**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

**FORM 10-Q**
| **(****Mark One)** |                                                                   |
|--------------------|------------------------------------------------------------------------|
| x                  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
|               | **SECURITIES EXCHANGE ACT OF 1934**                                    |
|               | For the quarterly period  ended March 31, 2006                    |
| OR                 |
| o                  | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF**    |
|               | **THE SECURITIES EXCHANGE ACT OF 1934**                                |

 

**For the transition periodfrom ____ to ____**

**COMMISSIONFILE NUMBER 001-32363**

**ADVANCE AMERICA, CASHADVANCE CENTERS, INC.**(Exactname of registrant as specified in its charter)
| **Delaware**                    |   | **58-2332639**       |
|---------------------------------|--------|----------------------|
| (State or other jurisdiction of |   | (I.R.S. Employer     |
| incorporation or organization)  |   | Identification  No.) |

 

**135North Church Street**

**Spartanburg, SouthCarolina  29306**

(Address of principal executive offices)

(Zip Code)

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

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (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   Noo

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

Large accelerated filer x  Accelerated filer  o  Non-accelerated filer  o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

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

| **Class**                               | ** ** | **Outstanding  as of May 4, 2006** |
|-----------------------------------------|------------|-----------------------------------------|
| Common Stock, par  value $.01 per share |       | 82,353,514 shares                       |

 

 

 

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**ADVANCE AMERICA,CASH ADVANCE CENTERS, INC.Form 10-QFor the three months ended March 31, 2006**

|                                         | ** ** |                                                                                                               | ** ** | **Page** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|----------|
| **FORWARD-LOOKING  STATEMENTS**         | ** ** | 3                                                                                                             |
| **PART I.  FINANCIAL INFORMATION** |       | 4                                                                                                             |
| Item  1.                                |       | Financial  Statements                                                                                         |       | 4        |
|                                    |       | Unaudited Consolidated Balance Sheets  December 31, 2005 and March 31, 2006                         |       | 4        |
|                                    |       | Interim Unaudited Consolidated  Statements of Income Three Months Ended March 31, 2005 and 2006          |       | 5        |
|                                    |       | Interim Unaudited Consolidated  Statement of Stockholders’ Equity Three Months Ended March 31, 2006 |       | 6        |
|                                    |       | Interim Unaudited Consolidated  Statements of Cash Flows Three Months Ended March 31, 2005 and 2006      |       | 7        |
|                                    |       | Notes to Interim Unaudited  Consolidated Financial Statements                                                 |       | 8        |
| Item 2.                                 |       | Management’s Discussion and Analysis  of Financial Condition and Results of Operations                   |       | 19       |
| Item 3.                                 |       | Quantitative and Qualitative  Disclosures About Market Risk                                                   |       | 38       |
| Item 4.                                 |       | Controls and Procedures                                                                                       |       | 39       |
| **PART II.  OTHER INFORMATION**    |       | 39                                                                                                            |
| Item  1.                                |       | Legal  Proceedings                                                                                            |       | 39       |
| Item 1A.                                |       | Risk  Factors                                                                                                 |       | 39       |
| Item  2.                                |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                  |       | 51       |
| Item  6.                                |       | Exhibits                                                                                                      |       | 52       |
| **SIGNATURES**                          |       | 53                                                                                                            |
| **INDEX TO EXHIBITS**                   |       | 54                                                                                                            |
|                                         |            |                                                                                                               |            |          |  |

 

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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 II. Item 1A. 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 in “Part II. Item 1A. Risk Factors.”

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.

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS.

**Advance America,Cash Advance Centers, Inc.Unaudited Consolidated Balance SheetsDecember 31, 2005 and March 31, 2006(in thousands, except per share data)**

| ** **                                                                                                                                                                                     | ** ** | **December 31,  2005** | ** ** | **March 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                                                                                                     | ** ** |                        | ** ** | ** **               |       | ** ** |   |
| Current assets                                                                                                                                                                                 |       |                        |       |                     |       |   |   |
| Cash and cash equivalents                                                                                                                                                                      |       |                        | $          | 27,259                   |       |   | $ | 30,767 |   |
| Advances and fees receivable, net                                                                                                                                                              |       |                        | 193,468    |                     |       | 153,777 |   |
| Deferred income taxes                                                                                                                                                                          |       |                        | 6,367      |                     |       | 5,600 |   |
| Other current assets                                                                                                                                                                           |       |                        | 5,033      |                     |       | 12,168 |   |
| Total current assets                                                                                                                                                                           |       |                        | 232,127    |                     |       | 202,312 |   |
| Restricted cash                                                                                                                                                                                |       |                        | 10,034     |                     |       | 10,359 |   |
| Property and equipment, net                                                                                                                                                                    |       |                        | 64,990     |                     |       | 63,089 |   |
| Goodwill                                                                                                                                                                                       |       |                        | 122,586    |                     |       | 122,627 |   |
| Other assets                                                                                                                                                                                   |       |                        | 6,651      |                     |       | 6,341 |   |
| Total assets                                                                                                                                                                                   |       |                        | $          | 436,388                  |       |   | $ | 404,728 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                 | ** ** |                        | ** ** | ** **               |       | ** ** |   |
| Current  liabilities                                                                                                                                                                           |       |                        |       |                     |       |   |   |
| Accounts payable                                                                                                                                                                               |       |                        | $          | 9,306                    |       |   | $ | 12,243 |   |
| Accrued liabilities                                                                                                                                                                            |       |                        | 29,895     |                     |       | 25,925 |   |
| Income taxes payable                                                                                                                                                                           |       |                        | 11,349     |                     |       | 3,941 |   |
| Accrual for excess bank losses                                                                                                                                                                 |       |                        | 1,373      |                     |       | 2,920 |   |
| Current portion of long-term debt                                                                                                                                                              |       |                        | 503        |                     |       | 482 |   |
| Total current liabilities                                                                                                                                                                      |       |                        | 52,426     |                     |       | 45,511 |   |
| Revolving credit facility                                                                                                                                                                      |       |                        | 37,933     |                     |       | - |   |
| Long-term debt                                                                                                                                                                                 |       |                        | 6,185      |                     |       | 6,061 |   |
| Deferred income taxes                                                                                                                                                                          |       |                        | 15,706     |                     |       | 16,566 |   |
| Other liabilities                                                                                                                                                                              |       |                        | 44         |                     |       | 89 |   |
| Total liabilities                                                                                                                                                                              |       |                        | 112,294    |                     |       | 68,227 |   |
| Non-controlling interest in variable interest entity                                                                                                                                           |       |                        | 21,069     |                     |       | 21,525 |   |
| 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 82,219 and 82,352 outstanding as  of December 31, 2005 and March 31, 2006, respectively |       |                        | 968        |                     |       | 968 |   |
| Paid in capital                                                                                                                                                                                |       |                        | 282,840    |                     |       | 283,422 |   |
| Retained earnings                                                                                                                                                                              |       |                        | 83,842     |                     |       | 95,211 |   |
| Common stock in treasury (14,602 and 14,469 shares  at cost at  December 31, 2005 and March 31, 2006, respectively)                                                                  |       |                        | (64,625    | )                        |       | (64,625 | ) |
| Total stockholders’ equity                                                                                                                                                                |       |                        | 303,025    |                     |       | 314,976 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                |       |                        | $          | 436,388                  |       |   | $ | 404,728 |   |

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

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**Advance America, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statements of IncomeThree Months Ended March 31, 2005 and 2006(in thousands, except per share data)**

| ** **                                                            | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Revenues:**                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fees and interest  charged to customers                               |       | $          | 105,156    |       | $          | 143,092 |   |
| Marketing,  processing and servicing fees                             |       | 33,227     |       | 9,077      |       |
| Total revenues                                                        |       | 138,383    |       | 152,169    |       |
| Provision for  doubtful accounts and agency bank losses               |       | (10,091    | )          | (11,876    | )          |
| Net revenues                                                          |       | 128,292    |       | 140,293    |       |
| **Center Expenses:**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and related payroll costs                                    |       | 42,048     |       | 46,547     |       |
| Occupancy costs                                                       |       | 19,127     |       | 21,048     |       |
| Center depreciation expense                                           |       | 3,537      |       | 3,953      |       |
| Advertising expense                                                   |       | 5,245      |       | 3,319      |       |
| Other center expenses                                                 |       | 12,437     |       | 15,290     |       |
| Total center expenses                                                 |       | 82,394     |       | 90,157     |       |
| Center gross profit                                                   |       | 45,898     |       | 50,136     |       |
| **Corporate and Other Expenses  (Income):**                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expenses                                  |       | 11,738     |       | 12,848     |       |
| General and  administrative expenses with related parties             |       | 63         |       | 163        |       |
| Corporate  depreciation expense                                       |       | 1,077      |       | 961        |       |
| Interest expense                                                      |       | 826        |       | 907        |       |
| Interest income                                                       |       | (91        | )          | (176       | )          |
| Loss on disposal  of property and equipment                           |       | 96         |       | 208        |       |
| Income before income taxes                                            |       | 32,189     |       | 35,225     |       |
| Income tax  expense                                                   |       | 12,451     |       | 14,313     |       |
| Income before income of consolidated variable  interest entity        |       | 19,738     |       | 20,912     |       |
| Income of  consolidated variable interest entity                      |       | —     |       | (485       | )          |
| Net income                                                            |       | $          | 19,738     |       | $          | 20,427 |   |
| Net income per common share—basic and diluted                    |       | $          | 0.24       |       | $          | 0.25 |   |
| Dividends declared per common share                                   |       | $          | 0.09       |       | $          | 0.11 |   |
| Weighted average  number of shares outstanding—basic and diluted |       | 83,958     |       | 81,827     |       |

 

 

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

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**AdvanceAmerica, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statement of Stockholders’ EquityThree Months Ended March 31, 2006(in thousands, except per share data)**

| ** **                       | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** **           | ** ** | **Common Stock   In Treasury** | ** ** |
|----------------------------------|------------|------------------|------------|--------------------|------------|----------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **Shares**       | ** ** | **Par Value** | ** ** | **Paid-In  Capital** | ** ** | **Retained  Earnings**                        | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Balances, December 31, 2005 |       |             | 96,821     |               |       |                 | $          | 968                                           |       |   | $ | 282,840 |   |   | $ | 83,842 |   |   | (14,602 | ) | $ | (64,625 | ) | $ | 303,025 |   |
| Net income                       |       |             | —     |               |       |                 | —     |                                          |       | — |   |   | 20,427 |   |   | — |   | — |   | 20,427 |   |
| Dividends paid ($0.11 per share) |       |             | —     |               |       |                 | —     |                                          |       | — |   |   | (9,000 | ) |   | — |   | — |   | (9,000 | ) |
| Dividends payable                |       |             | —     |               |       |                 | —     |                                          |       | — |   |   | (58 | ) |   | — |   | — |   | (58 | ) |
| Issuance of restricted stock     |       |             | —     |               |       |                 | —     |                                          |       | — |   |   | — |   |   | 133 |   | — |   | — |   |
| Amortization of restricted stock |       |             | —     |               |       |                 | —     |                                          |       | 363 |   |   | — |   |   | — |   | — |   | 363 |   |
| Stock option expense             |       |             | —     |               |       |                 | —     |                                          |       | 219 |   |   | — |   |   | — |   | — |   | 219 |   |
| Balances, March 31,  2006   |       |             | 96,821     |               |       |                 | $          | 968                                           |       |   | $ | 283,422 |   |   | $ | 95,211 |   |   | (14,469 | ) | $ | (64,625 | ) | $ | 314,976 |   |

 

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

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**Advance America,Cash Advance Centers, Inc.Interim Unaudited Consolidated Statements of Cash FlowsThree Months Ended March 31, 2005 and 2006(in thousands)**

| ** **                                                                                            | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash flows from operating activities**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                            |       | $          | 19,738     |       | $          | 20,427 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisition |       |       |       |       |       |
| Income of consolidated  variable interest entity                                                      |       | —     |       | 485        |       |
| Depreciation                                                                                          |       | 4,614      |       | 4,914      |       |
| Non-cash interest expense                                                                             |       | 245        |       | 246        |       |
| Provisions for doubtful  accounts and agency bank losses                                              |       | 10,091     |       | 11,876     |       |
| Agency bank charge-offs,  net of recoveries                                                           |       | (4,374     | )          | (863       | )          |
| Deferred income taxes                                                                                 |       | 1,289      |       | 1,627      |       |
| Loss on disposal of  property and equipment                                                           |       | 96         |       | 208        |       |
| Amortization of  restricted stock                                                                     |       | 291        |       | 363        |       |
| Stock option expense                                                                                  |       | —     |       | 219        |       |
| Changes in operating assets and liabilities                                                           |       |       |       |       |       |
| Other current assets                                                                                  |       | (269       | )          | (7,135     | )          |
| Other assets                                                                                          |       | (29        | )          | 63         |       |
| Accounts payable                                                                                      |       | (3,760     | )          | (1,365     | )          |
| Accrued liabilities                                                                                   |       | 3,155      |       | (5,366     | )          |
| Income taxes payable                                                                                  |       | 936        |       | (7,409     | )          |
| Net cash provided by  operating activities                                                            |       | 32,023     |       | 18,290     |       |
| **Cash flows from investing activities**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Changes in advances and  fees receivable, net                                                         |       | 16,502     |       | 30,225     |       |
| Changes in restricted  cash                                                                           |       | (39        | )          | (325       | )          |
| Acquisition of business,  net of cash acquired                                                        |       | —     |       | (41        | )          |
| Proceeds from sale of  property and equipment                                                         |       | 38         |       | 26         |       |
| Purchases of property and  equipment                                                                  |       | (2,689     | )          | (1,892     | )          |
| Net cash provided by  investing activities                                                            |       | 13,812     |       | 27,993     |       |
| **Cash flows from financing activities**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payments on revolving  credit facility, net                                                           |       | (39,506    | )          | (37,933    | )          |
| Common stock issuance  costs                                                                          |       | (169       | )          | —     |       |
| Payments on mortgage  payable                                                                         |       | (83        | )          | (87        | )          |
| Payments on note payable                                                                              |       | (27        | )          | (57        | )          |
| Payments of dividends                                                                                 |       | (7,535     | )          | (9,000     | )          |
| Changes in book  overdrafts                                                                           |       | (3,049     | )          | 4,302      |       |
| Net cash used in  financing activities                                                                |       | (50,369    | )          | (42,775    | )          |
| Net (decrease)/increase  in cash and cash equivalents                                                 |       | (4,534     | )          | 3,508      |       |
| Cash and cash  equivalents, beginning of period                                                       |       | 18,224     |       | 27,259     |       |
| Cash and cash  equivalents, end of period                                                             |       | $          | 13,690     |       | $          | 30,767 |   |
| Supplemental disclosures of cash flow information:                                                    |       |       |       |       |       |
| Cash paid during the period for:                                                                      |       |       |       |       |       |
| Interest, net of amounts  capitalized                                                                 |       | $          | 554        |       | $          | 837 |   |
| Income taxes                                                                                          |       | 10,226     |       | 20,095     |       |
| Supplemental schedule of non-cash investing and  financing activity:                                  |       |       |       |       |       |
| Property and equipment  purchases included in accounts payable and accrued expenses                   |       | 1,268      |       | 1,356      |       |
| Restricted stock  dividends payable                                                                   |       | 21         |       | 58         |       |
| Issuance of restricted common stock                                                                   |       | —     |       | 1,918      |       |

 

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

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**Advance America,Cash Advance Centers, Inc.Notes to Interim Unaudited 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 for interim financial information and the rules andregulations of the U.S. Securities and Exchange Commission (the “SEC”). They donot include all information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.Although management believes that the disclosures are adequate to prevent theinformation from being misleading, the interim unaudited consolidated financialstatements should be read in conjunction with the Company’s audited financialstatements in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005 filed with the SEC. In the opinion of the Company’smanagement, all adjustments, consisting of normal recurring accruals considerednecessary for a fair statement, have been included. The results of operationsfor the three months ended March 31, 2006 are not necessarily indicativeof the results that may be expected for future interim periods or the entireyear ended December 31, 2006.

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

**Revenue Recognition**

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

**Concentration ofRisk**

During the three monthsended March 31, 2005 and 2006, the Company marketed, processed andserviced payday cash advances and, beginning in July 2005, installmentloans under the agency business model, and originated payday loans under thestandard business model, to a broad base of individuals in up to 36 states inthe United States. For the three months ended March 31, 2005 and 2006,total revenues within the Company’s five largest states accounted for approximately41% and 46%, respectively, of the Company’s total revenues.

**Income Taxes**

Effective October 1, 2001, AACACI filed anelection to convert to Subchapter S status. Certain subsidiaries also convertedto Subchapter S status as part of this election. The Company terminated theseelections on December 21, 2004.

