks in one ormore of our present or future markets, our business, results of operations andfinancial condition could be materially adversely affected. In addition, anysuch changes in laws or regulations or adverse result in litigation orregulatory proceedings could deprive us of the agency business model as analternative method for conducting our business in the event that statutoryprovisions or regulations specifically authorizing payday cash advances changedor expired in any of the states in which we currently operate under thestandard business model.

***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 July 2005,37 states and the District of Columbia had specific laws that permitted paydaycash advances or allowed a form of payday cash advances under small loan laws.The states with specific payday cash advance laws have laws that generallygovern the terms of the transaction and require certain consumer protections. Asof July 2005, we operate in 31 of these 37 states under the standard businessmodel. We do not conduct business in the remaining six of these 37 states or inthe District of Columbia because we do not believe it is as economicallyattractive at this time to operate in these jurisdictions due to specificlegislative restrictions such as interest rate ceilings, an unattractivepopulation density or unattractive location characteristics. The remaining 13of the 50 states do not currently have laws specifically authorizing the paydaycash advance business. As of July 2005, we operate in three of these 13states under 

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the agency business model,serving as marketing, processing and servicing agent through our payday cashadvance centers for two lending banks that make payday cash advances to theircustomers in those states.

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 Credit OpportunityAct, the Fair Debt Collection Practices Act and the Gramm-Leach-Bliley Act. Anyfailure to comply with any of these federal laws and regulations could have amaterial adverse effect on our business, results of operations and financialcondition.

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 marketing,processing and servicing agent for the lending banks could have a materialadverse impact on our business, results of operations and financial condition.

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

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

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

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

We are also involved inother litigation and administrative proceedings. See “Item 1. FinancialStatements—Notes to Interim Unaudited Consolidated Financial Statements—Note 7—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 monetary penaltiesand/or modify or terminate our operations in particular states. We may also besubject to adverse publicity. Defense of any lawsuits or proceedings, even ifsuccessful, would require substantial time and attention of our senior officersand other management personnel that would otherwise be spent on other aspectsof our business and would require the expenditure of significant amounts forlegal fees and other related costs. Any of these events could have a materialadverse effect on our business, results of operations and financial condition.

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

If we close our payday cash advance centers in astate, in addition to the loss of net revenues attributable to that closing, wewould incur closing costs such as severance payments and lease cancellationpayments and we would have to write off assets that we could no longer use. Ifwe were to suspend rather than permanently cease our operations in a state, wemay also have continuing costs associated with maintaining our payday cash advancecenters and our employees in that state, with little or no revenues. See “Item1. Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 7—Commitments and Contingencies” for a discussion of ourGeorgia and North Carolina operations.

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

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

Our primary businessactivity is offering payday cash advance services. If we are unable to maintainand grow our payday cash advance services business, our future revenues andearnings could decline. Our lack of product and business diversification couldinhibit our opportunities for growth, reduce our revenues and profits and makeus more susceptible to earnings fluctuations than many of our competitors whoare more diversified and provide other services such as check cashing, pawnlending, title lending, wire transfer services or other similar services.External factors, such as changes in laws and regulations, new entrants andenhanced competition, could also make it more difficult for us to operate asprofitably as a more diversified company could operate. Any internal orexternal change in the payday cash advance services industry could result in adecline in our future revenues and earnings, which could have a materialadverse effect on our stock price.

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

We have an existingrevolving credit facility that allows us to borrow up to $265.0 million,assuming we are in compliance with a number of covenants and conditions. Becausewe typically use substantially all of our available cash generated from ouroperations to repay borrowings on our revolving credit facility on a currentbasis, we have limited cash balances and we expect that a substantial portionof our liquidity needs, including any amounts to pay any future cash dividendson our common stock, will be funded primarily from borrowings under ourrevolving credit facility. As of June 30, 2005, we had approximately$225.7 million available for future borrowings under this facility. Due to theseasonal nature of our business, our borrowings are historically the lowestduring the first calendar quarter and increase during the remainder of the year.If our existing sources of liquidity are insufficient to satisfy our financialneeds, we may need to raise additional debt or equity in the future.

