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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

COMMISSION FILE NUMBER 001-32363

ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

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

        Indicate by a check mark whether the Registrant is an accelerated filer (as defined in exchange Act Rule 12b-2). Yes o    No ý

        The registrant completed its initial public offering of its voting common stock on December 21, 2004. Accordingly, the registrant's voting common stock was not publicly traded at June 30, 2004.

        At March 15, 2005 there were 83,958,270 shares of the registrant's Common Stock, par value $.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain information required by Part III of this Annual Report is incorporated herein by reference from the registrant's Proxy Statement for the registrant's Annual Meeting of Stockholders to be held on May 19, 2005.

ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.
Form 10-K
For the year ended December 31, 2004

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FORWARD-LOOKING STATEMENTS

        The matters discussed in this Annual Report on Form 10-K that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties, which could cause actual results to differ materially from the results expressed in, or implied by these forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "expect," "intend," "plan," "believe," "project," "anticipate," "may," "will," "should," "would," "could," "estimate," "continue" and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other "forward-looking" information.

        The factors listed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors," as well as any cautionary language in this Annual Report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, those described under the heading "Risks Factors" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report.

        Forward-looking statements speak only as of the date of this Annual Report. Except as required under federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Annual Report, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Annual Report or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

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PART I

ITEM 1.    BUSINESS.

Overview

        We are the largest provider of payday cash advance services in the United States, as measured by the number of payday cash advance centers operated. As of December 31, 2004, we operated 2,408 payday cash advance centers in 34 states. Payday cash advances are small-denomination, short-term, unsecured advances that typically are due on the customer's next payday. We provide these services primarily to middle-income working individuals. We do not franchise any of our payday cash advance centers. We focus exclusively on payday cash advance services and do not provide check cashing, pawn lending, title lending or wire transfer or similar services. We believe our sole focus on payday cash advance services is a competitive strength that has allowed us to better reach and service our primary market of middle-income customers. The table below shows selected demographics of the customers we serve:

(1)

Based on a study performed for us by DX Marketing, LLC, a data solutions provider, of the approximately 63% of customers served during the twelve months ended June 30, 2004 for whom this information was available.

(2)

Percent of population 25 years old and older that are high school graduates or higher.

        In order for a new customer to be approved for a payday cash advance by us or by a lending bank, he or she is required to have a bank account and a regular source of income, such as a job. To obtain a payday cash advance, a new customer typically:

•

completes an application and presents the required documentation (usually proof of identification, a pay stub or other evidence of income, and bank statement);



•

enters into an agreement governing the terms of the payday cash advance (including the customer's agreement to repay the cash advance in full on or before a specified due date, usually the customer's next payday, and our or the lending bank's agreement to defer the presentment or deposit of the customers' check until the due date of the payday cash advance);



•

writes a personal check to cover the amount of the payday cash advance plus charges for applicable fees and/or interest; and



•

makes an appointment to return on the specified due date of the payday cash advance to repay the advance plus the applicable charges and to reclaim his or her check.

        Immediately upon completion of the approval process, the customer is given cash or a check drawn on our or the lending bank's account in the amount of the payday cash advance. At the specified due date, the customer is required to pay off the payday cash advance in full, which is usually accomplished by he or she returning to the payday cash advance center with cash. Upon a repayment in full, we return the customer's personal check to him or her. If the customer does not repay the outstanding payday cash advance in full on or before the due date, the payday cash advance center will seek to collect from the customer and may deposit the customer's personal check.

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        Our goal is to attract customers by offering straightforward, rapid access to temporary funding while providing high-quality, professional customer service. We believe that our payday cash advance service represents a competitive source of liquidity to the customer relative to other credit alternatives, which typically include overdraft privileges or bounced check protection, late bill payments, checks returned for insufficient funds and short-term collateralized loans.