Income taxes are accountedfor under the asset and liability method for those subsidiaries that remainedC corporations for all periods presented and for the period December 21,2004 through December 31, 2004 for the Company. Deferred tax assets andliabilities are recognized for the future tax 

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consequencesattributable to differences between the financial statement carrying value ofexisting assets and liabilities and their respective tax bases and foroperating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which the related temporary differences are expected tobe recovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in the period that includes the enactmentdate.

**Earnings Per Share**

Basic earnings per shareare computed by dividing net income by the weighted average number of commonshares outstanding for the period excluding unvested restricted stock. Dilutedearnings per share are computed by dividing net income by the weighted averagenumber of common shares outstanding for the period, after adjusting for thedilutive effect of unvested restricted stock and stock options. Unvested sharesof restricted stock of 233,329 and 524,822 at March 31, 2005 and 2006,respectively, and options to purchase 1,280,000 shares of common stock thatwere outstanding at March 31, 2006 were not included in the computation ofdiluted earnings per share since the effect of including these shares ofrestricted stock and stock options would be anti-dilutive.

**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 applicationsfrom 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.

Although the Company markets, processes and servicespayday cash advances and, as of July 2005, installment loans made by thelending banks under the agency business model, each lending bank is responsiblefor evaluating each of its customers’ applications and determining whether thepayday cash advance or installment loan is approved. The Company is notinvolved in the lending banks’ payday cash advance or installment loan approvalprocess or the determination of their approval procedures or criteria, and theCompany generally does not fund or acquire any payday cash advances or installmentloans from the lending banks. The payday cash advances and installment loansare repayable solely to the lending banks and are assets of the lending banks;accordingly, they are not included in the Company’s balance sheet.

During the three months ended March 31, 2005, theCompany was compensated under MP&S Agreements with the lending banks formarketing, processing and servicing the payday cash advances made by thelending banks to their customers in Arkansas, Michigan, North Carolina,Pennsylvania and Texas. During the period ending March 31, 2006, theCompany was compensated under MP&S Agreements with 

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the lending banks formarketing, processing and servicing payday cash advances and installment loansmade by the lending banks to their customers in Pennsylvania and Arkansas. TheMP&S Agreements with lending banks offering payday cash advances in Texasand Michigan were terminated in June and July 2005. In response to anorder from the Commissioner of Banks for North Carolina, the Company’s NorthCarolina subsidiary ceased all business operations in December 2005.Therefore, the Company no longer operates in Michigan, North Carolina or Texasunder the agency business model.

In February 2006, the FDIC instructed the lendingbank for Pennsylvania and the lending bankfor Arkansas to discontinue offering payday cash advances andalternative credit products if they could not adequately address the FDIC’sconcerns. In response to the FDIC’s instructions, the lending bank forPennsylvania ceased its payday cash advance and installment loan originationsas of the close of business on March 27, 2006. The Company expects tocontinue, through August 2006, to service all payday cash advances andinstallment loans that were outstanding in Pennsylvania as of March 27,2006. Additionally, the lending bank forArkansas discontinued offering installment loans on April 8,2006 and intends to discontinue offering payday cash advances on June 24,2006. The Company expects to continue, through September 2006, toservice all payday cash advances and installment loans that areoutstanding in Arkansas as of those dates.

Prior to July 2005,under each MP&S Agreement, the applicable lending bank was contractuallyobligated for the losses on payday cash advances in an amount established as apercentage of the interest and/or fees charged by the banks to their customers.The Company’s marketing, processing and servicing fee increased by the lendingbank’s contractual obligation for losses. If the amount of the lending bank’suncollected payday cash advances and installment loans exceeded the lendingbank’s contractual obligations, the Company was potentially obligated to paythe lending bank the outstanding amount of the advances and loans plus thelending bank’s fees and/or interest receivable on the advances, less thelending bank’s contractually obligated portion of the losses. The outstandingbalances of the lending banks’ advances, installment loans and fees receivableserviced by the Company were approximately $21.9 million and $14.5 million at December 31,2005 and March 31, 2006, respectively. Beginning in July 2005, thelending bank offering payday cash advances and installment loans in NorthCarolina and Arkansas became responsible for any and all losses associated withits payday cash advances and installment loans, while the lending bank offeringpayday cash advances and installment loans in Pennsylvania continued to becontractually obligated only for losses in an amount established as apercentage of the interest and/or fees charged by the lending bank to itscustomers.

**3.      Advancesand Fees Receivable, Net**

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

| ** **                                                          | ** ** | **December 31,  2005** | ** ** | **March 31,  2006** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Payday advances  receivable                                         |       |                        | $          | 165,212                  |       |   | $ | 130,603 |   |
| Fees and interest  receivable                                       |       |                        | 25,945     |                     |       | 20,372 |   |
| Returned items  receivable                                          |       |                        | 35,244     |                     |       | 27,146 |   |
| Loans and fees  receivable of consolidated variable interest entity |       |                        | 24,905     |                     |       | 20,188 |   |
| Lending bank  receivable                                            |       |                        | 2,342      |                     |       | 1,992 |   |
| Other                                                               |       |                        | 3,350      |                     |       | 2,877 |   |
| Allowance for  doubtful accounts                                    |       |                        | (45,585    | )                        |       | (35,558 | ) |
| Unearned revenues                                                   |       |                        | (17,945    | )                        |       | (13,843 | ) |
| Advances and fees  receivable, net                                  |       |                        | $          | 193,468                  |       |   | $ | 153,777 |   |

 

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**4.**                   Allowance forDoubtful Accounts and Accrual for Excess Bank Losses

Changesin the allowance for doubtful accounts for the three months ended March 31,2005 and 2006 were as follows (in thousands):

| ** **                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                |       | $        | 29,221     |     | $          | 45,585 |   |
| Provision for  doubtful accounts |       | 6,606    |       | 9,466    |       |
| Charge-offs                      |       | (19,485  | )          | (30,631  | )          |
| Recoveries                       |       | 7,256    |       | 11,138   |       |
| Ending balance                   |       | $        | 23,598     |     | $          | 35,558 |   |

 

Changesin the accrual for excess bank losses for the three months ended March 31,2005 and 2006 were as follows (in thousands):

| ** **                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                 |       | $        | 3,219      |     | $          | 1,373 |   |
| Provision for  agency bank losses |       | 3,485    |       | 2,410    |       |
| Charge-offs                       |       | (7,803   | )          | (2,164   | )          |
| Recoveries                        |       | 3,429    |       | 1,301    |       |
| Ending balance                    |       | $        | 2,330      |     | $          | 2,920 |   |

 

The provision for agencybank losses consists of those losses for which the lending banks arecontractually obligated and an estimate by which actual losses will differ fromthe lending banks’ contractual obligation.

**5.**                   AccruedLiabilities

Accruedliabilities were as follows (in thousands):

| ** **                           | ** ** | **December 31,  2005** | ** ** | **March 31,  2006** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Employee  compensation               |       |                        | $          | 8,819                    |       |   |   | $ | 7,059 |   |   |
| Workers’  compensation          |       |                        | 4,120      |                     |       |   | 4,258 |   |   |
| Health and dental  insurance         |       |                        | 3,352      |                     |       |   | 3,266 |   |   |
| Lease smoothing                      |       |                        | 2,357      |                     |       |   | 2,430 |   |   |
| Construction in  progress            |       |                        | 3,071      |                     |       |   | 1,356 |   |   |
| Branch closing  costs                |       |                        | 2,235      |                     |       |   | 1,294 |   |   |
| Accounting and  tax                  |       |                        | 1,362      |                     |       |   | 1,016 |   |   |
| Property, sales  and franchise taxes |       |                        | 676        |                     |       |   | 634 |   |   |
| Legal                                |       |                        | 583        |                     |       |   | 1,084 |   |   |
| Other                                |       |                        | 3,320      |                     |       |   | 3,528 |   |   |
| Total                                |       |                        | $          | 29,895                   |       |   |   | $ | 25,925 |   |   |

 

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**6.**                   Income Taxes

Incometax expense for the three months ended March 31, 2005 and 2006 consistedof the following (in thousands):

| ** ** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Current    |       |     |       |     |       |
| Federal    |       | $        | 9,312      |     | $          | 10,584 |   |
| State      |       | 1,850    |       | 2,102    |       |
|       |       | 11,162   |       | 12,686   |       |
| Deferred   |       | 1,289    |       | 1,627    |       |
| Total      |       | $        | 12,451     |     | $          | 14,313 |   |

 

Areconciliation of the statutory federal income tax rate and the Company’seffective income tax rate for the three months ended March 31, 2005 and2006 follows:

| ** **                 | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Statutory income  tax rate |       | 35.0     | %          | 35.0     | %          |
| State income  taxes, net   |       | 4.3      |       | 4.4      |       |
| Other                      |       | (0.6     | )          | 1.2      |       |
| Effective income tax  rate |       | 38.7     | %          | 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,  2005** | ** ** | **March 31,  2006** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Deferred tax  assets                          |       |                        |       |                     |       |   |   |
| Accrued expenses                              |       |                        | $          | 4,113                    |       |   | $ | 3,938 |   |
| Bad debts                                     |       |                        | 2,491      |                     |       | 2,457 |   |
| Net operating loss carryforwards              |       |                        | 631        |                     |       | 631 |   |
| Other                                         |       |                        | 46         |                     |       | 189 |   |
| Total deferred tax assets                     |       |                        | 7,281      |                     |       | 7,215 |   |
| Deferred tax  liabilities                     |       |                        |       |                     |       |   |   |
| Goodwill                                      |       |                        | (10,743    | )                        |       | (11,460 | ) |
| Depreciation                                  |       |                        | (3,731     | )                        |       | (4,123 | ) |
| Prepaid expenses                              |       |                        | (1,477     | )                        |       | (1,929 | ) |
| Book versus tax basis difference for aircraft |       |                        | (669       | )                        |       | (669 | ) |
| Total deferred tax liabilities                |       |                        | (16,620    | )                        |       | (18,181 | ) |
| Net deferred tax  liability                   |       |                        | $          | (9,339                   | )          |   | $ | (10,966 | ) |

 

From October 1, 2001 through December 20,2004, AACACI and substantially all of its subsidiaries (the “Subchapter SCompanies”) were collectively treated for federal and most state income taxpurposes as an S corporation under the Internal Revenue Code and comparablestate laws. As a result, the Subchapter S Companies’ earnings were taxed forfederal and most state income tax purposes directly to AACACI’s stockholdersrather than to the Subchapter S Companies. On December 21, 2004, theSubchapter S Companies revoked their status as an S corporation and are nowtaxed as C corporations. As a result of the revocation of the Subchapter SCompanies’ S corporation status, AACACI recorded a net deferred tax liabilityand corresponding income tax expense on the revocation date of $8.4 million.

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Until the final income tax returns of the Subchapter S Companies as an S corporationare filed, the amount of deferred income tax liability recorded as a result of the Subchapter S Companies’ conversion from an S status to a C status remainsan estimate. Any change in this deferred income tax liability will result in achange in income tax expense when the final S corporation income tax returnsare filed. This should occur in the third quarter of 2006.

As of December 31,2005 and March 31, 2006, the Company had net operating loss carryforwardsfor federal and state income tax purposes totaling approximately $0.8 million,which will begin to expire in 2014. A valuation allowance has not been recordedbecause management believes it is more likely than not that the entire deferredtax asset will be realized. As of December 31, 2005 and March 31,2006, the Company had credit carryforwards for federal and state income taxpurposes totaling approximately $0.4 million, which will begin to expire in2010.

**7.**                   Commitments andContingencies

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

*BankWest, Inc.et al. vs. Baker et al.*

A Georgia statute, effective May 2004,essentially prohibits payday cash advance services in the state and effectivelyrestricts the Company’s ability to act as a marketing, processing and servicingagent for a lending bank in the state. In April 2004, the Company, alongwith a lending bank, BankWest, and other banks and agents involved in providingpayday cash advances in Georgia, filed an action in the U.S. District Court forthe Northern District of Georgia against the Attorney General of Georgia andthe Georgia Secretary of State (“*BankWest vs. Baker*”),seeking a declaration that the Georgia anti-payday cash advance law isunconstitutional, is preempted by federal law and should not be enforced. TheDistrict Court denied the request. As a result, BankWest and the Company’sGeorgia subsidiary suspended operations in Georgia in 2004. The District Court’sorder was appealed to the U.S. Court of Appeals for the Eleventh Circuit, andin June 2005 a two judge majority of a three judge panel affirmed theDistrict Court’s order. In December 2005, the Eleventh Circuit Court grantedPetitions for Rehearing En Banc, vacated the majority’s opinion and set thematter for oral argument**in June 2006. The State fileda suggestion of mootness with the Eleventh Circuit Court as a result of theFDIC’s actions that resulted in the banks discontinuing offering payday cash advancesand ending the marketing, processing and servicing agreements with theiragents. As a result, the Eleventh Circuit Court vacated its order grantingrehearing en banc and remanded the appeal to the three judge panel to addressthe mootness issue. On April 28, 2006, the three judge panel concludedthat the issue was moot and vacated its prior decision as well as its priordenial and order of the District Court. The Company anticipates this matterwill now likely be remanded to the District Court where the lawsuit is stillpending.

*Kucan et al. vs.Advance America, Cash Advance Centers of North Carolina, Inc. et al.*

On July 27, 2004, John Kucan, Welsie Torrence andTerry Coates, each of whom was a customer of Republic Bank & TrustCompany (“Republic”), the lending bank for whom the Company marketed, processedand serviced payday cash advances in North Carolina, filed a putative classaction lawsuit in the General Court of Justice for the Superior Court Divisionfor New Hanover County, North Carolina against the Company and William M.Webster, IV, the Company’s Vice Chairman, alleging, among other things, thatthe relationship between the Company’s North Carolina subsidiary and Republicwas a “rent a charter” relationship and therefore Republic was not the “truelender” on the payday cash advances it offered. The lawsuit also claims thatthe payday cash advances were made, administered and collected in violation ofnumerous North Carolina consumer protection laws. The lawsuit seeks aninjunction barring the subsidiary from continuing to do business in NorthCarolina, the return of the principal amount of the 

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payday cash advances madeto the plaintiff class since August 2001, the return of any interest orfees associated with those advances, treble damages, attorneys’ fees and otherunspecified costs. On December 30, 2005, the court issued an Ordergranting defendants’ motion for arbitration, staying the proceedings anddenying class certification. The plaintiffs have appealed this Order to theNorth Carolina Court of Appeals and the appeal is pending.

*King and Strong vs.Advance America, Cash Advance Centers of Georgia, Inc. et al.*

On August 6, 2004, Tahisha King and James E.Strong, who were customers of BankWest, the lending bank for whom the Companymarketed, processed and serviced payday cash advances in Georgia, filed aputative class action lawsuit in the State Court of Cobb County, Georgiaagainst the Company, Mr. Webster and other unnamed officers, directors,owners and “stakeholders,” alleging various causes of action including that theGeorgia subsidiary made illegal payday loans in Georgia in violation of Georgia’susury law, the Georgia Industrial Loan Act and Georgia’s Racketeer Influencedand Corrupt Organizations Act. The complaint alleges that BankWest was not the “truelender” on the advances that were marketed, processed and serviced for BankWestin Georgia and the Company was the “de facto” lender. The complaint seekscompensatory damages, attorneys’ fees, punitive damages and the trebling of anycompensatory damages. The Company and the other defendants denied theplaintiffs’ claims and asserted that all of the claims are subject to mandatoryand binding individual arbitration pursuant to arbitration agreements signed byeach plaintiff. In April 2006, the State Court of Cobb County entered aconsent order, which was jointly submitted by the parties, whereby the partiesagreed and consented to arbitration of all claims raised by plaintiffs in thisaction and to stay all proceedings pending the outcome of arbitration onplaintiffs’ claims. The plaintiffs have filed a Demand for Arbitration withJAMS, an alternative dispute resolution forum in Atlanta, Georgia, seeking toarbitrate their claims in a class action or representative status. The Company intendsto continue to deny plaintiffs’ claims and resist plaintiffs’ efforts toconduct class arbitration.

*Glasscock vs.Advance America, Cash Advance Centers of Georgia, Inc. et al.*

The Company’s Georgia subsidiary is involved inanother case in Georgia that, although not a class action lawsuit, containsessentially the same allegations as the King and Strong case. On March 10,2003, Angela Glasscock, a customer of BankWest, filed an adversary proceedingin the U.S. Bankruptcy Court for the Southern District of Georgia alleging thatthe Georgia subsidiary was making payday cash advances in Georgia in violationof the Georgia Industrial Loan Act. BankWest intervened into the case andsubsequently both the subsidiary and BankWest filed a motion for summary judgmentwhich was granted in September 2005. In its holding, the court ruled thatBankWest, was the “true lender.” Plaintiffs have appealed this ruling to theUnited States District Court where it is now pending. Although the amount incontroversy in the case is only $350, the underlying claims of Ms. Glasscock,if validated by the appellate court, could serve as a basis for future claimsagainst the Company.