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

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

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

Our cash advance centersoperate in 35 states and, for the three months and six months ended June 30,2004 and 2005, our five largest states (measured by total revenues) accountedfor approximately 42% and 41%, respectively, of our total revenues, withCalifornia, our largest state (measured by total revenues), representingapproximately 11% of our total revenues during all periods. While we believe wehave a diverse geographic presence, for the near term we expect thatsignificant revenues will continue to be generated by certain states, largelydue to the currently prevailing economic, demographic, regulatory, competitiveand other conditions in those states. Furthermore, our five largest states, asmeasured by revenues, are not in all instances our five largest states asmeasured by the number of payday cash advance centers operated. Changes toprevailing economic, demographic, regulatory or any other conditions in themarkets in which we operate could lead to a reduction in demand for our paydaycash advance services, a decline in our revenues or an increase in ourprovision for doubtful accounts and agency bank losses that could result in adeterioration of our financial condition.

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

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

***Our provision fordoubtful accounts and agency bank losses could increase if the lending bank’spayday cash advance approval processes are flawed and more payday cash advancesgo uncollected than anticipated. This would result in a decline in our futurerevenues and earnings, which could have a material adverse effect on our stockprice.***

Pursuant to our agreementsto market, process and service payday cash advances and installment loans madeby the lending banks, the banks are responsible for evaluating each of theircustomers’ applications and determining whether the payday cash advance orinstallment loan is approved. We are not 

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involvedin the lending banks’ approval process, are not involved in determining the approvalprocedures or criteria of the lending banks and generally do not fund oracquire any payday cash advances or installment loans from the lending banks.Consequently, the lending banks’ payday cash advances are not included in ourpayday cash advance portfolio nor are they reflected on our balance sheetwithin our advances and fees receivable, net. However, pursuant to our MP&SAgreement with BankWest, and our recently terminated agreements with otherlending banks, the lending banks are/were contractually obligated for thelosses on payday cash advances in an amount established as a percentage of thefees and/or interest charged by the lending bank to its customers. Dependingupon the lending bank, this percentage ranged from 8.0% to 20.0%. In aggregate, this percentage was 13.3% and 13.9%for the three months ended June 30, 2004 and 2005, and was 13.0% and 13.7%for the six months ended June 30, 2004 and 2005, respectively. Ourmarketing, processing and servicing fees are increased by the percentagespecified in such agreements. If the amount of uncollected payday cash advancesexceeds the lending bank’s contractual obligation, we would likely be obligatedto pay the lending bank the outstanding amount of the advances plus its feesand/or interest receivable on the advances, less its contractually obligatedportion of the losses. As of June 30, 2005, this aggregate contingentliability amounted to $49.5 million and was not included on our balance sheet. Ifthe banks’ payday cash advance approval processes are flawed and the number ofuncollected payday cash advances increases, our provision for doubtful accountsand agency bank losses could increase. This would result in a decline in ourfuture revenues and earnings, which could have a material adverse effect on ourstock price.

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

For the three months endedJune 30, 2004 and 2005, we deposited approximately 5.6% and 5.7%,respectively, of all the customer checks we received and approximately 75.1%and 75.9%, 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. For the six months ended June 30,2004 and 2005, we deposited approximately 4.7% and 5.0%, respectively, of allthe customer checks we received and approximately 75.8% and 73.6%, respectively,of these deposited customer checks were returned unpaid because ofnon-sufficient funds in the customers’ bank accounts or because of closedaccounts or stop-payment orders. Total charge-offs, net of recoveries, for thethree months ended June 30, 2004 and 2005 were approximately $13.8 millionand $17.3 million, respectively. Total charge-offs, net of recoveries, for thesix months ended June 30, 2004 and 2005 were approximately $27.8 millionand $33.9 million, respectively. If the number of customer checks that wedeposit increases or the percent of the customers’ returned checks that wecharge-off increases, our provision for doubtful accounts and agency banklosses will increase and our net income will decrease.

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

Under the agency businessmodel, all charges of fees and/or interest paid by a lending bank’s customersare deposited directly in the lending bank’s bank account. We invoice thelending bank for the marketing, processing and servicing fees payable to us bysuch bank. In addition, 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.