        In most states in which we conduct business we make payday cash advances directly to our customers (which we refer to as the standard business model). In other states in which we conduct business we act as a processing, marketing and servicing agent through our payday cash advance centers for Federal Deposit Insurance Corporation ("FDIC") insured, state-chartered banks that make payday cash advances to their customers pursuant to the authority of the laws of the state in which they are located and federal interstate banking laws, regulations and guidelines (which we refer to as the agency business model). We refer to the banks for which we act as agent as the lending banks. Under the agency business model, federal interstate banking laws, regulations and guidelines enable a FDIC-insured, state-chartered bank located in one state to make loans to a consumer in another state and to charge fees and/or interest allowed by the lending bank's home state even if the fees and/or interest exceed what may be charged in the consumer's state. As of December 31, 2004, pursuant to our processing, marketing and servicing agreements with the lending banks, we are the processing, marketing and servicing agent for payday cash advances offered, made and funded by BankWest, Inc., a South Dakota bank ("BankWest"), in Pennsylvania, First Fidelity Bank, a South Dakota bank, in Michigan, Republic Bank & Trust Company, a Kentucky bank ("Republic"), in North Carolina and Texas and Venture Bank, a Washington bank, in Arkansas.

        Under the standard business model, we determine whether to approve a payday cash advance to our customers. Using this model, we do not undertake any evaluation of the creditworthiness of our customers in determining whether to approve customers for payday cash advances, other than requiring proof of identification, bank account and income source, as described above. However we consider the customer's income in determining the amount of the payday cash advance. Under the agency business model, the lending banks determine whether to approve a payday cash advance to their customers utilizing third-party credit scores to evaluate and approve the customer's application.

        The following table summarizes the most significant differences between the standard business model and the agency business model, including the applicable separation of obligations, fees and risks:

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        As of December 31, 2004, we were making payday cash advances directly to customers under the standard business model in 1,868 of our payday cash advance centers in 29 states and serving as agent for the lending banks under the agency business model in 540 of our payday cash advance centers in five states.

        We provide payday cash advances and charge fees and/or interest as specified by the laws of the states where we operate under the standard business model. In the states where we operate under the agency business model, the lending banks provide payday cash advances and charge fees and/or interest

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as specified by the laws of the states in which they are located and consistent with the regulatory authority of the FDIC and federal banking law. The permitted size of a payday cash advance varies by state and ranges from $50 to $1,000. The permitted fees and/or interest on a payday cash advance also varies by state and ranges from 10% to 44% of the amount of the payday cash advance.

        Additional fees that the lending banks or we may collect include fees for returned checks and late fees. The returned check fee varies by state and ranges up to $30.00. The lending bank or we, as the case may be, charge the customers this fee if the check is deposited and is returned due to non-sufficient funds ("NSF") in the customers' accounts or other reasons. In three states we are permitted to charge a late fee, the amount of which varies by state. The late fees are established as a percent of the amount due up to a maximum amount. For the years ended December 31, 2004 and 2003, total NSF fees collected by us and the lending banks were approximately $2.4 million and $2.3 million, respectively, and total late fees collected by us and the lending banks were approximately $75,000 and $89,000, respectively.

        The amount of the average payday cash advance provided or processed by us was $328, $321 and $313 in the years ended December 31, 2004, 2003 and 2002, respectively. The average charge to customers for providing or processing a payday cash advance was $52, $52 and $51 in the years ended December 31, 2004, 2003 and 2002, respectively. The average duration of a payday cash advance provided or processed by us was 15.4 days, 15.1 days and 14.5 days in the years ended December 31, 2004, 2003 and 2002, respectively.

        The following table presents key operating data for our business:

        Our payday cash advance centers, which we design to have the appearance of a mainstream financial institution, are typically located in middle-income shopping areas with high retail activity. We have developed our national network of payday cash advance centers by opening new centers on a regular basis. In the year ended December 31, 2004, we opened 469 new payday cash advance centers in 29 states, and in the year ended December 31, 2003, we opened 330 new payday cash advance centers in 30 states.

Our Industry

        The payday cash advance services industry has grown steadily since the early 1990s in response to a shortage of available short-term consumer credit alternatives from traditional banking institutions. The rapid increase in the charges associated with having insufficient funds in one's bank account, as well as other late/penalty fees charged by financial institutions and merchants, have also helped increase customer demand for payday cash advances. A payday cash advance typically involves a single charge, unlike other alternatives that often require collateral, origination and administration fees, prepayment penalties and charges for other services such as credit life insurance, interest payments and additional incremental charges. Other alternatives, such as bounced checks and late bill payments, may also have negative credit consequences. We believe customers use short-term payday cash advances because they provide a simple, quick and confidential way to meet short-term cash needs between paydays while avoiding the potentially higher costs and negative credit consequences of other alternatives.