*Betts and Reuter vs.McKenzie Check Advance of Florida, LLC et al.*

The Company, the Company’s subsidiary, McKenzie CheckAdvance of Florida, LLC (“McKenzie”), and certain officers, directors andemployees are defendants in a putative class-action lawsuit commenced byformer customers, Wendy Betts and Donna Reuter, in Florida. This putative classaction was filed by Ms. Betts and Ms. Reuter in February 2001 inthe Circuit Court of Palm Beach County and alleges that McKenzie, by andthrough the actions of certain officers, directors and employees, engaged inunfair and deceptive trade practices and violated Florida’s criminal usurystatute, Consumer Finance Act, and Racketeer Influenced and CorruptOrganizations Act. The suit seeks unspecified damages, and McKenzie or theother defendants could be required to refund fees and/or interest collected, refundthe principal amount of payday cash advances, pay multiple damages and payother monetary penalties.

Defendants’ motionfor summary judgment was originally granted as to Ms. Betts’ claims butlater reversed by a Florida appellate court. On appeal, the Florida SupremeCourt issued an adverse opinion on 

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April 27,2006 holding that the deferred presentment transactions between Betts and theCompany were governed by Florida’s usury laws and not governed by the FloridaMoney Transmitters’ Code as the Company asserted. The case has been remanded tothe Circuit Court by the Fourth District Court of Appeals where the Companyanticipates the parties will proceed with litigating the case. The Company willfile an Answer in which it asserts its affirmative defenses. Although thisruling by the Florida Supreme Court was adverse to the Company, it is too earlyin this proceeding to identify the amount of any potential losses to theCompany, if any, since the case is still in its early stages and severalmaterial issues have yet to be addressed by the courts.

Ms. Reuters’ claims were originally dismissed anddefendants’ motion to compel arbitration was granted by the state trial court.This ruling is currently on appeal to the Florida Supreme Court. The FloridaSupreme Court stayed the appeal of Ms. Reuter’s claims pending the U.S.Supreme Court’s review of *Buckeye Check Cashing, Inc.*,*v. Cardegna, et al.* (“*Buckeye*”) which held that a substantially similararbitration agreement was unenforceable. On February 21, 2006, the U.S.Supreme Court reversed the Florida Supreme Court’s holding in *Buckeye*. The U.S. Supreme Court held that where a contractcontained an arbitration clause, any challenge to the validity of the contractis a question for an arbitrator rather than a state or federal court. TheCompany believes the U.S. Supreme Court’s decision in *Buckeye*should be binding on Ms. Reuter’s claims and that the Florida SupremeCourt will reach a decision that is consistent with the U.S. Supreme Court’sruling in *Buckeye*.

*Reuter and Bettsvs. Advance America, Cash Advance Centers of Florida, Inc. et al.*

A second Florida lawsuit was filed in August 2004in the Circuit Court of Palm Beach County by former customers Gerald Betts and Ms. Reuteragainst the Company, the Company’s subsidiary, Advance America, Cash AdvanceCenters of Florida, Inc., and certain officers and directors. Theallegations are nearly identical to those alleged in the first Betts and Reuterlawsuit. The Company filed motions to dismiss, to stay the proceedings pendingdetermination of dispositive actions by the Florida Supreme Court in theoriginal Betts and Reuter case and to compel arbitration. Proceedings in thiscase were stayed pending the disposition of the appeals in the original Bettsand Reuter case. Once the Florida Supreme Court’s April 27th ruling in the original Betts and Reuter casebecomes final, the Company anticipates the parties will proceed with litigatingthe case and the court will review and consider the Company’s motions todismiss and to compel arbitration that were previously filed.

*North CarolinaCommissioner of Banks Investigation*

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 andthe lending bank in North Carolina, Republic, to determine whether operationsin North Carolina are in compliance with North Carolina law. On February 1,2005, the Commissioner of Banks initiated a contested case against the Company’sNorth Carolina subsidiary for alleged violations of the North Carolina ConsumerFinance Act. On December 22, 2005, at the conclusion of the contestedcase, the Commissioner of Banks ordered that the Company’s North Carolinasubsidiary immediately cease and desist operating. A Notice of Appeal to theNorth Carolina State Banking Commission was immediately filed and the appeal ispending. In accordance with the Commissioner of Banks’ Order, the Company’sNorth Carolina subsidiary ceased all business operations on December 22,2005.

*New Mexico Attorney General Proposed Rules andRegulations Governing the Extension of Credit For Small Loans*

In February 2006, the Company joined four other paydaylenders in a lawsuit against the New Mexico Attorney General requestingimmediate injunctive relief from the enforcement of the Proposed Rules andRegulations Governing the Extension of Credit for Small Loans. The Proposed Rules recently

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promulgated by theAttorney General attempt to severely limit the payday loan industry in NewMexico. The parties have mutually agreed to stay any further proceedingspending regulations that the Governor of New Mexico, Bill Richardson, haspublicly identified he intends to implement through the Financial InstitutionsDivision of the New Mexico Regulation and Licensing Department. If the Companyis unsuccessful in its attempt to obtain temporary or permanent relief from theProposed Rules, the Company will be unable to operate profitably in New Mexico.

*Department of LaborInvestigations*

The United StatesDepartment of Labor initiated three investigations in 2005 and one in 2006 fromits district offices in the field regarding the payment of overtime wages tocertain employees. The Company has been cooperating with these ongoinginvestigations that could result in the payment of back wages, civil monetarypenalties and other enforcement action.

*Other Matters*

The Company is also involved in other litigation andadministrative proceedings. This litigation includes contractual disputes, employeeclaims for workers’ compensation, wrongful termination, harassment, discrimination,payment of wages due and customer claims relating to collection practices andviolations of state and/or federal consumer protections laws.

The amount of loss and/orthe probability of an unfavorable outcome, if any, cannot be reasonablyestimated. Accordingly, no accrual has been recorded for any of the abovematters as of March 31, 2006.

**8.             Capital Stock and Stock-BasedCompensation Plans**

On May 4, 2005, the Company announced that itsBoard of Directors had approved a program authorizing the repurchase by theCompany of up to $50.0 million of its currently outstanding common stock.During the three months ended March 31, 2006, the Company did notrepurchase any shares pursuant to its stock repurchase program.

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

The Company’s 2004 Omnibus Stock Plan provides for thegranting of restricted shares, stock options or other stock awards to certaindirectors, officers and other key employees of the Company.

During the quarter ended March 31, 2006, theCompany issued to certain executives 133,334 restricted shares under the 2004Omnibus Stock Plan. These restricted shares vest in three-, five- or eight-yearequal annual installments beginning on the first anniversary of the grant.

During the quarter ended March 31, 2006, theCompany granted to certain executives stock options to purchase 80,000 sharesof the Company’s common stock at an exercise price of $14.70 per share. Theseoptions vest in five equal annual installments beginning on the firstanniversary of the grant and were granted under the Company’s 2004 OmnibusStock Plan.

The weighted-average fairvalue of the options granted during the quarter ended March 31, 2006 was$5.29 per option. The fair value was estimated on the date of grant using theBlack-Scholes option pricing model using the following assumptions: dividendyield of 3.6%, weighted average risk-free interest rate of 4.62%, expectedvolatility of 49% and a weighted average expected life of 5.41 years. Theseoptions expire ten years from the date of grant.

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The grant date fair value of all shares of restrictedstock was based on the market value of the Company’s common stock on the datesof grant. These amounts are being amortized and charged to expense ratably overeach award’s respective vesting period. All stock options were granted with anexercise price equal to the market value of the Company’s common stock on thedates of grant. The weighted-average fair values of all stock options are beingcharged to expense ratably over each award’s respective vesting period.

Asummary of the Company’s authorized and available shares, activity and theweighted average stock option exercise prices under its stock-basedcompensation plans follows:

| ** **                             | ** ** | ** **     | ** ** | **Outstanding**       | ** ** | ** **         | ** ** | **Weighted  Average**         | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Authorized** | ** ** | **Restricted  Stock** | ** ** | **Stock  Options** | ** ** | **Available  For Grant** | ** ** | **Exercise  Price** | ** ** |
| Outstanding at  December 31, 2005 |       | 5,200,000      |       |                  | 457,043    |               |       | 1,200,000                     |       | 3,542,957 |   |   | $ | 12.47 |   |   |
| Authorized                             |       | —         |       |                  | —     |               |       | —                        |       | — |   |   | — |   |   |
| Granted                                |       | —         |       |                  | 133,334    |               |       | 80,000                        |       | (213,334 | ) |   | $ | 14.70 |   |   |
| Exercised                              |       | —         |       |                  | —     |               |       | —                        |       | — |   |   | — |   |   |
| Canceled                               |       | —         |       |                  | —     |               |       | —                        |       | — |   |   | — |   |   |
| Outstanding at  March 31, 2006    |       | 5,200,000      |       |                  | 590,377    |               |       | 1,280,000                     |       | 3,329,623 |   |   | $ | 12.61 |   |   |

 

Exercise prices for stock options outstanding at March 31,2006 ranged from $12.11 to $14.70. There were no options exercisable as of March 31,2006.

Asummary of the Company’s restricted stock activity and the weighted averagegrant-date fair values follows:

| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Nonvested at  December 31, 2005 |       | 391,488    |       |                                   | $          | 12.69 |   |   |
| Granted                              |       | 133,334    |       |                                   | 14.38      |   |   |
| Vested                               |       | —     |       |                                   | —     |   |   |
| Forfeited                            |       | —     |       |                                   | —     |   |   |
| Nonvested at  March 31, 2006    |       | 524,822    |       |                                   | $          | 13.12 |   |   |

 

Asummary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three months ended March 31, 2005 and 2006 follows (in thousands):

| ** **                              | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Stock-based  compensation expense:      |       |     |       |     |       |
| Restricted stock                        |       | $        | 291        |     | $          | 363 |   |
| Stock options                           |       | —   |       | 219      |       |
| Total stock-based compensation  expense |       | $        | 291        |     | $          | 582 |   |

 

As of March 31, 2006,the total compensation cost not yet recognized related to nonvested stockawards under the Company’s plans is approximately $12.3 million. The weightedaverage period over which this expense is expected to be recognized isapproximately 6.3 years.

**9.   Transactionswith Variable Interest Entity**

Beginning in July 2005, the Company ceasedconducting business under the agency business model in its 208 centers inTexas, and began conducting business in those centers through a wholly ownedsubsidiary 

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registered as a CreditServices Organization (“CSO”) under Texas law. As a CSO, the Company offers 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. In connection with commencing operations as aCSO in Texas, the Company has entered into a credit services organizationagreement (“CSO Agreement”) with an unaffiliated 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 loansor related fees that are not collected from such customers.

Under the CSO model, the lender determines whether toapprove the loan and establishes all of the loan underwriting criteria. All ofthe terms, conditions and features of the loan agreements between the lenderand the customers are determined by the lender. The customer writes a personalcheck payable to the lender in the amount of the loan, including interest forthe anticipated duration of the loan and the CSO fee, which the Company holdson behalf of the lender pending repayment of the loan. Under the CSO Agreement,the Company agrees to reimburse the lender for the full amount of the loans andall related fees that are not paid by the customers.

When the loan becomes due, the customer returns to theCSO center to repay the loan, the Company returns the customer’s check, and theCompany deposits the loan payment in the lender’s account. If the customer doesnot return to the CSO center to repay the loan, the Company may then begincollection efforts to obtain from the customer payment of the loan and anyapplicable late and non-sufficient funds (“NSF”) fees. If the Company isunsuccessful in collecting any payments for the lender, the Company willreimburse the lender, and then may continue its collection efforts with respectto all amounts due from the customer. Under the CSO Agreement, the Company iscontractually obligated for all losses incurred by the lender with respect toloans it makes to customers referred by the Company.

The Company has determined that the lender’ssubsidiary is a variable interest entity (“VIE”) under FIN 46R. The Company hasneither an equity interest nor voting rights in the lender’s subsidiary and hasno input into the management of the lender’s subsidiary. However, the Companyhas determined that it is the primary beneficiary of the VIE because theCompany has committed to reimburse the lender for the full amount of the loansand all related fees that are not paid by the customers. As a result, theCompany has consolidated this lender into the Company’s financial statements.

The impact of theconsolidation of this VIE on the Company’s March 31, 2006 consolidatedbalance sheet was to increase cash and cash equivalents by approximately $6.1million, increase advances and fees receivable, net by approximately $15.5million, increase accrued liabilities by approximately $70.0 thousand andincrease non-controlling interest in variable interest entity by $21.5 million.The impact of the consolidation of this VIE on the Company’s consolidatedstatements of income for the three months ended March 31, 2006 was toincrease net revenues by approximately $0.7 million and increase other centerexpenses by approximately $0.2 million, the net effect of which was an increasein income of the consolidated variable interest entity of approximately $0.5million.

**10.   SubsequentEvents**

On April 8, 2006, in response to the FDIC’s mostrecent instructions, the lending bank for Arkansas discontinued offeringinstallment loans. This lending bank also intends to discontinue offeringpayday cash advances on June 24, 2006. The Company expects to continue,through September 2006, to service all of this lending bank’s payday cashadvances and installment loans that are outstanding as of these dates.

In April 2006, in response to the lending bank forPennsylvania ceasing to originate payday cash advances and installment loans, theCompany began offering payday cash advance services directly to Pennsylvaniacustomers who are in good standing without charging fees, other than applicableNSF fees. The Company is doing so on an interim basis while the Company  studies alternative methods for conductingbusiness in Pennsylvania.

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On April 13, 2006, Raymond King, who was acustomer of  the lending bank for  Pennsylvania, filed a declaratory judgmentaction in the Court of Common Pleas in Philadelphia County against the Company’sPennsylvania subsidiary. The plaintiff is seeking to void his Consumer LoanAgreements with the lending bank and obtain a declaration that the arbitrationclause that prohibits a class action lawsuit is unenforceable and that he mayfile a class action lawsuit for alleged violation of various Pennsylvaniastatutes. The Company has retained local counsel, but has not yet filed an answer.

On April 26, 2006,the Company’s Board of Directors declared a cash dividend of $0.11 per share ofcommon stock, payable on June 9, 2006 to shareholders of record on May 26,2006.

**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.”This discussion contains forward-looking statements that involve risks anduncertainties. Our actual results could differ materially from thoseanticipated by these forward-looking statements. Please see “Part II. Item1A. Risk Factors” and “Forward-Looking Statements” for discussions of theuncertainties, risks and assumptions 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 centers operated. Our centers provide, directly or onbehalf of unaffiliated third-party lending banks, small-denomination,short-term, unsecured cash advances that are typically due on the customers’next payday. As of March 31, 2006, we operated 2,640 centers in 36 states.

In most states we conduct our business under theauthority of a variety of enabling state statutes including payday advance,check-cashing, small loan and credit service organization state laws (which werefer to as the standard business model). In other states in which we conductbusiness, we act as a marketing, processing and servicing agent through ourcenters for FDIC supervised, 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. As of March 31, 2006, we were offering paydaycash advances under enabling state statutes in 2,509 of our 2,640 centers andserving as agent for the lending banks under the agency business model in our131 centers located in Arkansas and Pennsylvania.

We havehistorically derived our revenues from (1) fees and/or interest paid to usdirectly by our customers under the standard business model and (2) marketing,processing and servicing fees paid to us by the lending banks under the agencybusiness model. Our total revenues for thethree months ended March 31, 2005 and 2006 consisted of (dollars inmillions):

| ** **                                | ** ** | **2005**    | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|
| ** **                                | ** ** | **Dollars** | ** ** | **%**    | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest  charged to customers   |       | $           | 105.2      |     | 76.0       |   | $ | 143.1 |   | 94.0 |   |
| Marketing,  processing and servicing fees |       | 33.2        |       | 24.0     |       | 9.1 |   | 6.0 |   |
| Total revenues                            |       | $           | 138.4      |     | 100.0      |   | $ | 152.2 |   | 100.0 |   |

 

Our expenses relateprimarily to the operation of our centers. These expenses include salaries andrelated payroll costs, occupancy expense related to our leased centers, centerdepreciation expense, advertising expense and other center expenses thatconsist principally of costs related to center closings, 

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communications,delivery, supplies, travel, bank charges, various compliance and collectioncosts and costs associated with theft.

***Operational Changes in Certain States***

During 2005, in connectionwith changes made by certain lending banks in response to the FDIC’s increasedscrutiny of the agency business model, we modified our operations in the fivestates where, during the first quarter of 2005, we conducted business under theagency business model.