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***If our estimates ofpayday cash advance, installment loan, or credit services losses are not adequateto absorb losses, our provision for doubtful accounts and agency bank losseswould increase. This would result in a decline in our future revenues andearnings, which could have a material adverse effect on our stock price.***

We maintain an allowance for doubtful accounts forestimated losses for payday cash advances we make directly to consumers andcheck-cashing and other credit services we offer under the standard businessmodel and an accrual for excess bank losses for our share of losses on payday cashadvances and installment loans we market, process and service for lending banksunder the agency business model. To estimate the appropriate allowance fordoubtful accounts and accrual for excess bank losses, we consider the amount ofoutstanding payday cash advances owed to us, the amount of payday cash advancesand installment loans owed to the lending banks and serviced by us, thecontract with each lending bank, historical payday cash advances or installmentloans we have charged off, our current collection patterns and the currenteconomic trends in the markets we serve. As of June 30, 2005, ourallowance for doubtful accounts was $33.9 million and our accrual for excessbank losses was $5.3 million. These amounts, however, are estimates, and we haveless experience upon which to base our estimates of losses from installmentloans, check-cashing or credit services. If our actual payday cash advance,check-cashing, or credit services losses are greater than our allowance fordoubtful accounts, or if the actual losses on the advances or loans made by thelending banks are greater than our accrual for excess bank losses, ourprovision 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 and installment loans that we market, process and service for thelending banks, as of June 30, 2005, our aggregate contingent liability was$49.5 million and this amount was not included on our balance sheet. We couldbe obligated to pay this amount to the lending banks if the lending banks’payday cash advances were to become uncollectible. The accrual for excess banklosses that was reported in our accrued liabilities in our balance sheet was$5.3 million as of June 30, 2005. Our accrual for excess bank losses is,however, an estimate. If actual payday cash advance losses are greater than ourrecorded accrual for excess bank losses, our provision for doubtful accountsand agency bank losses would increase. This would result in a decline in ourfuture revenues and earnings, which could have a material adverse effect on ourstock price.

***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 July 2005, wewere party to agreements with two of the 12 FDIC insured, state-chartered banksthat we believe were then offering payday cash advances in the United States.Our MP&S Agreements with these two lending banks have largely been theresult of the relationships that have developed between bank personnel and keymembers of our management team. If the key members of our management team, whonegotiate and maintain these relationships, are no longer employed by us, theserelationships could be adversely affected and the lending banks could terminateor choose not to renew our MP&S Agreements. We cannot assure you that wewould be able to enter into new bank agency relationships on terms as favorableas our current relationships if these agreements were terminated or notrenewed. In addition, other factors, such as changes in state or federal laws,regulations or guidelines, regulatory examinations and changes in lending bankpolicies and strategies, could lead to the termination of these contractualrelationships. The termination or non-renewal of our MP&S Agreements withlending banks could have a material adverse effect on our business, results ofoperations and financial condition by preventing us from operating under the agencybusiness model.

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

We have experienced substantial growth in recentyears. Our growth strategy, which is based on rapidly opening a large number ofpayday cash advance centers in existing and new markets, is subject tosignificant risks. We cannot assure you that we will be able to expand ourmarket presence in our current markets or successfully enter new marketsthrough the opening of new payday cash advance centers or acquisitions.Moreover, the start-up costs and the losses from initial operationsattributable to each newly opened payday cash advance center place demands uponour liquidity and cash flow, and we cannot assure you that we will be able tosatisfy these demands.

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

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

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

·       ourability to market, process and service an installment loan and to introduce andmanage a check-cashing and deferred presentment business and credit serviceorganization business;

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

·       ourability to compete for expansion opportunities in suitable locations;

·       ourability to recruit, train and retain qualified personnel;

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

·       ourability to obtain adequate financing for our expansion plans.

We cannot assure you thatour systems, procedures, controls and existing space will be adequate tosupport expansion of our operations. Our growth has placed significant demandson all aspects of our business, including our administrative, technical andfinancial personnel and systems. Additional expansion may further strain 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 may incursubstantial additional debt in the future. As of June 30, 2005, our totaldebt was approximately $34.4 million and our stockholders’ equity wasapproximately $307.6 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;

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

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

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

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

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

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

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

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

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

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

·       incuradditional debt;

·       createliens;

·       effectmergers or consolidations;

·       makeinvestments, acquisitions or dispositions;

·       paydividends or make other payments;

·       enterinto certain sale and leaseback transactions;

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

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·       haveforeign subsidiaries.