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        We believe many banks and other traditional financial institutions have reduced or eliminated their provision of small-denomination, short-term consumer loans, in part due to the costs associated with originating these loans. As a result, a significant number of companies have begun to offer such loans, or payday cash advances, to lower-income and middle-income individuals. The providers of these types of loans are fragmented and range from specialty finance offices, like our payday cash advance centers, to retail stores in other industries that offer these types of loans as ancillary services. Because of the relatively low cost of entry and the regulatory safe harbor that many state statutes provide for payday cash advances, the payday cash advance services industry has experienced significant growth in the number of payday cash advance centers. Recently, businesses offering payday cash advances and short-term loans over the internet as well as by telephone have also begun to compete in the payday cash advance services industry.

        We believe the payday cash advance services industry is growing, fueled by overall increases in the population and increased consumer and legislative acceptance of payday cash advances. The number of jurisdictions with specific legislation and/or regulations permitting payday cash advances or small loans has grown from 16 states in 1997, the year in which we commenced operations, to 37 states and the District of Columbia as of December 31, 2004.

Competitive Strengths

        Market Leader with Economies of Scale.    With 2,408 payday cash advance centers located in 34 states as of December 31, 2004, we are the largest provider of payday cash advance services in the United States, as measured by the number of payday cash advance centers operated, with approximately twice as many payday cash advance centers as the next largest provider of payday cash advance services. We believe our scale provides us with a leadership position in the industry, allows us to leverage our brand name in opening payday cash advance centers in existing and new markets and enables us to benefit from economies of scale and to enter favorable relationships with landlords, strategic vendors and other suppliers. We have centralized most payday cash advance center support functions, including marketing and advertising, accounting and finance, treasury management, human resources, regulatory compliance, information technology support and customer support systems. We believe these centralization efforts will enable us to continue to expand our network of payday cash advance centers while controlling our costs.

        Successful Execution of Growth Strategy.    We believe we have successfully executed an effective growth strategy, including identifying attractive locations for new payday cash advance centers, rapidly entering into new leases and establishing the necessary processes and systems to manage the overall growth process. We use our database of approximately 3.4 million customer records to analyze market opportunities and make management decisions regarding expanding our network of payday cash advance centers. In the year ended December 31, 2004, we opened 469 new payday cash advance centers in 29 states, and in the year ended December 31, 2003, we opened 330 new payday cash advance centers in 30 states.

        Continued Focus on Government Affairs.    We have experience with the legislative and regulatory environment in all of the states in which we operate as well as at the federal level. We are a founding member of the Community Financial Services Association of America ("CFSA"), an industry trade group comprised of our company and more than 100 other companies engaged in the payday cash advance services industry. Our internal government affairs team, together with the CFSA, seeks to encourage favorable legislation that permits us to operate profitably within a balanced regulatory framework. In 2004, 2003 and 2002, payday cash advance legislation we supported was adopted in 15 states, five states and six states, respectively. We have added to the size of our internal government affairs team to provide more complete coverage of state legislatures. Our approach is to continue to work with policymakers and grass roots organizations to provide a predictable, favorable legislative environment for the payday cash advance services industry.

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        Costs incurred by our government affairs team were approximately $4.1 million, $3.1 million and $3.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. In addition, certain employees who are not members of our government affairs team and who do not work full time on government affairs also meet from time to time with government representatives. We do not separately track the expenses and time incurred by these employees on government matters.

        Ability to Respond Rapidly to Regulatory Changes.    Our regulatory department, along with our internal government affairs team and outside counsel, monitors the various state and federal legislatures and rule-making bodies to keep abreast of changes in laws and regulations relevant to our business. Our organization is designed to be able to respond rapidly to these regulatory developments. We believe that our strong internal regulatory team enables us to seize opportunities for growth in new jurisdictions, permits us to conduct our business in compliance with often changing laws and regulations and allows us to react quickly to those changes.