**Modified MP&SAgreements in Arkansas, Pennsylvania and North Carolina**

In March 2005, the FDIC issued revised guidanceto FDIC supervised institutions that offer payday cash advances (the “RevisedGuidance”), including the lending banks for which we then acted as marketing,processing and servicing agent. The Revised Guidance limits the frequency ofcustomer usage of payday cash advances and the period that a customer may havepayday cash advances outstanding from any lender, requires the offering of alternativelonger-term credit products andcalls for more stringent underwriting standards. In response to theRevised Guidance, certain lending banks adopted new policies and procedures andbegan offering installment loans, which generally have bi-weekly paymentsamortized over a four-month period. Dependingon the lending bank, fees charged to the customer for the installment loanproduct range from $55 to $65 per $100 advance plus an additional originationfee of $25 to $30 per transaction. Although the total fee is higher than for apayday cash advance, total revenues are reduced because of the longer durationof the installment loans. In connection with these changes, we revised orentered into new MP&S Agreements with lending banks in Arkansas, North Carolinaand Pennsylvania to operate as marketing, processing and servicing agentfor payday cash advances and installment loans made by those lending banks.

Pursuant to the newMP&S Agreements with respect to Arkansas and North Carolina, the lendingbank became contractually obligated for all losses on payday cash advances andinstallment loans to its customers. Pursuant to the revised MP&S Agreementwith respect to Pennsylvania, the lending bank remained contractually obligatedfor the losses on its payday cash advances and installment loans in an amountestablished as a percentage of the fees and interest charged by the lendingbank to its customers.

**New Operations inMichigan and Texas**

Effective June 2005, we terminated our priorMP&S Agreement with the lending bank for Michigan. Under the terminatedagreement, the lending bank recorded advances and fees receivable on itsbalance sheet and was contractually obligated for uncollectible accounts inamounts determined as a percentage of fees and interest charged by the lendingbank to its customers. Therefore, our balance sheet included, as an accrual forexcess bank losses, the  amount by whichestimated losses exceeded the lending bank’s contractual obligation. Inconnection with terminating this MP&S Agreement, we purchased from thelending bank for Michigan its Michigan payday cash advance accounts receivablefor approximately $7.7 million and hence the lending bank no longer has anyobligations for losses with respect to those accounts.

After terminating our prior MP&S Agreement forMichigan, we began offering check-cashing and deferred-presentment servicesdirectly to customers in our Michigan centers. The approval process for us toprovide customers with check-cashing and deferred-presentment services inMichigan is similar to the process we use to provide payday cash advances underour standard business model. The amount of the fee we charge varies based onwhether the check cashed is a government check, a payroll check or a personalcheck, and for a personal check we charge interest for the period of time thatwe agree with the customer to hold the check before presenting it to the bank.Customers also have the opportunity to repurchase the check from us. Theprofitability of our check-cashing and deferred-presentment business andaverage fees, check amounts and duration for which we hold checks is similar tothe corresponding amounts under our 

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standard business model.****Following this change in operations in Michigan, we includeour Michigan centers and our check-cashing and deferred-presentment businessunder our standard business model.

Because of the recent adoption of a new affirmativepayday lending law in Michigan, we expect to begin offering payday cashadvances in Michigan some time in the middle of 2006.   Due to the limits on fees and chargesincluded in the initial version of that law, we expect that our revenues inMichigan will be lower when the law is initially implemented.

In the beginning of July 2005, we terminated ourprior MP&S Agreement with the lending bank for Texas and began conductingbusiness in those centers through a wholly owned subsidiary that has registeredas a Credit Services Organization (“CSO”) under Texas law. 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 athird-party lender. In connection with commencing operations as a CSO in Texas,we entered into a credit services organization agreement (“CSO Agreement”) withan unaffiliated third-party lender. The CSO Agreement governs the terms bywhich we refer customers in Texas to that lender, on a non-exclusive basis, fora possible extension of credit, process loan applications and commit toreimburse the lender for any loans or related fees that are not collected fromsuch customers.

Under the CSO model, the lender determines whether toapprove the loan and establishes all of the loan underwriting criteria. Thelender also determines all of the terms, conditions and features of the loanagreements between the lender and the customers. The customer writes a personalcheck payable to the lender in the amount of the loan, including interest forthe anticipated duration of the loan and the credit services fee owed to us,which we hold on behalf of the lender pending repayment of the loan. We alsoassist customers by agreeing to reimburse the lender for the full amount of theloan and all related fees (other than the credit service fee) that are not collectedfrom the customers.

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

Under our prior MP&SAgreement with the lending bank in Texas for payday cash advances, the lendingbank was contractually obligated for uncollectible payday cash advance accountsin amounts determined as a percentage of fees and interest charged by the lendingbank to its customers, which historically have been sufficient in Texas tocover all losses incurred. Under the CSO Agreement, we are contractuallyobligated for all losses incurred by the lender with respect to loans it makesto customers referred by us.

***Suspensions and Closings***

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. Accordingly, during the second quarter of 2004, we suspended operationsat our 89 centers in Georgia, three of which we closed in 2004 and theremaining 86 of which we closed in 2005. Our Georgia operations have notgenerated revenue since we ceased operations there in May 2004. Werecorded an impairment of assets charge in 2004 of approximately $1.3 millionto write-off the undepreciated costs of the Georgia centers, and the leasecancellation and other closing costs were approximately $0.4 million in 2005.

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Thefollowing is a summary of financial information for our operations in Georgiafor the three months ended March 31, 2005 and 2006 (in thousands):

| ** **                  | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Net revenues                |       | $        | —     |     | $          | — |   |
| Total center  expenses      |       | 735      |       | 72       |       |
| Center gross  profit/(loss) |       | $        | (735       | )        | $          | (72 | ) |

 

In August 2004, the North Carolina AttorneyGeneral’s office, in conjunction with the Commissioner of Banks for NorthCarolina, commanded an investigation of the agency business model operations ofour centers in North Carolina. In September 2005, the lending bank forwhich we marketed, processed and serviced payday cash advances and installmentloans in our North Carolina centers suspended its payday cash advance andinstallment loan originations. On December 22, 2005, the North CarolinaCommissioner of Banks issued an order directing us to cease operation of ourcenters in the state. As a result, we ceased all of our business activities inNorth Carolina and closed 117 centers.

Thefollowing is a summary of financial information for our operations in NorthCarolina for the three months ended March 31, 2005 and 2006 (inthousands):

| ** **                  | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Net revenues                |       | $        | 6,513      |     | $          | (35 | ) |
| Total center  expenses      |       | 3,757    |       | 792      |       |
| Center gross  profit/(loss) |       | $        | 2,756      |     | $          | (827 | ) |

 

In February 2006, the FDIC instructed the lendingbanks for which we market, process and service payday cash advances andinstallment loans in Pennsylvania and Arkansas,to discontinue offering payday cash advances and alternative credit products ifthey could not adequately address the FDIC’s concerns.

In response, the lending bank for Pennsylvania ceasedits payday cash advance and installment loan originations as of the close ofbusiness on March 27, 2006. We expect to continue, throughAugust 2006, to service all of this lending bank’s payday cash advancesand installment loans that were outstanding as of March 27, 2006.

Thefollowing is a summary of financial information for our operations inPennsylvania for the three months ended March 31, 2005 and 2006 (inthousands):

| ** **             | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Net revenues           |       | $        | 9,368      |     | $          | 6,900 |   |
| Total center  expenses |       | 3,993    |       | 4,012    |       |
| Center gross profit    |       | $        | 5,375      |     | $          | 2,888 |   |

 

In addition, the lending bank for Arkansasdiscontinued offering installment loans on April 8, 2006 andintends to discontinue offering payday cash advances on June 24, 2006. Weexpect to continue, through September 2006, to service all of thislending bank’s payday cash advances and installment loans that are outstandingas of these dates.

 

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Thefollowing is a summary of financial information for our operations in Arkansasfor the three months ended March 31, 2005 and 2006 (in thousands):

| ** **             | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Net revenues           |       | $        | 1,569      |     | $          | 1,348 |   |
| Total center  expenses |       | 908      |       | 998      |       |
| Center gross profit    |       | $        | 661        |     | $          | 350 |   |

 

Pursuant to the decision by the lending banks to ceaseoriginations, the revenue from  paydaycash advances and installment loans in Arkansas and Pennsylvania will diminishthrough the second quarter 2006 as existing advances and loans mature. We estimate that our net revenues will be reducedby approximately $2.3 million for each month that we are not able to operate inPennsylvania and $0.5 million for each month that we are not able to operate inArkansas. Furthermore, center expenses average approximately $1.3 million permonth in Pennsylvania and $0.4 million per month in Arkansas. We continue toincur these expenses while we service payday cash advances and installmentloans that are outstanding when the lending banks stop originating additionaladvances and loans. If it becomes necessary to shut down operations, we estimatethat severance, lease cancellation, write-down of the undepreciated costs offixed assets and the cost to vacate the premises will approximate $2.9 million inPennsylvania and $0.7 million in Arkansas. At this time, we do not believe thatthese changes in Pennsylvania and Arkansas will result in any impairment ofgoodwill.

We are studyingalternative methods for conducting business in Pennsylvania and Arkansas and wecurrently do not intend to close our centers in those states. In April 2006,we began offering payday cash advance services directly to Pennsylvaniacustomers who are in good standing without charging fees, other than applicableNSF fees.

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***Centers***

Thefollowing table lists the number of centers by state at December 31, 2005and March 31, 2006:

| **State**          | ** ** | ** ** | ** ** | **December 31,   2005** | ** ** | **March 31,  2006** | ** ** |
|--------------------|------------|------------|------------|-----------------------------------|------------|--------------------------|------------|
| Alabama            |       |       | 140        |                              |       |                     | 141        |   |   |
| Arizona            |       |       | 53         |                              |       |                     | 55         |   |   |
| Arkansas(1)(2)     |       |       | 30         |                              |       |                     | 30         |   |   |
| California         |       |       | 298        |                              |       |                     | 299        |   |   |
| Colorado           |       |       | 62         |                              |       |                     | 61         |   |   |
| Delaware           |       |       | 13         |                              |       |                     | 13         |   |   |
| Florida            |       |       | 211        |                              |       |                     | 218        |   |   |
| Idaho              |       |       | 13         |                              |       |                     | 13         |   |   |
| Illinois           |       |       | 60         |                              |       |                     | 60         |   |   |
| Indiana            |       |       | 116        |                              |       |                     | 118        |   |   |
| Iowa               |       |       | 35         |                              |       |                     | 35         |   |   |
| Kansas             |       |       | 42         |                              |       |                     | 43         |   |   |
| Kentucky           |       |       | 39         |                              |       |                     | 41         |   |   |
| Louisiana          |       |       | 75         |                              |       |                     | 75         |   |   |
| Michigan(1)        |       |       | 111        |                              |       |                     | 114        |   |   |
| Mississippi        |       |       | 53         |                              |       |                     | 53         |   |   |
| Missouri           |       |       | 70         |                              |       |                     | 74         |   |   |
| Montana            |       |       | 9          |                              |       |                     | 9          |   |   |
| Nebraska           |       |       | 25         |                              |       |                     | 25         |   |   |
| Nevada             |       |       | 10         |                              |       |                     | 10         |   |   |
| New Hampshire      |       |       | 16         |                              |       |                     | 17         |   |   |
| New Mexico         |       |       | 12         |                              |       |                     | 12         |   |   |
| North Dakota       |       |       | 7          |                              |       |                     | 7          |   |   |
| Ohio               |       |       | 210        |                              |       |                     | 213        |   |   |
| Oklahoma           |       |       | 67         |                              |       |                     | 67         |   |   |
| Oregon             |       |       | 56         |                              |       |                     | 57         |   |   |
| Pennsylvania(1)(3) |       |       | 101        |                              |       |                     | 101        |   |   |
| Rhode Island       |       |       | 3          |                              |       |                     | 3          |   |   |
| South Carolina     |       |       | 112        |                              |       |                     | 113        |   |   |
| South Dakota       |       |       | 11         |                              |       |                     | 12         |   |   |
| Tennessee          |       |       | 62         |                              |       |                     | 62         |   |   |
| Texas(1)           |       |       | 207        |                              |       |                     | 207        |   |   |
| Virginia           |       |       | 120        |                              |       |                     | 123        |   |   |
| Washington         |       |       | 105        |                              |       |                     | 109        |   |   |
| Wisconsin          |       |       | 45         |                              |       |                     | 45         |   |   |
| Wyoming            |       |       | 5          |                              |       |                     | 5          |   |   |
| Total              |       |       | 2,604      |                              |       |                     | 2,640      |   |   |

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(1)          We have operated underthe agency business model in Arkansas since April 14, 2001. Prior to thisdate, we operated in Arkansas under the standard business model. We have onlyoperated in Pennsylvania under the agency business model. We operated in Texasunder the agency business model until July 2005, when we began operatingas a CSO. We have operated in Michigan under the standard business model since June 27,2005. Prior to this date, we operated in Michigan under the agency businessmodel.

(2)          The lending bank for which we market, processand service payday cash advances and installment loans in Arkansas ceasedoffering installment loans in April 2006, and intends to discontinueoffering payday cash advances in June 2006.

(3)          The lending bank forwhich we market, process and service payday cash advances and installment loansin Pennsylvania ceased offering advances and loans in March 2006.

***New centers***

We opened 22 and 42 newcenters in the three months ended March 31, 2005 and 2006, respectively.

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***Closed centers***

We closed 6 centers in thethree months ended March 31, 2005 and 2006. 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 center closures of approximately $59.0 thousand and $0.6 million inthe three months ended March 31, 2005 and 2006, respectively.

***Prior S Corporation Status***

From October 1, 2001through December 20, 2004, Advance America, Cash Advance Centers, Inc.(“AACACI”) and substantially all of its subsidiaries (the “Subchapter SCompanies”) were collectively treated for federal and most state income taxpurposes as an S corporation under the Internal Revenue Code and comparablestate laws. As a result, the Subchapter S Companies’ earnings were taxed forfederal and most state income tax purposes directly to AACACI’s stockholdersrather than to the Subchapter S Companies. On December 21, 2004, theSubchapter S Companies terminated their status as an S Corporation and arenow taxed as C corporations. As a result of the termination of the Subchapter SCompanies’ S corporation status, we recorded a net deferred tax liability andcorresponding income tax expense on the termination date of $8.4 million.

**Critical AccountingPolicies 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 and webase these estimates on the information currently available to us and onvarious other assumptions that we believe are reasonable under thecircumstances. Actual results could vary from these estimates under differentassumptions or conditions.

We believe that the following critical accountingpolicies affect the more significant estimates and assumptions used in thepreparation of our financial statements:

***Provision for Doubtful Accountsand Agency Bank Losses, Allowance for Doubtful Accounts and Accrual for ExcessBank 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, and

·       theamount we accrue for probable excess bank losses for our share of the losses onpayday cash advances and installment loans we market, process and service forthe lending banks under the agency business model.

Our business experiences cyclicality in receivablesbalances from both the time of year and the day of the week. Fluctuations inreceivables balances result in a corresponding impact on the allowance fordoubtful accounts and the accrual for excess bank losses.

Our receivables are traditionally lower at the end ofthe first quarter, corresponding to tax refund season. Historically, the numberof loans outstanding reach their highest level during the last week of December andthen decrease substantially by the first half of March. During this period, thenumber of loans outstanding decreased by approximately 38% and 33% in 2005 and2006, respectively.

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In addition to the seasonal fluctuations, thereceivables balances can fluctuate throughout a week, generally being at theirhighest levels on a Wednesday or Thursday and at their lowest levels on aFriday. In general, receivable balances decrease approximately 4% to 7% from atypical Thursday to a typical Friday. The first quarter of 2005 began on aSaturday (a relative low point in weekly receivable balances) and ended on aThursday (a relative high point in weekly receivable balances). The firstquarter of 2006 began on a Sunday (a relative low point in weekly receivablebalances) and ended on a Friday (a relative low point in weekly receivablebalances).

The allowance for doubtful accounts and accrual forexcess bank losses are primarily based upon models that analyze specificportfolio statistics and also reflect, to a lesser extent, management’sjudgment regarding overall accuracy. The analytical models take into accountseveral factors including the number of transactions customers complete, andcharge-off and recovery rates. Additional factors such as changes instate laws, center closings, length of time centers have been open in a state,relative mix of new centers within a state and other relevant factors are alsoevaluated to determine whether the results from the analytical models should berevised.

For those states where we operate under the standardbusiness model, we record this estimate of probable losses on receivables as areduction of advances and receivables, net on our balance sheet.