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

***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 contractual commitmentsand debt service obligations. We depend on distributions from our subsidiariesand borrowings to meet our contractual commitments and debt service obligationsand to pay dividends on our common stock. We cannot assure you that ourbusiness will generate sufficient cash flow from operations or that futureborrowings will be available to us to enable us to meet our contractualcommitments, to pay our indebtedness, to pay dividends on our common stock orto fund our other liquidity needs. Certain states require us to maintain someminimum net worth or liquidity based on the number of payday cash advancecenters we operate in the state and other factors. These requirements mayrestrict our subsidiaries’ ability to pay dividends or make other distributionsto us. In order to comply with these requirements, we were required to maintaincash and cash equivalents at our subsidiaries in an aggregate amount of $9.1million and $9.3 million as of December 31, 2004 and June 30, 2005,respectively. In addition, if we undertake additional expansion efforts in thefuture, our cash requirements may increase significantly. Because of this, wemay not have enough cash flow to meet our future liquidity needs, which mayhave a material adverse effect on our business, results of operations andfinancial condition.

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

Our business is seasonal due to the impact offluctuating demand for payday cash advances and fluctuating collection ratesthroughout the year. Demand has historically been highest in the third andfourth quarters of each year, corresponding to the back-to-school and holidayseasons, and lowest in the first quarter of each year, corresponding to ourcustomers’ receipt of income tax refunds. Our provision for doubtful accountsand agency bank losses, allowance for doubtful accounts and accrual for excessbank losses are historically lowest as a percentage of revenues in the firstquarter of each year, corresponding to our customers’ receipt of income taxrefunds, and increase as a percentage of revenues for the remainder 

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of each year. Thisseasonality requires us to manage our cash flows over the course of the year.If our revenues or collections were to fall substantially below what we wouldnormally expect during certain periods, our ability to service our debt, paydividends on our common stock and meet our other liquidity requirements may beadversely affected, which could have a material adverse effect on our resultsof operations and stock price.

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

***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(0.22% of total revenues) and $0.4 million (0.24% of total revenues) in thethree months ended June 30, 2004 and 2005, respectively. Cash shortagesfrom employee and third-party theft and errors were approximately $0.6 million(0.24% of total revenues) and $0.6 million (0.21% of total revenues) in the sixmonths ended June 30, 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.

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***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. Prior to ourinitial public offering in December 2004, we had been operating as a private companysince inception. To address this deficiency and in connection with becoming apublic company, we hired a director of accounting and reporting. In addition,we are enhancing our financial reporting capability by investing in additionalpersonnel and creating an internal audit department, all of which will increaseour costs. We cannot assure you that these measures or any future measures willenable us to remedy this significant deficiency or avoid other significantdeficiencies in the future.

***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 andfinancial condition 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.

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***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 be diluted,which could affect the market price of our stock. As a result, if we fail toproperly evaluate acquisitions or investments, we may not achieve theanticipated benefits of any such acquisitions, and we may incur costs in excessof what we anticipate, either of which could have a material adverse effect onour business, results of operations and financial condition.

***If 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 of June 30,2005, among our payday cash advance center managers was approximately 56% andamong our other payday cash advance center employees was approximately 96%.Approximately 50% of the turnover has traditionally occurred in the first sixmonths following the hire date of our payday cash advance center managers and employees.This turnover increases our cost of operations and makes it more difficult tooperate our payday cash advance centers. If we are unable to retain ouremployees in the future, our business, results of operations and financialcondition could be adversely affected.

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***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 coststo us and could have a material adverse effect on our business, results ofoperations and 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.