        Rigorous Implementation of Payday Cash Advance Center-Level Controls.    We believe that our management information systems, our cash management systems and our internal compliance systems are critical to our success and continued growth. We employ a proprietary point-of-sale system to record transactions in our payday cash advance centers. This information is recorded daily and analyzed at our payday cash advance centers and at our headquarters. We also employ a third-party cash reconciliation software system to balance and monitor cash receipts and disbursements. The principal benefits from our use of these two systems are our quick recognition of variances from expected operating results, our early detection of theft and fraud and our ability to monitor compliance with various federal and state laws.

        Exclusive Focus on Payday Cash Advance Services.    We only offer payday cash advance services and do not engage in any other businesses such as check cashing, pawn lending, title lending, wire transfer services or other similar businesses in which many of our competitors engage. We believe that our single service focus has allowed us to expand our network of payday cash advance centers at a faster pace and with a more effective control environment than could a diversified multi-product company. We believe that focusing solely on payday cash advance services provides us with many substantial benefits, including:

•

an enhanced ability to attract middle-income working customers who have bank accounts by locating our payday cash advance centers in middle-income shopping areas;



•

superior customer relationships and service;



•

an exclusive management focus on the quality of our payday cash advance services and the growth of our network of payday cash advance centers, without distractions from other product lines;



•

more effective and efficient training of our employees; and



•

lower capital requirements than most of our competitors who engage in check cashing, pawn lending, title lending, wire transfer services or other similar more capital intensive businesses.

        Geographical Diversification of Our Payday Cash Advance Centers.    With payday cash advance centers located in 34 states as of December 31, 2004, we believe we have developed a significant presence throughout the United States that helps us to mitigate the risk and possible financial impact of unfavorable changes in state legislation or in the economic environment of a particular region or state and allows us to take advantage of competitive opportunities in those markets. For the year ended December 31, 2004, no state accounted for more than 10% of our total revenues, except for California, which accounted for 10.8% of our total revenues.

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        Management Team with Significant Expertise.    Our highly experienced management team has substantial knowledge of the retail, specialty finance and payday cash advance industries. George D. Johnson, Jr., our Chairman and co-founder, is the former Chief Executive Officer of Extended Stay America and former President of Blockbuster's consumer products division. William M. Webster, IV, our Chief Executive Officer and co-founder, has served the executive branch of the United States government in various capacities and has extensive retail experience operating franchised restaurant locations. John T. Egeland, our President, has extensive experience in the consumer finance and banking industries. John I. Hill, our Executive Vice President and Chief Financial Officer, has extensive experience as a corporate chief financial officer and as an accountant with a national accounting firm. Our management team's ability to execute on our rapid roll-out business model and their thorough understanding of the legislative and regulatory environment have been demonstrated by our rapid growth over the past few years.

Business Strategy

        Continue to Open Payday Cash Advance Centers Systematically.    A key objective of our growth strategy is to become the leading provider of payday cash advance services in each market we enter by rapidly opening proprietary, wholly owned payday cash advance centers. We do not intend to franchise our payday cash advance centers. We opened 469 payday cash advance centers in 2004, and we expect to continue our rapid roll-out of new payday cash advance centers. We believe that internal development of new payday cash advance centers is currently more economical than acquiring and integrating existing payday cash advance centers. However, from time to time we may also consider opportunities to acquire payday cash advance companies or businesses. We believe that by offering the convenience of a high density of payday cash advance centers, as well as exceptional customer service, we will maintain a high level of customer satisfaction.

        Continued Revenue Growth at Mature Payday Cash Advance Centers.    We believe we have an opportunity to continue to increase revenues at our payday cash advance centers that have been operating for at least 24 months. For the year ended December 31, 2004, per center total revenues at centers opened before December 31, 2001 increased 6.3% compared to per center total revenues for centers opened before December 31, 2001 for the year ended December 31, 2003. In order to increase revenues at these centers, we employ a variety of advertising and marketing programs, including television advertising, direct mail marketing, local center marketing and yellow pages advertising.