Historically, the lending banks have beencontractually obligated for a portion of the payday cash advance andinstallment loan losses. Those obligations, denominated as a percent of feesand interest, have typically ranged between 8% and 20%. Under our revisedMP&S Agreement with the lending bank in Pennsylvania, the lending bankcontinues to be contractually obligated for loan losses up to 8.5% of fees andinterest. Subsequent to July 2005, under our current MP&S Agreementswith the lending bank in Arkansas and North Carolina, the lending bank has beencontractually obligated for all loan losses.

For those states in which we have operated as amarketing, processing and servicing agent, the estimate of probable losses is reducedby the lending bank’s contractual obligation, as described above, to arrive atan estimate of excess loan losses. This is recorded as an accrual for excess banklosses, a current liability on our balance sheet.

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We charge the portion of payday cash advances,installment loans and fees deemed to be uncollectible against the allowance fordoubtful accounts or the accrual for excess bank losses, as appropriate, andcredit any subsequent recoveries to the allowance for doubtful accounts or theaccrual for excess bank losses, as appropriate.

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 outstanding balancewithin 60 days of the date the check was returned by the customer’s bank fornon-sufficient funds or other reasons. Under the agency business model, unpaidpayday cash advances and the related fees and/or interest generally have beencharged off 60 days from the due date. Under the agency business model, unpaidinstallment loans and the related fees and/or interest generally have beencharged off 60 days from the deposit date if the check is returned by thecustomer’s bank for non-sufficient funds or other reasons. Unpaid payday cashadvances of customers who file for bankruptcy are charged off upon receipt ofthe bankruptcy notice. Although management uses the best information availableto make evaluations, future adjustments to the allowance for doubtful accountsand accrual for excess bank losses may be necessary if conditions differsubstantially from our assumptions used in assessing their adequacy.

To the extent historicalcredit experience is not indicative of future performance or other assumptionsused by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts and agency bank losses. As of March 31, 2006, if averagedefault rates were 5% higher or lower, the allowance for doubtful accounts andaccrual for excess bank losses would change by approximately $1.9 million.

***Intangible Assets***

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

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

Accrued liabilities in ourDecember 31, 2005 and March 31, 2006 financial statements includeaccruals of approximately $3.4 and $3.3 million, respectively, for theself-insured portion of our health and dental insurance and approximately$4.1 million and $4.3 million, respectively, for workers’ compensation. Werecognize our obligations associated with those benefits in the period theclaim is incurred. The costs of both reported claims and claims incurred butnot reported, up to specified deductible limits, are estimated based onhistorical data, current enrollment, employee statistics and other information.We review and periodically update our estimates and the resulting reserves andany necessary adjustments are reflected in earnings currently. To the extenthistorical claims are not indicative of future claims, there are changes inenrollment or employee history, workers’ compensation loss development factorschange or other assumptions used by management do not prevail, our expense andrelated accrued liabilities could increase or decrease.

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***Consolidation of Variable Interest Entity***

In connection with our CSOoperations in Texas, we entered into an agreement with an unaffiliatedthird-party lender. We have determined that the third-party lender’s subsidiaryis a variable interest entity (“VIE”) under Financial Accounting StandardsBoard Interpretation No. 46 (Revised) (“FIN 46R”). We have neither anequity interest nor voting rights in the lender’s subsidiary and have no inputinto the management of the lender’s subsidiary. However, we determined that weare the primary beneficiary of the VIE, because we have committed to reimbursethe lender for the full amounts of the loans and all related fees that are notpaid by the customers. As a result, we have consolidated the lender’ssubsidiary as of March 31, 2006. See “Item 1. Financial Statements—Notesto Interim Unaudited Consolidated Financial Statements—Note 9. Transactionswith Variable Interest Entity” for the impact of adopting FIN 46R on ourresults of operations and financial condition

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

In 2004, we adoptedStatement of Financial Accounting Standards No. 123 (Revised), Share-BasedPayment (“SFAS 123(R)”). Accordingly, we measure the cost of our share-basedemployee compensation at the grant date based on fair value and recognize suchcost in the financial statements over each award’s requisite service period. Asof March 31, 2006, the total compensation cost not yet recognized relatedto nonvested stock awards under our share-based employee compensation plans isapproximately $12.3 million. The weighted average period over which thisexpense is expected to be recognized is approximately 6.3 years. See “Item 1.Financial Statements—Notes to Interim Unaudited Financial Statements—Note 8.Capital Stock and Stock-Based Compensation Plans” for a description of ourrestricted stock and stock option awards and the assumptions used to calculatethe fair value of such awards including the expected volatility assumed invaluing our stock option grants.

**Results of Operations**

***Three Months Ended March 31, 2005 Compared toThree Months Ended March 31, 2006***

The following tables setforth our results of operations for the three months ended March 31, 2005compared to the three months ended March 31, 2006 (dollars in thousands,except Center Information):

| ** **                                              | ** ** | **2005**    | ** ** | **2006**                  | ** ** | **Variance** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|---------------------------|------------|--------------|------------|
| ** **                                              | ** ** | **Dollars** | ** ** | **% Net   Revenues** | ** ** | **Dollars**  | ** ** | **% Net   Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                           |       |        |       |                      |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                 |       | $           | 105,156    |                      |       | 82.0         | %          |   | $ | 143,092 |   |   | 102.0 | % |   | $ | 37,936 |   | 36.1 | % |
| Marketing, processing  and servicing fees               |       | 33,227      |       |                      | 25.9       | %            |       | 9,077 |   |   | 6.5 | % |   | (24,150 | ) | (72.7 | )% |
| Total revenues                                          |       | 138,383     |       |                      | 107.9      | %            |       | 152,169 |   |   | 108.5 | % |   | 13,786 |   | 10.0 | % |
| Provision for doubtful  accounts and agency bank losses |       | (10,091     | )          |                      | (7.9       | %)           |       | (11,876 | ) |   | (8.5 | %) |   | 1,785 |   | 17.7 | % |
| Net revenues                                            |       | 128,292     |       |                      | 100.0      | %            |       | 140,293 |   |   | 100.0 | % |   | 12,001 |   | 9.4 | % |
| **Center Expenses:**                                    |       |        |       |                      |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and  related payroll costs                     |       | 42,048      |       |                      | 32.8       | %            |       | 46,547 |   |   | 33.2 | % |   | 4,499 |   | 10.7 | % |
| Occupancy costs                                         |       | 19,127      |       |                      | 14.9       | %            |       | 21,048 |   |   | 15.0 | % |   | 1,921 |   | 10.0 | % |
| Center  depreciation expense                            |       | 3,537       |       |                      | 2.7        | %            |       | 3,953 |   |   | 2.8 | % |   | 416 |   | 11.8 | % |
| Advertising  expense                                    |       | 5,245       |       |                      | 4.1        | %            |       | 3,319 |   |   | 2.4 | % |   | (1,926 | ) | (36.7 | )% |
| Other center  expenses                                  |       | 12,437      |       |                      | 9.7        | %            |       | 15,290 |   |   | 10.9 | % |   | 2,853 |   | 22.9 | % |
| Total center  expenses                                  |       | 82,394      |       |                      | 64.2       | %            |       | 90,157 |   |   | 64.3 | % |   | 7,763 |   | 9.4 | % |
| Center gross  profit                                    |       | 45,898      |       |                      | 35.8       | %            |       | 50,136 |   |   | 35.7 | % |   | 4,238 |   | 9.2 | % |
|                                                         |            |             |            |                           |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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| **Corporate and Other Expenses  (Income):**                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| General and  administrative expenses                      |   | 11,801 |   |   | 9.2    | %      |   | 13,011 |   |   | 9.3    | %      |   | 1,210  |   | 10.3   | %      |
| Corporate depreciation  expense                                |   | 1,077  |   |   | 0.8    | %      |   | 961    |   |   | 0.7    | %      |   | (116   | )      | (10.8  | )%     |
| Interest expense                                               |   | 826    |   |   | 0.7    | %      |   | 907    |   |   | 0.6    | %      |   | 81     |   | 9.8    | %      |
| Interest income                                                |   | (91    | )      |   | (0.1   | %)     |   | (176   | )      |   | (0.1   | %)     |   | (85    | )      | (93.4  | )%     |
| Loss on disposal of  property and equipment                    |   | 96     |   |   | 0.1    | %      |   | 208    |   |   | 0.1    | %      |   | 112    |   | 116.7  | %      |
| Total corporate  and other expenses                            |   | 13,709 |   |   | 10.7   | %      |   | 14,911 |   |   | 10.6   | %      |   | 1,202  |   | 8.8    | %      |
| Income before income  taxes                                    |   | 32,189 |   |   | 25.1   | %      |   | 35,225 |   |   | 25.1   | %      |   | 3,036  |   | 9.4    | %      |
| Income tax expense                                             |   | 12,451 |   |   | 9.7    | %      |   | 14,313 |   |   | 10.2   | %      |   | 1,862  |   | 15.0   | %      |
| Income before income of consolidated  variable interest entity |   | 19,738 |   |   | 15.4   | %      |   | 20,912 |   |   | 14.9   | %      |   | 1,174  |   | 5.9    | %      |
| Income of consolidated  variable interest entity               |   | — |   |   | — |   |   | (485   | )      |   | (0.3   | )%     |   | (485   | )      | (100.0 | )%     |
| Net income                                                     |   | $      | 19,738 |   |   | 15.4   | %      |   | $      | 20,427 |   |   | 14.6   | %      |   | $      | 689    |   | 3.5 | % |
|                                                                |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |  |  |  |

 

| ** **                                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Center Information:**                                               |       |     |       |     |       |
| Number of centers open  at beginning of period                        |       | 2,408    |       | 2,604    |       |
| Opened                                                                |       | 22       |       | 42       |       |
| Closed                                                                |       | (6       | )          | (6       | )          |
| Number of centers open  at end of period                              |       | 2,424    |       | 2,640    |       |
| Weighted average  number of centers open during the period            |       | 2,416    |       | 2,617    |       |
| Number of payday  cash advances provided and processed (in thousands) |       | 2,623    |       | 2,565    |       |
| Amount of average  payday cash advance provided and processed         |       | $        | 333        |     | $          | 351 |   |
| Number of  installment loans provided and processed (in thousands)    |       | —   |       | 17       |       |
| Amount of average  installment loan provided and processed            |       | —   |       | $        | 519        |   |
|                                                                       |            |          |            |          |            |  |  |

 

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| ** **                                                                            | ** ** | **2005**                             | ** ** | **2006**                 | ** ** | **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                                                                  |       |                                 | $          | 53.1                     |       |         |       | 100.0 | % |   |   | $ | 53.6 |   |   |   | 100.0 | % |   |   | $ | 0.5 |   |   | 0.9 | % |
| Center expenses:                                                                      |       |                                 |       |                     |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       |                                 | 17.4       |                     |       |         | 32.8       | % |   |   | 17.8 |   |   |   | 33.2 | % |   |   | 0.4 |   |   | 2.3 | % |
| Occupancy costs                                                                       |       |                                 | 7.9        |                     |       |         | 14.9       | % |   |   | 8.0 |   |   |   | 15.0 | % |   |   | 0.1 |   |   | 1.2 | % |
| Center depreciation expense                                                           |       |                                 | 1.5        |                     |       |         | 2.7        | % |   |   | 1.5 |   |   |   | 2.8 | % |   |   | — |   |   | — |   |
| Advertising expense                                                                   |       |                                 | 2.2        |                     |       |         | 4.1        | % |   |   | 1.3 |   |   |   | 2.4 | % |   |   | (0.9 | ) |   | (40.9 | )% |
| Other center expenses                                                                 |       |                                 | 5.1        |                     |       |         | 9.7        | % |   |   | 5.8 |   |   |   | 10.9 | % |   |   | 0.7 |   |   | 13.7 | % |
| Total center expenses                                                                 |       |                                 | 34.1       |                     |       |         | 64.2       | % |   |   | 34.4 |   |   |   | 64.3 | % |   |   | 0.3 |   |   | 1.0 | % |
| Center gross profit                                                                   |       |                                 | $          | 19.0                     |       |         |       | 35.8 | % |   |   | $ | 19.2 |   |   |   | 35.7 | % |   |   | $ | 0.2 |   |   | 1.1 | % |

 

***Revenue Analysis***

Total revenues increased approximately $13.8 millionduring the three months ended March 31, 2006 compared to the same periodin 2005. The increase was primarily due tothe opening of new centers and growth in existing centers. Totalrevenues for the 2,237 centers opened prior to January 1, 2005 and stillopen as of March 31, 2006 increased $15.9 million from $129.1 million forthe three months ended March 31, 2005 to $145.0 million for the sameperiod in 2006. Centers opened prior to January 1, 2005 were at leastthree months and fifteen months old at the end of the three-month periods endedMarch 31, 2005 and 2006, respectively. Total revenues for the 403 centersopened after January 1, 2005 and still open as of March 31, 2006increased $7.1 million from $22.0 thousand for the three months ended March 31,2005 to $7.1 million for the same period in 2006. Total revenues for theremaining 257 centers closed represented a decrease of approximately $9.2million for the three months ended March 31, 2006 compared to the sameperiod in 2005. This decrease is primarily due to the suspension and subsequentclosure of operations in North Carolina during the fourth quarter of 2005.

In addition to theclosed centers mentioned in the preceding paragraph, the increase in totalrevenues during the three months ended March 31, 2006 was partially offsetby:

·  the implementation of the FDIC RevisedGuidance in Pennsylvania and Arkansas, beginning during the third quarter of2005. The installment loan as offered by the two lending banks generatesapproximately 50% of the revenue generated by a payday cash advance outstandingfor the same period. Total revenues for the first quarter of 2006 inPennsylvania and Arkansas were approximately $3.1 million less than the first quarterof 2005;

·  the implementation of material changes inenabling legislation in Illinois and Indiana. Total revenues for the firstquarter of 2006 in Illinois and Indiana were approximately $3.4 millionless than the first quarter of 2005; and

·  the continued impact of Hurricanes Katrina andRita in Louisiana and Mississippi. Total revenues for the first quarter of 2006in Louisiana and Mississippi were approximately $2.0 million less than thefirst quarter of 2005.

As a percentage of totalrevenues, the provision for doubtful accounts and agency bank losses increasedto 7.8% for the three months ended March 31, 2006 from 7.3% for the sameperiod in 2005. The increase in the provision is due primarily to increasedloss rates and an increase of approximately 

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$2.2 millionrelated to changes in the contractual relationships with lending banks in theremaining agency states.

***Center ExpenseAnalysis***

*Salaries and related payroll costs.**  *The increase in salaries andrelated payroll costs for the three months ended March 31, 2006 was dueprimarily to the new centers opened in 2005 and 2006. We averaged approximately2.14 full-time equivalent field employees, including district directors, percenter during both the three months ended March 31, 2006 and the sameperiod in 2005.

*Occupancy costs, center depreciation expense andother center expenses.**  *Theincreases in occupancy costs, center depreciation expense and other centerexpenses in 2006 were due primarily to the new centers opened in 2005 and 2006.

*Advertisingexpense.**  *Advertisingexpense decreased for the three months ended March 31, 2006 compared tothe same period in 2005 due primarily to a decision to conduct less advertisingactivities during the first quarter of 2006.

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

*Generaland administrative expenses.**  *The increase in general and administrative expensesfor the three months ended March 31, 2006 was due primarily to:

·       approximately$1.0 million related to consultant costs for new product development; and

·       anincrease in stock-based compensation expense of approximately $0.3 million,offset by a decrease in airplane operating expenses of $0.2 million.

*Income tax expense.**  *The increase in 2006 income tax expense compared to2005 is primarily due to our conversion to a C corporation for tax purposes.

**Liquidity andCapital Resources**

Thefollowing table presents a summary of cash flows for the three months endedMarch 31, 2005 and 2006 (dollars in thousands):

| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                            | ** ** | **2005**   | ** ** | **2006**   | ** ** | **Dollars**  | ** ** | **%** | ** ** |
| Cash flows provided by  (used in):                    |       |       |       |       |       |         |       |   |   |
| Operating activities                                  |       | $          | 32,023     |       | $          | 18,290       |       | $ | (13,733 | ) | (42.9 | )% |
| Investing activities                                  |       | 13,812     |       | 27,993     |       | 14,181       |       | 102.7 |   % |
| Financing activities                                  |       | (50,369    | )          | (42,775    | )          | 7,594        |       | 15.1 |   % |
| Net  (decrease)/increase in cash and cash equivalents |       | (4,534     | )          | 3,508      |       | 8,042        |       | 177.4 |   % |
| Cash and cash  equivalents, beginning of period       |       | 18,224     |       | 27,259     |       | 9,035        |       | 49.6 |   % |
| Cash and cash  equivalents, end of period             |       | $          | 13,690     |       | $          | 30,767       |       | $ | 17,077 |   | 124.7 |   % |

 

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Our principal sources of cash are from operations andfrom borrowings under our revolving credit facility. We anticipate that ourprimary uses of cash will be to provide working capital, finance capitalexpenditures, meet debt service requirements, fund payday cash advances underthe standard business model, finance center growth, pay dividends on our commonstock and repurchase shares of our outstanding common stock.