**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 our commonstock to fund acquisitions or to refinance debt incurred for acquisitions coulddilute 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 

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may prevent ourstockholders from receiving the benefit from any premium to the market price ofour common stock offered by a bidder in a takeover context. Even in the absenceof a takeover attempt, the existence of these provisions may adversely affectthe prevailing market price of our common stock if they are viewed asdiscouraging 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 takeoverattempt that our stockholders might consider in their best interests. Inparticular, our certificate of incorporation and bylaws:

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

·       prohibitstockholders from filling vacancies on our board of directors;

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

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

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

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***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 ofAugust 5, 2005, there were approximately 84 million shares of our commonstock outstanding. All of the 24,725,000 shares of common stock sold in ourinitial public offering are freely tradable in the public market, except forany shares sold to our “affiliates,” as that term is defined in Rule 144under the Securities Act of 1933, as amended (the “Securities Act”). Theapproximately 58 million shares of our common stock outstanding prior to ourinitial public offering that were not sold in the offering and the 724,947shares issued in connection with our acquisition of two aircraft that we useand the entity that owns our headquarters building are eligible for future salein the public market at prescribed times pursuant to Rule 144 under theSecurities Act, or otherwise. Sales of a significant number of these shares ofcommon stock in the public market could reduce the market price of the commonstock. In addition, our certificate of incorporation permits the issuance of upto approximately 166 million additional shares of common stock after thisoffering. Thus, we have the ability to issue substantial amounts of commonstock in the future, which would dilute the percentage ownership held by theinvestors who purchase our shares in this offering. Certain of our pre-IPOstockholders entered into a registration rights agreement with us, pursuant towhich these stockholders may demand that we register under the Securities Actfor resale all or a portion of their approximately 31 million shares of our commonstock. Registration of the sale of these shares of our common stock wouldfacilitate their sale into the public market, which could, in turn, cause themarket price of our common stock to decline.

Additionally, shares issuedunder our 2004 Omnibus Stock Plan will be available for sale into the publicmarkets, subject to the vesting of restricted stock and to the exercise offuture issued options, 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 results of operations from the agency business model;

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

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

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

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

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

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

·       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;

·       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. Wemake no prediction or statement about the performance of our shares of commonstock.

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

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

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

***Interest Rate Risk***

We are exposed to interestrate risk on our revolving credit facility. We may from time to time enter intointerest rate swaps, collars or similar instruments with the objective ofreducing our volatility in borrowing costs. We do not use derivative financialinstruments for speculative or trading purposes. We had no derivative financialinstruments outstanding as of December 31, 2004 or June 30, 2005. Inaddition, our variable interest expense is sensitive to changes in the generallevel of interest rates. The weighted average interest rate on our$39.5 million of variable interest debt as of December 31, 2004 wasapproximately 6.35%. The weighted average interest rate on our$27.5 million of variable interest debt as of June 30, 2005 wasapproximately 6.51%.

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We had total interestexpense of $4.0 million and $0.7 million for the three months ended June 30,2004 and 2005, respectively. We had total interest expense of $8.0 million and$1.6 million for the six months ended June 30, 2004 and 2005, respectively.The estimated change in interest expense from a hypothetical 200 basis-pointchange in applicable variable interest rates would have been approximately $0.5million and $15,000 for the three months ended June 30, 2004 and 2005,respectively, and approximately $1.0 million and $66,000 for the six monthsended June 30, 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 marketing, processing 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.

**ITEM 4.**                CONTROLSAND PROCEDURES

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

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**PART II.   OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS.

See “Part I. Item 1.Financial Statements—Notes to the Interim Unaudited Consolidated Financial Statements—Note7—Commitments and Contingencies”, which is incorporated herein by reference.