        Drive New Payday Cash Advance Center Operating Performance.    In our 797 operating payday cash advance centers that opened in 2004 and 2003 (excludes one Georgia center opened in 2003 and one center both opened and closed in 2004), we are striving to match the operating performance of our centers that have been open for at least 24 months. To do this, our employees are evaluated and compensated, in part, based on their achievement of operational goals, which we adjust each year to account for the continued improvement in our business. The three key metrics we reward are (1) maintaining a high level of compliance with applicable laws and regulations, (2) meeting stated growth objectives and (3) meeting collection targets. We believe that by focusing on these specific goals and tying them to employee compensation, we can achieve operating performance in our newer payday cash advance centers comparable to the operating performance at our mature payday cash advance centers.

        Maximize the Efficiency of Our Infrastructure.    We have made significant investments in technology, infrastructure and monitoring/compliance systems that are highly scalable. As we expand our network of payday cash advance centers, we expect that our general and administrative expenses will decline as a percentage of our net revenues.

        Support Improvement of the Legislative and Regulatory Environment.    As of December 31, 2004, 37 states and the District of Columbia had specific laws that permitted payday cash advances or allowed a

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form of payday cash advances under small loan laws. Our goal is to work with policymakers and other grass roots organizations to facilitate the implementation of a balanced, visible and predictable regulatory framework that protects the interests of the customers we serve while allowing us to operate profitably in every state.

Our Payday Cash Advance Services

        We provide directly, or we process, market and service for the lending banks for which we act as agent, small-denomination, short-term unsecured consumer credit because we believe that many consumers have limited access to alternative sources of liquidity. We advertise our payday advance services primarily through television, direct mail, the yellow pages, and local store marketing activities. To obtain a payday cash advance from a lending bank or us, a new customer first completes an application that includes personal information such as his or her name, address, phone number, employment information or source of income, and references. This information is entered into our information system. The new customer then presents the required documentation, usually proof of identification, a pay stub or other evidence of income, and a bank statement, to our payday cash advance center employee. In order for a new customer to be approved for a payday cash advance by us or by a lending bank, he or she is required to have a bank account and a regular source of income, such as a job. Under the standard business model, we determine whether to approve a payday cash advance to our customers. Using this model, we do not undertake any evaluation of the creditworthiness of our customers in determining whether to approve customers for payday cash advances, other than requiring proof of identification, bank account and income source, as described above. However we consider the customer's income in determining the amount of the payday cash advance. Under the agency business model, the lending banks determine whether to approve a payday cash advance to their customers utilizing third-party credit scores to evaluate and approve each customer's application. After we have reviewed the documents presented by the customer for completeness and accuracy, made copies for record keeping purposes and the lending bank or we, as applicable, have approved the payday cash advance, the customer enters into an agreement governing the terms of the payday cash advance. The customer then writes a personal check to cover the amount of the payday cash advance plus charges for applicable fees and/or interest, and makes an appointment to return on a specified due date, typically his or her next payday, to repay the advance plus the applicable charges. At the specified due date, the customer is required to pay off the payday cash advance in full, which is usually accomplished by the customer returning to the payday cash advance center with cash. Upon a repayment in full, we are obligated to return the customer's personal check to the customer. If the customer does not repay the outstanding payday cash advance in full on or before the due date, the payday cash advance center will seek to collect from the customer and may deposit the customer's personal check. Collection procedures include (1) contacting the customer by telephone or in person to obtain a payment or a promise to pay or (2) negotiating the customer's personal check at the customer's bank by depositing it or obtaining a cashier's check. For details on our collection procedures, see "—Collection Procedures."

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        We have agreed to abide by the CFSA's Best Practices for the payday cash advance services industry, set forth below.

Source: Community Financial Services Association of America, as of March 2005.

Collection Procedures

        As part of the closing process for each payday cash advance, we typically establish the expectation with the customer that they will return by scheduling an appointment for them to come back to our payday cash advance center to repay their payday cash advance on its due date. The day before the due date, we typically call the customer to confirm their appointment.

        If the customer does not return to repay the payday cash advance, the payday cash advance center manager has the discretion to either (1) commence past-due collection efforts, which typically may proceed for up to 14 days in most states, or (2) deposit the customer's personal check. Payday cash advance center managers have discretion to commence past-due collection efforts in place of depositing the customer's personal check in order to maintain accounts, improve customer relations and enhance collection efforts. If the payday cash advance center manager has decided to commence past-due

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collection efforts in place of depositing the customer's personal check, payday cash advance center employees typically:

•

contact the customer by telephone or in person to obtain a payment or a promise to pay; and



•

attempt to exchange the customer's check for a cashier's check if funds are available.