We borrow under our$265.0 million revolving credit facility to fund our payday cash advancesand our other liquidity needs. Our day-to-day balances under our revolvingcredit facility, as well as our cash balances, vary because of seasonal andday-to-day requirements resulting from making and collecting payday cashadvances. For example, if a month ends on a Friday (a typical payday)**,** our borrowings and our cash balances will be high comparedto a month that does not end on a Friday. This is because a substantial portionof the payday cash advances will be repaid in cash on that day but sufficienttime will not yet have passed for the cash to reduce the outstanding borrowingsunder our revolving credit facility. Our borrowings under our revolving creditfacility will also increase as the demand for payday cash advances increasesduring our peak periods such as the back-to-school and holiday seasons.Conversely, our borrowings typically decrease during the tax refund season whencash receipts from customers peak or the customer demand for new payday cashadvances decreases. Advances and fees receivable, net increased approximately$21.9 million, or 16.6%, to $153.8 million at March 31, 2006 compared to$131.9 million at March 31, 2005, due primarily to an increase in thenumber of new centers. Advances and fees receivable, net at March 31, 2006decreased approximately $39.7 million, or 20.5%, to $153.8 million compared to$193.5 million at December 31, 2005.

On May 4, 2005, weannounced that our Board of Directors had approved a program authorizing therepurchase of up to $50.0 million of our currently outstanding common stock.Our Board of Directors determined that the stock repurchase program served thebest interest of us and our stockholders by returning capital to ourstockholders, by providing an attractive investment opportunity for our funds,and by reducing the dilutive impact of employee stock incentive programs andpotential acquisitions.

Share repurchases willcontinue to be made from time to time and will be effected on the open market,in block trades, or in privately negotiated transactions, and in compliancewith applicable laws, including Securities and Exchange Commission Rule 10b-18and Regulation M. The program does not generally require us to purchase anyspecific number of shares, and any purchases under the program depend on marketand other conditions. Our Board of Directors may suspend or cancel the stockrepurchase program at any time. During the three months ended March 31,2006 we did not repurchase any shares of our outstanding common stock.

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 fromOperating Activities***

The decrease in net cashprovided by operating activities for the three months ended March 31, 2006compared to the same period in 2005 was due primarily to a net decrease inchanges in operating assets and liabilities of $21.2 million, partiallyoffset by a net increase in non-cash adjustments of $6.8 million. The$21.2 million net decrease in changes in operating assets and liabilitiesis due primarily to an increase in the change in other current assets of$6.9 million due to the timing of center rent payments, a decrease in thechange in income taxes payable of $8.3 million and a decrease in thechange in accrued liabilities of $8.5 million (primarily payroll,severance and branch closing costs).

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***Cash Flows fromInvesting Activities***

The increase in net cashprovided by investing activities for the three months ended March 31, 2006compared to the same period in 2005 was primarily due to a $13.7 milliondecrease in cash invested in advances and fees receivable, net.

***Cash Flows fromFinancing Activities***

The decrease in net cashused in financing activities for the three months ended March 31, 2006compared to the same period in 2005 was primarily due to a $7.4 millionincrease in book overdrafts.

**Capital Expenditures**

For the three months endedMarch 31, 2005 and 2006, we spent $2.7 million and $1.9 million,respectively, on capital expenditures. Capital expenditures includedexpenditures for (1) new centers opened, (2) center remodels and (3) computerequipment replacements in our centers and at our corporate headquarters.

**Off-Balance Sheet Arrangements with the Lending Banks**

During the three monthsended March 31, 2006, we operated as marketing, processing and servicingagent for payday cash advances and installment loans offered, made and fundedby FDIC supervised, state-chartered banks through 131 of our centers located inArkansas and Pennsylvania. Prior to July 2005, we operated as an agent forlending banks in Arkansas, Michigan, North Carolina, Pennsylvania and Texas.Under our prior MP&S Agreements with these lending banks, the lending bankswere contractually obligated for the losses on their payday cash advances in anamount established as a percentage of the fees and interest charged by thelending banks to their customers. Therefore, under our prior MP&SAgreements, 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 were potentially 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’s contractuallyobligated portion of the losses.

Effective June 26,2005, however, we terminated our MP&S Agreement with the lending bank forMichigan and began to offer check-cashing and deferred-presentment 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, weterminated our old MP&S Agreement and entered into a new MP&S Agreementwith a new lending bank for Arkansas, pursuant to which we are no longercontractually obligated for any losses on payday cash advances and installmentloans made in Arkansas. As a result, we no longer accrue any amounts for excessbank losses relating to our operations in Arkansas. Effective July 6,2005, we terminated our old MP&S Agreement and entered into a new MP&SAgreement with a new lending bank for North Carolina. Pursuant to thisreplacement MP&S Agreement, we were no longer contractually obligated forany losses on payday cash advances and installment loans made in NorthCarolina, and as a result we stopped accruing any amounts for excess banklosses relating to our operations in North Carolina.

Beginning in July 2005,we ceased conducting business under the agency business model in our 208centers in Texas and began conducting business in those centers as a CSO. Underour prior MP&S Agreement with the lending bank for Texas, the lending bankwas contractually 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 in Texas. Under the CSO Agreement with the unaffiliatedthird-party lender in Texas, we are contractually obligated 

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for alllosses incurred by the lender with respect to loans it makes to its customersthat are referred by us. We therefore still accrue amounts for doubtfulaccounts for these operations.

Approximately 23.4% and2.1% of our total center gross profit, in the three months ended March 31,2005 and 2006, respectively, were derived from marketing, processing andservicing fees paid to us by the lending banks.

Each lending bank for whomwe market, process and service payday cash advances and, as of July 2005,installment loans offered, made and funded by the lending banks under theagency business model is responsible for evaluating each of its customers’applications and determining whether the payday cash advance and/or installmentloan is approved. The lending banks utilize an automated third-partycredit scoring system to evaluate and approve each customer application. We arenot involved in the lending banks’ payday cash advance or installment loanapproval process, we are not involved in determining the approval procedures orcriteria of the lending banks and, in the normal course of business, we generallydo not fund or acquire any payday cash advances or installment loans from thelending banks. The payday cash advances and installment loans are repayablesolely to the lending banks and are assets of the lending banks. Consequently,the lending banks’ payday cash advances and installment loans are not includedin our payday cash advance and installment loan portfolios nor are theyreflected on our balance sheet within our advances and fees receivable, net.

Under our MP&SAgreements with the lending banks that were offering payday cash advances in Arkansas,Michigan, North Carolina, Pennsylvania and Texas prior to July 2005, thelending banks were contractually obligated for the losses on payday cashadvances in an amount established as a percentage of the fees and/or interestcharged by the banks to their customers. This continues to be the case underour amended MP&S Agreement with respect to Pennsylvania. If the amount ofuncollected payday cash advances and installment loans exceeds the lending bank’scontractual obligation, we could be obligated to pay to the lending bank theoutstanding amount of the advances or installment loan plus its fees and/orinterest receivable, less its contractually obligated portion of the losses. Asof March 31, 2006, our aggregate contingent liability to the lending bankfor Pennsylvania amounted to $11.1 million, which was not included on ourbalance sheet. We could also be obligated to pay this amount to the lendingbank if, as a result of a change in law, regulation or otherwise, the lendingbank’s payday cash advances and installment loans were to become uncollectible.

Because our economicexposure for excess bank losses relates to the lending banks’ payday cashadvances and installment loans, we have an accrual for excess bank losses, toreflect our probable losses related to uncollected lending bank payday cashadvances and installment loans. The accrual for excess bank losses that wasreported in our balance sheet was $1.4 million and $2.9 million as of December 31,2005 and March 31, 2006, respectively. The accrual for excess bank losseshas been established on a basis similar to the allowance for doubtful accountsfor the standard business model payday cash advances. If the payday cashadvance and installment loan losses are materially greater than our accrual forexcess bank losses, our business, results of operations and financial conditioncould be materially adversely affected.

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**Certain Contractual Cash Commitments**

Ourprincipal future contractual obligations and commitments as of March 31,2006, including periodic interest payments, included the following (dollars inthousands):

| ** **                                 | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** **                                          | ** ** | **2007 and** | ** ** | **2009 and** | ** ** | **2011 and** | ** ** |
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**                                           | ** ** | **2006** | ** ** | **2008** | ** ** | **2010** | ** ** | **thereafter** | ** ** |
| Long-term debt  obligations:               |       |       |       |                                                |       |   |   |   |   |   |   |   |   |
| Revolving credit facility                  |       | $          | —     |                                                | $          | — |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Mortgage payable                           |       | 8,962      |       | 597                                                 |       | 1,594 |   | 1,594 |   |   | 5,177 |   |   |
| Note payable                               |       | 484        |       | 104                                                 |       | 276 |   | 104 |   |   | — |   |   |
| Operating lease  obligations  (1)          |       | 120,447    |       | 42,045                                              |       | 65,154 |   | 12,914 |   |   | 334 |   |   |
| Purchase  obligations                      |       | 1,722      |       | 1,722                                               |       | — |   | — |   |   | — |   |   |
| Total                                      |       | $          | 131,615    |                                                | $          | 44,468 |   | $ | 67,024 |   | $ | 14,612 |   |   | $ | 5,511 |   |   |
|                                            |            |            |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

***Long-Term DebtObligations***

*RevolvingCredit Facility.**  *OnJuly 16, 2004, we entered into an amendment and restatement of our priorcredit facility with a syndicate of banks. As amended and restated, ourrevolving credit facility provides us with a $265.0 million revolving lineof credit, which amount includes the ability to issue up to $20.0 millionin letters of credit. Our revolving credit facility matures on July 16,2009. We have the option to (i) increase our revolving credit facility byan additional $10.0 million and (ii) extend its maturity date to July 16,2010, in each case upon our satisfaction of certain covenants and conditions.Any portion of our revolving credit facility that is repaid may be borrowedagain. In May 2005, we amended our revolving credit facility to allow therepurchase of up to $50.0 million of our outstanding common stock. In June 2005,we further amended our revolving credit facility to permit us to operate as aCSO in Texas.

As of March 31, 2006,we had no borrowings outstanding on the revolving portion of our creditfacility and approximately $14.6 million of letters of credit outstanding,leaving approximately $250.4 million available for future borrowings underour credit facility.

In general, our borrowingsunder our revolving credit facility bear interest, at our option, at either abase rate plus an applicable margin or a LIBOR-based rate plus anapplicable margin. The base rate equals the greater of (i) the prime rateannounced by Bank of America, the administrative agent under the revolvingcredit facility, and (ii) the sum of the federal funds rate plus 0.50%.The applicable margin is determined each quarter by a pricing grid based on oursenior leverage ratio of our consolidated senior debt to consolidated EBITDA.The base rate applicable margin ranges from 0.75% to 1.50% based upon oursenior leverage ratio. The LIBOR-based applicable margin ranges from2.50% to 3.25% based upon our senior leverage ratio. As of March 31, 2006,the applicable margin for the prime-based rate was 0.75% and theapplicable margin for the LIBOR-based rate was 2.5%.

The applicable rate ischosen when we request a draw down under the revolving credit facility and isbased on the forecasted working capital requirements and the required noticeperiod for each type of borrowing. LIBOR-based rates can be selected forone-, two-, three-  or six-month terms.In the case of a base rate loan, we must notify the bank on the business dayprior to the date of the required borrowing and in the case of a LIBOR-basedloan, we must notify the bank on the third business day prior to the date ofthe requested borrowing. Base rate loans are variable, and the rates on thoseloans are changed whenever the underlying rate changes. LIBOR-based loansbear interest for the term of the loan at the rate set at the time of borrowingfor that loan.

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Our obligations under therevolving credit facility are guaranteed by each of our subsidiaries. Ourborrowings under the revolving credit facility are secured by substantially allof our assets and the assets of our subsidiaries. In addition, our borrowingsunder the revolving credit facility are secured by a pledge of all of thecapital stock, or similar equity interests, of our subsidiaries. Our revolvingcredit facility contains various financial covenants that require, among otherthings, the maintenance of a minimum net worth and leverage and fixed chargecoverage ratios. The revolving credit facility contains customary covenants andevents of default, including covenants that restrict our ability to encumberassets, to create indebtedness and to declare and pay dividends. The revolvingcredit facility also includes cross default provisions where an event ofdefault with respect to any other indebtedness in excess of $1.0 millionin the aggregate could cause all amounts outstanding under the revolving creditfacility to become due and payable. We were in compliance with all covenants atMarch 31, 2006.

We borrow under our$265.0 million revolving credit facility to fund our payday cash advancesand other liquidity needs. Our day-to-day balances under our revolving creditfacility, 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 Friday (a typical payday), our borrowings and ourcash balances will be high compared to a month that does not end on a Friday.This is because a substantial portion of the payday cash advances will berepaid in cash on that day but sufficient time will not yet have passed for thecash to reduce the outstanding borrowings under our revolving credit facility.Our borrowings under our revolving credit facility will also increase as thedemand for 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.

*MortgagePayable.**  *Our corporateheadquarters building and related land are subject to a mortgage, the principalamount of which was approximately $6.2 million and $6.1 million at December 31,2005 and March 31, 2006, respectively. The mortgage is payable to aninsurance company and is collateralized by our corporate headquarters buildingand related land. The mortgage is payable in 180 monthly installments ofapproximately $66,400, including principal and interest, and bears interest ata fixed rate of 7.30% over its term. The mortgage matures on June 10,2017. The carrying amount of our corporate headquarters (land, landimprovements and building) was approximately $5.4 million and $5.3 millionat December 31, 2005 and March 31, 2006, respectively.

***Operating LeaseObligations***

We lease all but three ofour centers from third-party lessors under operating leases. These leasestypically have initial terms of three to five years and may contain provisionsfor renewal options, additional rental charges based on revenue and payment ofreal estate taxes and common area charges. In addition, we lease aircrafthangar space and have certain other leases for security and office equipment.The lessor under three center leases, the aircraft hanger space lease and otheroffice and warehouse space leases are companies controlled by our Chairman.

***PurchaseObligations***

We enter into agreementswith vendors to purchase furniture, fixtures and other items used to open newcenters. These purchase commitments typically extend for a period of two tothree months after the opening of a new center. As of March 31, 2006, ourpurchase obligations totaled approximately $1.7 million.

**Critical Estimates, Uncertainties or Assessments inthe Financial Statements**

The preparation of ourfinancial statements in conformity with GAAP requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent 

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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.

Actual results related tothe estimates and assumptions made in preparing our consolidated financialstatements will emerge over periods of time, such as estimates and assumptionsunderlying the determination of allowance for doubtful accounts. Theseestimates and assumptions are monitored and periodically adjusted ascircumstances warrant. These amounts may be adjusted based on higher or loweractual loss experience. Although there is greater risk with respect to theaccuracy of these estimates and assumptions because of the period over whichactual results may emerge, this risk is mitigated by the ability to makechanges to these estimates and assumptions 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.

**FORWARD-LOOKINGSTATEMENTS**

This Quarterly Report on Form 10-Qincludes forward-looking statements. All statements other than historicalinformation or statements of current condition contained in this QuarterlyReport, including statements regarding our future financial performance, ourbusiness strategy and expected developments in the payday cash advance servicesindustry, are forward-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-lookingstatements.

Wehave based these forward-looking statements on management’s current views andexpectations. Although we believe that the current views and expectationsreflected in these forward-looking statements are reasonable, those views andexpectations, and the related statements, are inherently subject to risks,uncertainties and other factors, many of which are not under our control andmay not even be predictable. These risks, uncertainties and other factors couldcause the actual results, performance or achievements to differ materially fromany future results, performance or achievements expressed or implied by theforward-looking statements. These risks, uncertainties and factors include, butare not limited to**:**

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

·       ourability to efficiently and profitably identify, implement and manage anyalternative methods of doing business or new products;

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

·       thelending banks in Pennsylvania and Arkansas ceasing to originate payday cashadvances and installment loans;

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·       ourability to identify and implement any alternative methods of doing business inPennsylvania and Arkansas;

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

·       theaccuracy of our estimates of losses;

·       theftand employee errors;

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

·       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;

·       ourcurrent lack of product and business diversification; and

·       theother matters set forth under “Part II. Item 1A. Risk Factors” below.

We expressly disclaim anyobligation to update or revise any of these forward-looking statements, whetherbecause of future events, new information, a change in our views orexpectations, or otherwise. We make no prediction or statement about theperformance of our shares of common stock.