**ITEM2.**                UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

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

**Issuer Purchase of Equity Securities**
| ** **                                 | ** ** | ** **                    | ** ** | ** **                | ** ** | ** **                    | ** ** | **Approximate **         | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | ** **                    | ** ** | ** **                | ** ** | **Total Number of** | ** ** | **Dollar Value of** | ** ** |
| ** **                                 | ** ** | ** **                    | ** ** | ** **                | ** ** | **Shares Purchased**     | ** ** | **Shares that May** | ** ** |
| ** **                                 | ** ** | ** **                    | ** ** | ** **                | ** ** | **as Part of**      | ** ** | **Yet Be**               | ** ** |
| ** **                                 | ** ** | ** **                    | ** ** | ** **                | ** ** | **Publicly**                  | ** ** | **Purchased Under**      | ** ** |
| ** **                                 | ** ** | **Total Number of** | ** ** | **Average Price**    | ** ** | **Announced Plans**      | ** ** | **the Plans or**    | ** ** |
| **Period(1)**                              | ** ** | ** **                    | ** ** | **Shares Purchased** | ** ** | **Paid per Share**  | ** ** | **or Programs(2)**       | ** ** | **Programs(2)** | ** ** |
| April 1,  2005 to April 30, 2005 |       |                          | —     |                      |       |                          | —     |                          |       |   | — |   |   |   | — |   |   |
| May 1, 2005  to May 31, 2005     |       |                          | 50,000     |                      |       |                          | $          | 12.45                         |       |   |   | 50,000 |   |   |   | $ | 49,377,500 |   |   |
| June 1, 2005  to June 30, 2005   |       |                          | 317,200    |                      |       |                          | $          | 12.02                         |       |   |   | 317,200 |   |   |   | $ | 45,563,449 |   |   |
| Total                                      |       |                          | 367,200    |                      |       |                          | $          | 12.08                         |       |   |   | 367,200 |   |   |   | $ | 45,563,449 |   |   |
|                                            |            |                               |            |                           |            |                               |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Based on trade date, notsettlement date

(2)          OnMay 4, 2005, the Company announced a stock repurchase program pursuant towhich the Company was authorized to repurchase up to $50 million of itsoutstanding common stock.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

Thefollowing table summarizes the votes at the Annual Meeting of our stockholdersheld on May 19, 2005:
| **Matter**                                                                                                       | ** ** | ** ** | ** ** | **For**   | ** ** | **Against** | ** ** | **Withheld** | ** ** | ** Abstain ** | ** ** | **Non-Vote** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|-------------|------------|--------------|------------|-------------------------|------------|--------------|------------|
| Election of Directors:                                                                                           |       |       |       |      |       |        |       |         |       |                    |       |         |       |
| George D. Johnson, Jr.                                                                                      |       | 76,726,561 |       | —    |       | 758,257     |       |         | —     |                    |       | —       |       |
| William M. Webster, IV                                                                                           |       | 77,408,614 |       | —    |       | 76,204      |       |         | —     |                    |       | —       |       |
| Claire L. Arnold                                                                                                 |       | 77,482,774 |       | —    |       | 2,044       |       |         | —     |                    |       | —       |       |
| Stephen K. Benjamin                                                                                              |       | 76,396,678 |       | —    |       | 1,088,140   |       |         | —     |                    |       | —       |       |
| Robert H. Chapman, III                                                                                      |       | 77,482,574 |       | —    |       | 2,244       |       |         | —     |                    |       | —       |       |
| Thomas E. Hannah                                                                                                 |       | 77,482,574 |       | —    |       | 2,244       |       |         | —     |                    |       | —       |       |
| W. Olin Nisbet                                                                                                   |       | 77,466,899 |       | —    |       | 17,919      |       |         | —     |                    |       | —       |       |
| Ratification of  the appointment of PricewaterhouseCoopers LLP as Independent Auditors for the  Company for 2005 |       | 77,285,324 |       | 199,294   |       | —      |       |         | 200        |                    |       | —       |       |
| Ratification of the  Company’s 2004 Omnibus Stock Plan                                                      |       | 66,182,369 |       | 3,105,955 |       | —      |       |         | 3,951      |                    |       | 8,192,543    |       |

 

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**ITEM 6.**                EXHIBITS
| ExhibitNumber | ** **                                                                                                                                                                                                           | ** ** | **Description** |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 31.1          | Certification of Principal Executive Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities  Exchange Act of 1934, as Amended                                                        |
| 31.2          | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as Amended                                                        |
| 32.1          | Certification of  Principal 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  Principal 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.** |
|----------------------|---------------------------------------------------|
| August 15, 2005 | By:                                               | /s/ JOHN I. HILL |
|                 |                                              | John I. Hill |
|                 |                                              | *Executive Vice President and  Chief Financial Officer* |
|                 |                                              | *(Duly authorized officer and  principal financial officer)* |

 

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**INDEX TO EXHIBITS**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                           |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1            |       | Certification of Principal Executive Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as Amended                                                             |
| 31.2            |       | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as Amended                                                                  |
| 32.1            |       | Certification of  Principal 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  Principal 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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