You are cautioned not torely unduly on any forward-looking statements. These risks and uncertaintiesare discussed in more detail elsewhere in this Quarterly Report, includingunder “Part II. Item 1A. Risk Factors” and in this Item.

**ITEM3. QUANTITATIVE AND 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. Our variable interest expense issensitive to changes in the general level of interest rates. We may from timeto time enter into interest rate swaps, collars or similar instruments with theobjective of reducing our volatility in borrowing costs. We do not usederivative financial instruments for speculative or trading purposes. We had noderivative financial instruments outstanding as of December 31, 2005 or March 31,2006. The weighted average interest rate on our $37.9 million of variableinterest debt as of December 31, 2005 was approximately 7.38%. We had nooutstanding borrowings on our revolving credit facility at March 31, 2006.

We had total interestexpense of $0.8 million and $0.9 million for the three months ended March 31,2005 and 2006, respectively. The estimated change in interest expense from ahypothetical 200 basis-point change in applicable variable interest rateswould have been approximately $0.1 million and $55.0 thousand for the threemonths ended March 31, 2005 and 2006, respectively.

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***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 each bankfor the marketing, processing and servicing fees payable to us by such bank. Inaddition, the lending bank in Pennsylvania is responsible for making paymentsto us if actual payday cash advance and installment loan losses are less thanthe payday cash advance and installment loan losses retained by the lending bank.We are subject to the risk that the lending banks will fail to pay all or aportion of the amounts due to us or that they will fail to pay us on a timelybasis. Any such failure could have a material adverse effect on our business,results of operations and financial condition.

**ITEM 4.  CONTROLS AND PROCEDURES.**

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we have evaluated the effectiveness of the designand operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, andour internal control over financial reporting, as of the end of the periodcovered by this Report. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that those disclosure controls andprocedures are effective. There were no changes in our internal control overfinancial reporting during the quarter ended March 31, 2006, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II. OTHERINFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS.**

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

**ITEM 1A.  RISK FACTORS.**

**Risks Related toOur Business and Industry**

***Our agency relationships with thelending banks are highly regulated and subject to the oversight of the FDIC andany changes in laws and regulations governing these relationships or theposition of the FDIC could have a material adverse effect on our business,results of operations and financial condition.***

The lending banks forwhich we act as marketing, processing and servicing agent are subject toextensive federal and state banking regulations. Additionally, asstate-chartered banks, the lending banks are subject to supervision by the FDICas well as regular examination by other state and federal regulatoryauthorities. In July 2003 and March 2005, the FDIC issued guidance governingpermissible agency arrangements between state-chartered banks and marketing,processing and servicing agents for the banks’ payday cash advances, such asus. In July 2005, the lending banks for whom we act as a marketing, processingand servicing agent implemented new policies, limits and procedures and beganoffering installment loans as an alternative credit product in response to theFDIC guidance. In February 2006, we became aware that the FDIC has instructedcertain lending banks to discontinue offering payday cash advances andalternative credit products if they could not adequately address the FDIC’scontinuing concerns regarding those products. In response to the FDIC’s recent instructions, the lending banks forwhom we act as a marketing, processing and servicing agent in Pennsylvania and Arkansashave decided to stop originating payday cash advances and installmentloans.  This suspension of our operationsin Pennsylvania and Arkansas will have a material adverse effect on our resultsof operations and financial condition. We estimate that our net revenues willbe reduced by approximately $2.3 million for each month that we are not able tooperate under the agency business model in Pennsylvania and $0.5 million foreach 

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monththat we are not able to operate under the agency business model in Arkansas. Furthermore,center expenses average approximately $1.3 million per month in Pennsylvaniaand $0.4 million per month in Arkansas. These expenses will continue to beincurred while we service payday cash advances and installment loans thatremain outstanding. If it becomes necessary to shut down operations, weestimate that severance, lease cancellation, write-down of the undepreciatedcosts of fixed assets and the cost to vacate the premises will approximate $2.9million in Pennsylvania and $0.7 million in Arkansas. 

At this time it is unclearwhat options may be available to us to meet customer demand for smalldenomination, short-term loans in these states. Defending the legality of theagency business model, finding new lending bank partners and pursuing alternativeproducts and services may take significant time, management attention andfinancial resources. Further, we may not be successful in any of these efforts.And, despite the decision of the lending banks to stop originating payday cashadvances and installment loans in response to the FDIC’s instructions, it ispossible that the FDIC or other regulators could take further action againstthe lending banks and us. Any such further action could have a material adverseeffect on our business, results of operations and financial condition.

***Thepayday cash advance services industry is also regulated under federal law andsubject to federal and state unfair and deceptive practices statutes. Ourfailure to comply with such regulations or changes in federal laws andregulations could have a material adverse effect on our business, results of operationsand financial condition.***

Although states providethe primary regulatory framework under which we offer payday cash advanceservices, certain federal laws also impact our business. Because payday cashadvances are viewed as extensions of credit, we must comply with the federalTruth-in-Lending Act and Regulation Z adopted under that Act. Additionally, weare subject to the Equal Credit Opportunity Act, the Fair Debt CollectionPractices Act, the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act.Any failure to comply with any of these federal laws and regulations could havea material adverse effect on our business, results of operations and financialcondition.

Additionally, since 1999,various anti-payday cash advance legislation has been introduced in the U.S.Congress. Congressional members continue to receive pressure from consumeradvocates and other industry opposition groups to adopt such legislation. Anyfederal legislative or regulatory action that restricts or prohibits payday cashadvance services could have a material adverse impact on our business, resultsof operations and financial condition.

Our marketing efforts andthe representations we make about our payday cash advance services also aresubject to federal and state unfair and deceptive practices statutes. TheFederal Trade Commission (“FTC”) enforces the Federal Trade Commission Act andthe state attorneys general and private plaintiffs enforce the analogous statestatutes. If we are found to have violated any of these statutes, thatviolation could have a material adverse effect on our business, results ofoperations and financial condition.

***Thepayday cash advance services industry is highly regulated under state law.Changes in state laws and regulations could have a material adverse effect onour business, results of operations and financial condition.***

Our business is regulatedunder a variety of enabling state statutes, including payday advance,check-cashing, small loan, and credit services organization state laws, all ofwhich are subject to change and which may impose significant costs orlimitations on the way we conduct or expand our business. As of March 31,2006, 39 states and the District of Columbia had specific laws that permittedpayday cash advances or allowed a form of payday cash advances under small loanlaws. As of March 31, 2006, we operated in 35 of these 39 states. In oneof these 35 states, we operated under the agency business model, serving asmarketing, processing and servicing agent through our centers for a lendingbank. We do not currently conduct business in the remaining four states or inthe District of Columbia because we do not believe it is economicallyattractive to operate in these jurisdictions due to specific legislativerestrictions such as interest rate ceilings, an unattractive population densityor unattractive location characteristics. The 

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remaining11 states do not have laws specifically authorizing the payday cash advancebusiness. Despite the lack of specific payday advance laws, other laws maypermit us to do business in these states. As of March 31, 2006, weoperated in one of these 11 states under the agency business model, serving asmarketing, processing and servicing agent through our centers for a lendingbank.

During the last few years, legislation has beenadopted in some states that prohibits or severely restricts payday cash advanceservices. In May 2004, a new law became effective in Georgia thatessentially prohibits payday cash advance services in the state and restrictedour ability to act as marketing, processing and servicing agent for a lendingbank in the state. See “Item 1. Financial Statements—Notes to Interim UnauditedFinancial Statements—Note 7. Commitments and Contingencies.” As a result, weclosed our 89 centers in Georgia.

Many bills have also been introduced in statelegislatures. In 2005, bills that severely restrict or effectively prohibitpayday cash advance services were introduced in 26 states. In addition, twostates have sunset provisions in their payday cash advance laws that requirerenewal of the laws by the state legislatures at periodic intervals. Futurelaws prohibiting payday cash advance services or making them unprofitable couldbe passed in any other state at any time or existing payday cash advance lawscould expire or be amended, any of which would have a material adverse effecton 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. In moststates, we are required to apply for a license, file periodic written reportsregarding business operations and undergo comprehensive state examinations toensure that we comply with applicable laws. Under statutory authority, stateregulators have broad discretionary power and may impose new licensingrequirements, interpret or enforce existing regulatory requirements indifferent ways or issue new administrative rules, even if not contained instate statutes, that impact the way we do business and may force us toterminate or modify our operations in particular states. They may also imposerules that are generally adverse to our industry. Any new licensingrequirements or rules could have a material adverse effect on ourbusiness, results of operations and financial condition.

In some cases, we rely on the interpretations of thestaff of state regulatory bodies with respect to the laws and regulations oftheir respective jurisdictions. These staff interpretations generally are notbinding legal authority and may be subject to challenge in administrative orjudicial proceedings. Additionally, as the staff of state regulatory bodieschange, it is possible that their interpretations of applicable laws andregulations also may change and negatively affect our business. As a result,our reliance on staff interpretations could therefore have a material adverseeffect on our business, results of operations and financial condition.

Additionally, state attorneys general and bankingregulators have begun to scrutinize payday cash advance services and takeactions that could require us to modify, suspend or cease operations in theirrespective states. In December 2005, after the conclusion of a contested case,the Commissioner of Banks for North Carolina ordered that the Company’s NorthCarolina subsidiary immediately cease all business operations. See “Item 1. Financial Statements—Notes to InterimUnaudited Financial Statements—Note 7. Commitments and Contingencies.” As aresult, we closed 118 centers in North Carolina. The lost revenue from suchclosures may have a material adverse effect on our results of operations andfinancial condition.

***The payday cash advance servicesindustry is subject to various local rules and regulations. Changes inthese local regulations could have a material adverse effect on our business,results of operations and financial condition.***

In addition to state and federal laws and regulations,our business can be subject to various local rules and regulations such aslocal zoning regulations. Any actions taken in the future by local zoning 

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boards or other localgoverning bodies to require special use permits for, or impose otherrestrictions on, payday cash advance service providers could have a materialadverse effect on our business, results of operations and financial condition.

From time to time, we may also choose to operate in astate even if legislation or regulations cause us to lose money on ouroperations in that state. The passage of a 2002 Indiana statute established arate structure at which we could not operate on a profitable basis. However, wecontinued to provide payday cash advances in the state while experiencingoperating losses until a new, less restrictive, law was passed inMarch 2004. Any of these actions or events could have a material adverseeffect on our business, results of operations and financial condition.

***Current and future litigation andregulatory proceedings against us could have a material adverse effect on ourbusiness, 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 Financial Statements—Note 7. Commitments and Contingencies.” Adverserulings in some of these lawsuits or regulatory proceedings could significantlyimpair our business or force us to cease doing business in one or more states.

We are likely to be subject to further litigation andproceedings in the future. The consequences of an adverse ruling in any currentor future litigation or proceeding could cause us to have to refund fees and/orinterest collected on payday cash advances, refund the principal amount ofpayday cash advances, pay treble or other multiple damages, pay monetarypenalties and/or modify or terminate our operations in particular states. Wemay also be subject to adverse publicity. Defense of any lawsuits orproceedings, even if successful, would require substantial time and attentionof our senior officers and other management personnel that would otherwise bespent on other aspects of our business and would require the expenditure ofsignificant amounts for legal fees and other related costs. Any of these eventscould have a material adverse effect on our business, results of operations andfinancial condition.

***Competition in the retailfinancial services industry could cause us to lose market share or reduce ourinterest and fees, possibly resulting in a decline in our future revenues andearnings.***

The industry in which we operate has low barriers toentry and is highly fragmented and very competitive. We believe that the marketmay become even more competitive as the industry grows and/or consolidates. Wecompete with services provided by traditional financial institutions, such asoverdraft protection, and with other payday cash advance providers, small loanproviders, credit unions, short-term consumer lenders, other financial serviceentities and other retail businesses that offer consumer loans or otherproducts and services that are similar to ours. We also compete with companiesoffering payday cash advances and short-term loans over the internet as well asby phone. Some of these competitors have larger local or regional customerbases, more locations and substantially greater financial, marketing and otherresources than we have. As a result of this increasing competition, we couldlose market share or we may need to reduce our interest and fees, possiblyresulting in a decline in our future revenues and earnings.

***The concentration of our revenues in certain statescould adversely affect us.***

Our centers operated in 34 and 36 states during thethree months ended March 31,2005 and 2006, respectively, and our five largest states (measured by totalrevenues) accounted for approximately 41% and 46%, respectively, of our totalrevenues. While we believe we have a diverse geographic presence, for the nearterm we expect that significant revenues will continue to be generated bycertain states, largely due to the currently prevailing economic, demographic,regulatory, competitive and other conditions in those states. Furthermore, ourfive largest states, as measured by revenues, are not in all instances our fivelargest states as measured by the number of centers operated. Changes toprevailing economic, demographic, regulatory or any other conditions in themarkets in which we operate could lead to a 

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reduction in demand forour payday cash advance services, a decline in our revenues or an increase inour provision for doubtful accounts and agency bank losses that could result ina deterioration of our financial condition.

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

Over the past few years, consumer advocacy groups andcertain media reports have advocated with increasing frequency governmental andregulatory action to prohibit or severely restrict payday cash advances. Theconsumer groups and media reports typically focus on the cost to a consumer fora payday cash advance. The consumer groups and media reports typicallycharacterize these payday cash advances as predatory or abusive towardconsumers. If this negative characterization of payday cash advances becomeswidely accepted by consumers, demand for payday cash advance services couldsignificantly decrease, which could materially adversely affect our business,results of operations and financial condition. Negative perception of paydaycash advances or other activities could also result in increased regulatoryscrutiny and increased litigation, and encourage restrictive local zoning rules andmake it more difficult to obtain government approvals necessary to open newcenters. These trends could materially adversely affect our business, resultsof operations and financial condition.

***The provision for doubtfulaccounts and agency bank losses may increase and net income may decrease if weare unable to collect customers’ personal checks that are returned due tonon-sufficient funds (“NSF”) in the customers’ accounts or other reasons.***

For the three months ended March 31, 2005 and2006, we deposited approximately 4.3% and 4.7%, respectively, of all thecustomer checks we received and approximately 71% and 77%, respectively, ofthese deposited customer checks were returned unpaid because of non-sufficientfunds in the customers’ bank accounts or because of closed accounts orstop-payment orders. Total charge-offs, net of recoveries, for the three monthsended March 31, 2005 and 2006 were approximately $16.6 million and $20.4million, respectively. If the number of customer checks that we depositincreases or the percent of the customers’ returned checks that we charge-offincreases, our provision for doubtful accounts and agency bank losses willincrease and our net income will decrease.

***We are subject to credit risk asa result of our arrangements with lending banks. The lending banks’ failure tohonor their obligations to us could have a material adverse effect on ourbusiness, results of operations and financial condition.***

Under the agency business model, all charges of feesand/or interest paid by a lending bank’s customers are deposited directly inthe lending bank’s bank account. We invoice the lending bank for the marketing,processing and servicing fees payable to us by such bank. In addition, thelending bank in Pennsylvania is responsible for making payments to us if actualpayday cash advance and installment loan losses are less than the bank’scontractually obligated portion of the losses. We are subject to the risk thatthe lending banks may fail to pay all or a portion of the amounts due to us orthat they fail to pay us on a timely basis. Any such failure could have amaterial adverse effect on our business, results of operations and financialcondition.

***If our estimates of losses arenot adequate, our provision for doubtful accounts and agency bank losses wouldincrease. This would result in a decline in our future revenues and earnings,which could have a material adverse effect on our stock price.***

We maintain an allowance for doubtful accounts forestimated losses for payday cash advances we make directly to consumers andcheck-cashing, deferred-presentment and other credit services we offer underthe standard business model and an accrual for excess bank losses for our shareof losses on payday cash advances and installment loans we market, process andservice for lending banks under the agency business model. To estimate theappropriate allowance for doubtful accounts and accrual for excess bank 

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losses, we consider theamount of outstanding payday cash advances owed to us, the amount of paydaycash advances and installment loans owed to the lending banks and serviced byus, the contract with each lending bank, historical payday cash advances orinstallment loans we have charged off, our current collection patterns and thecurrent economic trends in the markets we serve.

As of March 31,2006, our allowance for doubtful accounts was $35.6 million and the accrual forexcess bank losses that was reported in our current liabilities in our balancesheet was $2.9 million. These amounts, however, are estimates, and we have lessexperience upon which to base our estimates of losses from installment loans,check-cashing, deferred-presentment or credit services. If our actual paydaycash advance, check-cashing, deferred-presentment or credit services losses aregreater than our allowance for doubtful accounts, our provision for doubtfulaccounts and agency bank losses would increase. This would result in a declinein our future revenues and earnings, which could have a material adverse effecton our stock price.

With respect to the payday cash advances andinstallment loans that we market, process and service for the lending bank inPennsylvania, as of March 31, 2006, our aggregate contingent liability was$11.1 million and this amount was not included on our balance sheet. We couldbe obligated to pay this amount to the lending bank if the lending bank’spayday cash advances and installment loans were to become uncollectible.

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

Our primary business activity is offering payday cashadvance services. If we are unable to maintain and grow our payday cash advanceservices business, our future revenues and earnings could decline. Our lack ofproduct and business diversification could inhibit our opportunities forgrowth, reduce our revenues and profits and make us more susceptible toearnings fluctuations than many of our competitors who are more diversified andprovide other services such as pawn lending, title lending or other similarservices. External factors, such as changes in laws and regulations, newentrants and enhanced competition, could also make it more difficult for us tooperate as profitably as a more diversified company could operate. Any internalor external change in the payday cash advance services industry could result ina decline in our future revenues and earnings, which could have a materialadverse effect on our stock price.

***Our inability to efficiently andprofitably introduce or manage new products or alternative methods forconducting business could have a material adverse effect on our business,results of operations and financial condition.***

In June 2005, we began offering check-cashing anddeferred-presentment services directly to customers in Michigan and inJuly 2005 we began offering credit services as a CSO to customers inTexas. In addition, in response to the FDIC’s most recent instruction tocertain banks to discontinue offering new payday cash advances and alternativecredit products, we are studying alternative methods for conducting business inArkansas and Pennsylvania. Further, we expect to introduce new products thatare compatible with our business. Each of these changes, alternative methods ofconducting business and new products are subject to risk and uncertainty andrequire significant investment in time and capital. Due to our lack ofexperience in offering these alternative services and products, we cannotassure you that we will be able to successfully implement any of these changes.We also cannot assure you that we will be able to identify or implement anyalternative methods of conducting business in Arkansas or Pennsylvania.Furthermore, we cannot predict the demand for any of these new services orproducts, nor do we know if we will be able to offer these new services orproducts in an efficient manner or on a profitable basis. Our failure to do so,or low customer demand for any of these new services or products, could have amaterial adverse effect on our business, results of operations and financialcondition.

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***Our ability to manage our growthmay deteriorate and our ability to execute our growth strategy may be adverselyaffected.***

We have experienced substantial growth in recentyears. Our growth strategy, which is based on opening centers in existing andnew markets, is subject to significant risks. We cannot assure you that we willbe able to expand our market presence in our current markets or successfullyenter new markets through the opening of new centers or acquisitions. Moreover,the start-up costs and the losses from initial operations attributable to eachnewly opened center place demands upon our liquidity and cash flow, and wecannot assure you that we will be able to satisfy 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 identify, manage and implement alternative methods for doingbusiness in Pennsylvania, Arkansas or any other state;

·       ourability to identify, implement and manage new products that are compatible withour 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 assureyou that our systems, procedures, controls and existing space will be adequateto support expansion of our operations. Our growth has placed significantdemands on all aspects of our business, including our administrative, technicaland financial personnel and systems. Additional growth or expansion may furtherstrain our management, financial and other resources. Our future results ofoperations will substantially depend on the ability of our officers and keyemployees to manage changing business conditions and to implement and improveour technical, administrative, financial control and reporting systems. Inaddition, we cannot assure you that we will be able to implement our businessstrategy profitably in geographic areas or product lines we do not currentlyserve.

***We may incur substantialadditional debt, which could adversely affect our business, results ofoperations and financial condition by limiting our ability to obtain financingin the future and react to changes in our business.***

We may incursubstantial additional debt in the future. As of March 31, 2006, our totaldebt was approximately $6.5 million and our stockholders’ equity wasapproximately $315.0 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:

·  restrict our operational flexibility throughrestrictive covenants that will limit our ability to make acquisitions, explorecertain business opportunities, dispose of assets and take other actions;

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

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

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

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

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

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

If we fail to generate sufficient cash flow fromfuture operations to meet our debt service obligations, we may need to seekrefinancing of all or a portion of our indebtedness or obtain additionalfinancing in order to meet our obligations with respect to our indebtedness. Wecannot assure you that we will be able to refinance any of our indebtedness orobtain additional financing on satisfactory terms or at all.

***We depend on loansand cash management services from banks to operate our business. If banksdecide to stop making loans and/or providing cash management services 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 borrowings under our revolving creditfacility to fund payday cash advances, capital expenditures to build newcenters and other needs. One major regional bank announced that it had revisedits credit policies to prohibit future loans to companies engaged in the paydaycash advance services or car title lending industries in a letter that the bankfiled with the Federal Reserve Board in connection with the bank’s applicationfor approval of an acquisition. The bank’s letter referred to comments filed bycertain consumer advocacy organizations in connection with the bank’sapplication, and stated that it had revised its credit policies “afterconsidering the potential reputational risks and consumer harm” that couldresult from lending to companies in these industries. While this bank is notone of our existing lenders under our revolving credit facility, if our currentor potential credit banks decided not to lend money to companies in the paydaycash advance services industry, we could face higher borrowing costs,limitations on our ability to grow our business as well as possible cashshortages, any of which could have a material adverse effect on our business,results of operations and financial condition. This bank also no longerprovides cash management services, including operating depository accounts, topayday advance companies. There are other banks that have notified us and othercompanies in the payday cash advance and check-cashing industries, that theywill no longer maintain bank accounts for these companies due to reputationalrisks and increased compliance costs of servicing money services businesses andother cash intensive industries. While none of our larger depository banks hasrequested that we close our bank accounts or put other restrictions on how weuse their services, if any of our larger current or future depository bankswere to take such action, we could face higher costs of managing our cash andlimitations on our ability to grow our business, both of which could have amaterial adverse effect on our business, results of operations and financialcondition.

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

We have an existing revolving credit facility thatallows us to borrow up to $265.0 million, assuming we are in compliance with anumber of covenants and conditions. Because we typically use substantially allof our available cash generated from our operations to repay borrowings on ourrevolving credit facility on a 

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current basis, we havelimited cash balances and we expect that a substantial portion of our liquidityneeds, including any amounts to pay any future cash dividends on our commonstock, will be funded primarily from borrowings under our revolving creditfacility. As of March 31, 2006, we had approximately $250.4 millionavailable for future borrowings under this facility. Due to the seasonal natureof our business, our borrowings are historically the lowest during the firstcalendar quarter and increase during the remainder of the year. If our existingsources of liquidity are insufficient to satisfy our financial needs, we mayneed to raise additional debt or equity in the future.

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

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

·       incuradditional debt;

·       createliens;

·       effectmergers or consolidations;

·       makeinvestments, acquisitions or dispositions;

·       paydividends or make other payments;

·       enterinto certain sale and leaseback transactions;

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

·       haveforeign subsidiaries.

The breach of any covenants or obligation in our revolvingcredit facility will result in a default. If there is an event of default underour revolving credit facility, the lenders under the revolving credit facilitycould cause all amounts outstanding there under to be due and payable, subjectto applicable grace periods. This could trigger cross-defaults under our otherexisting or future debt instruments. As a result, our ability to respond tochanging business and economic conditions and to secure additional financing,if needed, may be significantly restricted, and we may be prevented fromengaging in transactions that might further our growth strategy. If we areunable to repay, refinance or restructure our indebtedness under our revolvingcredit facility, the lenders under that facility could proceed against thecollateral securing that indebtedness. Our obligations under the revolvingcredit facility are guaranteed by each of our existing and future subsidiaries.The borrowings under the revolving credit facility and the subsidiaryguarantees are secured by substantially all of our assets and the assets of thesubsidiary guarantors. In addition, borrowings under the revolving creditfacility are secured by a pledge of substantially all of the capital stock, orsimilar equity interests, of the subsidiary guarantors. In the event of ourinsolvency, liquidation, dissolution or reorganization, the lenders under ourrevolving credit facility and any other existing or future debt of ours wouldbe entitled to payment in full from our assets before distributions, if any,were made to our stockholders.

***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 

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our customers’ receipt ofincome tax refunds, and increase as a percentage of revenues for the remainderof each year. This seasonality requires us to manage our cash flows over thecourse of the year. If our revenues or collections were to fall substantiallybelow what we would normally expect during certain periods, our ability toservice our debt, pay dividends on our common stock and meet our otherliquidity requirements may be adversely affected, which could have a materialadverse effect on our results of operations and stock price.

In addition, our quarterly results have fluctuated inthe past and are likely to continue to fluctuate in the future because of theseasonal nature of our business. Therefore, our quarterly revenues and resultsof operations are difficult to forecast, which, in turn could cause our futurequarterly results to not meet the expectations of securities analysts or investors.Our failure to meet expectations could cause a material drop in the marketprice of our common stock.

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

Because our business requires us to maintain asignificant supply of cash in each of our centers, we are subject to the riskof cash shortages resulting from employee and third-party theft and errors.Although we have implemented various programs to reduce these risks, maintaininsurance coverage for theft and provide security for our employees andfacilities, we cannot assure you that employee and third-party theft and errorswill not occur. Cash shortages from employee and third-party theft and errorswere approximately $0.2 million (0.18% of total revenues) and $0.3 million(0.20% of total revenues) in the three months ended March 31, 2005 and2006, respectively. Theft and errors could lead to cash shortages and couldadversely affect our business, results of operations and financial condition.It is also possible that crimes such as armed robberies may be committed at ourcenters. We could experience liability or adverse publicity arising from suchcrimes. For example, we may be liable if an employee, customer or bystandersuffers bodily injury, emotional distress or death. Any such event may have amaterial adverse effect on our business, results of operations and financialcondition.

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

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

***Our 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 building is located in Spartanburg,South Carolina. Our information systems and administrative and managementprocesses are primarily provided to our zone and regional management and to ourcenters from this centralized location, and they could be disrupted if acatastrophic event, such as a tornado, power outage or act of terror, destroyedor severely damaged our headquarters. Any of these catastrophic events could havea material adverse effect on our business, results of operations and financialcondition.

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***Potential future acquisitionscould be difficult to integrate, divert the attention of key managementpersonnel, disrupt our business, dilute stockholder value and adversely affectour 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 also frequently result in the recordingof goodwill and other intangible assets that are subject to potentialimpairments in the future that could harm our financial results. In addition,if we finance acquisitions by issuing convertible debt or equity securities,our existing stockholders may be diluted, which could affect the market priceof our stock. As a result, if we fail to properly evaluate acquisitions orinvestments, we may not achieve the anticipated benefits of any suchacquisitions, and we may incur costs in excess of what we anticipate, either ofwhich could have a material adverse effect on our business, results ofoperations and financial condition.

***Regular turnover among our managers and employees atour centers makes it more difficult for us to operate our 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 March 31, 2006, amongour center managers was approximately 57% and among our other center employeeswas approximately 108%. Approximately 50% of the turnover has traditionallyoccurred in the first six months following the hire date of our center managersand employees. This turnover increases our cost of operations and makes it moredifficult to operate our centers. If we are unable to retain our employees inthe future, our business, results of operations and financial condition couldbe adversely affected.

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

Between October 1, 2001, and the closing of ourinitial public offering (“IPO”) on December 21, 2004, we were taxed as a “pass-through”entity under Subchapter S of the Internal Revenue Code. Currently, we are taxedas a C corporation under Subchapter C of the Internal Revenue Code, which isapplicable to most corporations and treats the corporation as an entity that isseparate and distinct from its stockholders. If our tax returns for the yearsin which we were an S corporation were to be audited by the Internal RevenueService or another taxing authority and we were determined not to havequalified for, or to have violated, our S corporation status, we could beobligated to pay back taxes, interest and penalties. These amounts couldinclude taxes on all of our net income while we were an S corporation. Wecurrently estimate that the net income during the period we were an Scorporation was approximately $225.0 million to $235.0 million. Any such claimscould result in additional costs to us and could have a material adverse effecton our business, results of operations and financial condition.

Until we file our finalincome tax returns as an S corporation, the amount of deferred income taxliability recorded as a result of our conversion from an S status to a C statusremains an estimate. Any 

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changein this deferred income tax liability will result in a change in income taxexpense when the final S corporation income tax return is filed. This should occurin the third quarter of 2006.

**Risks Related toOur Common Stock**

***Our executive officers and directors may be able toexert significant influence over our future direction.***

Our executive officers and directors together withcertain trusts for the benefit of some of the family members of certaindirectors, control approximately 35%****of ouroutstanding common stock. As a result, these stockholders, if they acttogether, may be able to influence any matter requiring our stockholders’approval, including the election of directors and approval of significantcorporate transactions. As a result, this concentration of ownership may delay,prevent or deter a change in control, could deprive our stockholders of anopportunity to receive a premium for their common stock as part of a sale ofour company or its assets and might reduce the market price of our commonstock.

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

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

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

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

·       permitour Board of Directors to issue one or more series of preferred stock;

·       prohibitstockholders from filling vacancies on our Board of Directors;

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

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

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

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 approved bythe 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.

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In addition, Section 203 of the GeneralCorporation Law of the State of Delaware may limit the ability of an “interestedstockholder” to engage in business combinations with us. An interestedstockholder is defined to include persons owning 15% or more of our outstandingvoting stock.

***We can redeem your common stock if you are or if youbecome a disqualified person.***

Federal and state laws andregulations applicable to providers of payday cash advance services or otherfinancial products or services that we may introduce in the future may now orin the future restrict direct or indirect ownership or control of providers ofsuch products or services by disqualified persons (such as convicted felons).Our certificate of incorporation provides that we may redeem shares of yourcommon stock to the extent deemed necessary or advisable, in the sole judgmentof 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.

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

On May 4, 2005, weannounced a stock repurchase program pursuant to which we were authorized torepurchase up to $50.0 million of our outstanding common stock. We made nostock repurchases during the three months ended March 31, 2006. As of March 31,2006, the approximate dollar value of shares that may yet be purchased underthe program was $24.4 million.

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**ITEM6. EXHIBITS**

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                           |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Form of Registration Rights Agreement  (incorporated herein by reference to Exhibit 10.6 to Advance America,  Cash Advance Centers, Inc.’s Registration Statement on Form S-1,  Registration No. 333-118227).                                                                                               |
| 10.2            |       | Separation Agreement and General Release between  Advance America, Cash Advance Centers, Inc. and John T. Egeland, dated  January 25, 2006 (incorporated herein by reference to Exhibit 10.1  to Advance America, Cash Advance Centers, Inc.’s Current Report on  Form 8-K filed on January 31, 2006). |
| 10.3            |       | Advance America, Cash Advance Centers, Inc.  Policy Regarding Receipt of Company Stock in Lieu of Cash Director’s Fees  (incorporated herein by reference to Exhibit 99.1 to Advance America,  Cash Advance Centers, Inc.’s Current Report on Form 8-K filed  on February 23, 2006).                   |
| 31.1            |       | Certification of Principal Executive Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as amended.                                                                                                                                                                            |
| 31.2            |       | Certification of Principal Financial Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as amended.                                                                                                                                                                            |
| 32.1            |       | Certification of Chief Executive Officer of Advance  America, Cash Advance Centers, Inc. pursuant to 18 U.S.C. Section 1350  (Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).                                                                                                                               |
| 32.2            | ** ** | Certification of Chief Financial Officer of Advance  America, Cash Advance Centers, Inc. pursuant to 18 U.S.C. Section 1350  (Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).                                                                                                                               |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                   |       |       |   | **ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.**                                                                   |
|-------------------|------------|------------|--------|-------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** ** |   |                                                                                                              |
| May 10, 2006 |       | 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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**INDEXTO EXHIBITS**

| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Form of  Registration Rights Agreement (incorporated herein by reference to  Exhibit 10.6 to Advance America, Cash Advance Centers, Inc.’s  Registration Statement on Form S-1, Registration No. 333-118227).                                                                                                |
| 10.2                |       | Separation  Agreement and General Release between Advance America, Cash Advance  Centers, Inc. and John T. Egeland, dated January 25, 2006  (incorporated herein by reference to Exhibit 10.1 to Advance America,  Cash Advance Centers, Inc.’s Current Report on Form 8-K filed  on January 31, 2006). |
| 10.3                |       | Advance America,  Cash Advance Centers, Inc. Policy Regarding Receipt of Company Stock in  Lieu of Cash Director’s Fees (incorporated herein by reference to  Exhibit 99.1 to Advance America, Cash Advance Centers, Inc.’s  Current Report on Form 8-K filed on February 23, 2006).                    |
| 31.1                |       | Certification of  Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                             |
| 31.2                |       | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a)under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                   |
| 32.1                |       | Certification of  Chief Executive Officer of Advance America, Cash Advance Centers, Inc.  pursuant to 18 U.S.C. Section 1350 (Adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002).                                                                                                                               |
| 32.2                |       | Certification of Chief  Financial Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002).                                                                                                                               |

 

 

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