        If at the end of this past-due collection period, the payday cash advance center has been unable to collect the amount due, the customer's check is then deposited.

        Additional collection efforts are not required if the customer's deposited check clears. If the customer's check does not clear and is returned because of non-sufficient funds in the customer's account or because of a closed account or a stop-payment order, additional collection efforts begin. These additional collection efforts are carried out by the payday cash advance center employees and typically include:

•

contacting the customer by telephone or in person to obtain payment or a promise to pay;



•

sending a series of collection letters to the customer; and/or



•

attempting to exchange the customer's check for a cashier's check if funds become available.

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Payday Cash Advance Center Operations

Payday Cash Advance Centers

        With 2,408 payday cash advance centers as of December 31, 2004, we operate the largest network of payday cash advance centers in the United States. The following table illustrates the growth of our payday cash advance center network since December 31, 2002:

(1)

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

(2)

In May 2004, a Georgia law became effective that essentially prohibits payday cash advance services in the state and effectively restricts our ability to act as processing, marketing and servicing agent for a lending bank in the state. As a result, we have suspended operations at our 89 payday cash advance centers in Georgia.

(3)

We are currently facing certain litigation and regulatory proceedings in North Carolina that may ultimately force us to stop acting as processing, marketing and servicing agent for a lending bank in that state.

Facilities and Hours of Operation

        We try to locate our payday cash advance centers in highly visible, accessible locations and attempt to operate during convenient hours for our customers. Normal business hours of our payday cash advance centers are from 10:00 a.m. until 6:00 p.m., Monday through Friday, and, in most states, from 10:00 a.m. until 3:00 p.m. on Saturday. We typically locate our payday cash advance centers in middle-income shopping areas with high retail activity. Other tenants in these shopping areas typically include grocery stores, discount retailers and national video rental stores. By using consistent signage and

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design at our payday cash advance centers, we hope to increase our brand recognition. As of December 31, 2004, we operated 2,300 payday cash advance centers under the "Advance America" brand and 108 payday cash advance centers under the "National Cash Advance" brand. In March 2005 we re-branded 21 of the "National Cash Advance" brand payday cash advance centers to the "Advance America" brand payday cash advance centers. We intend to re-brand the remaining 87 "National Cash Advance" brand payday cash advance centers as "Advance America" brand payday cash advance centers, although we have no specific timetable for doing so.

Internal Compliance Audit

        We have a staff of 18 internal compliance auditors and managers based throughout the United States (as of February 28, 2005) whose function is to monitor compliance by our payday cash advance centers with applicable federal and state laws and regulations, the CFSA's Best Practices and our company policies and procedures. The auditors conduct unannounced audits of our payday cash advance centers. They typically spend one day in each payday cash advance center, although the time may vary if a more extensive investigation is needed. The auditors typically conduct a thorough compliance audit, analyzing customer files, reports, held checks, cash controls and compliance with state specific legal requirements and disclosures. Upon completion of an audit, the auditor will conduct an exit interview with the payday cash advance center personnel and/or the divisional director and discuss issues found during the audit. As part of the internal audit program, the compliance information manager prepares reports for management regarding audit results. These reports are generated from a centralized database maintained at our corporate headquarters. These reports help to identify compliance issues that need to be addressed and areas for further training.

Relationship with the Lending Banks

        Under processing, marketing and servicing agreements with the lending banks, we are compensated by the lending banks for processing, marketing and servicing the payday cash advances the lending banks make to their customers. Approximately 24.4% and 26.0% of our total revenues in the years ended December 31, 2004 and 2003, respectively, were derived from processing, marketing and servicing fees paid to us by the lending banks. As of December 31, 2004, BankWest was offering its payday cash advances in 101 of our payday cash advance centers in Pennsylvania, First Fidelity Bank was offering its payday cash advances in 87 of our payday cash advance centers in Michigan, Republic was offering its payday cash advances in 322 of our payday cash advance centers in North Carolina and Texas and Venture Bank was offering its payday cash advances in 30 of our payday cash advance centers in Arkansas. In addition, BankWest offered its payday cash advances in our 89 Georgia centers before we suspended our Georgia operations in May 2004. The total revenues we derived from processing, marketing and servicing fees paid to us by the various lending banks for the years ended December 31, 2003 and 2004 were:

        Although we process, market and service payday cash advances offered, made and funded by the lending banks under the agency business model, each lending bank is responsible for evaluating each of

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its customers' applications and determining whether the payday cash advance is approved. The lending banks for which we act as agent utilize an automated third-party credit scoring system to evaluate and approve each customer application. We are not involved in the lending banks' payday cash advance approval process, are not involved in determining the approval procedures or criteria of the lending banks and do not fund or acquire any payday cash advances from the lending banks. The payday cash advances are repayable solely to the lending banks and are assets of the lending banks. Consequently, the lending banks' payday cash advances are not included in our payday cash advance portfolio nor are they reflected on our balance sheet within our advances and fees receivable, net. Under our processing, marketing and servicing agreements with the lending banks, the lending banks are contractually obligated for the losses on payday cash advances in an amount established as a percentage of the fees and/or interest charged by the banks to their customers on their payday cash advances. Depending upon the lending bank, this percentage currently ranges from 8.0% to 20.0%. In aggregate, this percentage was 13.2%, 10.1% and 7.3% for the years ended December 31, 2004, 2003 and 2002, respectively. We negotiated the contractual percentages, in part, based on historical data regarding our loss history and to serve as an incentive for us to diligently pursue collection efforts for the lending banks. The aggregate actual payday cash advance loss history for all states operating under the agency business model has been close to the aggregate lending banks' contractual obligation and we therefore have not historically been responsible for much of the aggregate actual payday cash advance losses realized on transactions originated by the lending banks. During 2004 we were ultimately responsible for approximately $1.7 million of the approximately $22.5 million in total losses associated with payday cash advances originated by the lending banks; in 2003, we were ultimately responsible for approximately $1.9 million of the approximately $18.4 million in total losses associated with payday cash advances originated by the lending banks; and, in 2002, we were ultimately responsible for approximately $3.9 million of the approximately $14.1 million in total losses associated with payday cash advances originated by the lending banks. If actual payday cash advance losses exceed the percentage specified in a lending bank's processing, marketing and servicing agreement with us, our processing, marketing and servicing fee is reduced by the excess through the provision for doubtful accounts and agency bank losses. If actual payday cash advance losses are less than the loss percentage specified in such agreement, our processing, marketing and servicing fees are increased by the difference through the provision for doubtful accounts and agency bank losses. As a result, if the amount of uncollected payday cash advances exceeds a lending bank's contractual obligation, we could be obligated to pay the lending bank the outstanding amount of the advances plus its fees and/or interest receivable on the advances, less its contractually obligated portion of the losses. As of December 31, 2004, our contingent liability to each of the lending banks amounted to $28.9 million to Republic, $18.2 million to BankWest, $10.2 million to First Fidelity Bank, and $4.5 million to Venture Bank. This contingent liability to the lending banks was not included on our balance sheet. We could also be obligated to pay this amount to the lending banks if, as a result of a change in law, regulation or otherwise, the lending banks' payday cash advances were to become uncollectible.

        Our processing, marketing and servicing agreements with the lending banks generally have three-year terms and may be terminated by either party upon the occurrence of certain events, including (i) the giving of four to six months notice to the other party, (ii) breaches of the agreement, (iii) changes in laws or regulations and (iv) bankruptcy and insolvency events. In addition, one of these agreements also permits the lending bank to terminate the agreement if either our President or Chief Executive Officer is no longer engaged in our daily management or if we experience a change in control.

Competition

        We believe that the principal competitive factors in the payday cash advance services industry are location, customer service, convenience, speed and confidentiality. We face intense competition in an industry with low barriers to entry, and we believe that the payday cash advance market is becoming

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more competitive as the payday cash advance services industry matures and consolidates. We compete with services offered by traditional financial institutions, such as overdraft protection, and with other payday cash advance providers, small loan providers, credit unions, short-term consumer lenders and other financial services entities and other retail businesses that offer consumer loans or other products and services that are similar to ours. Recently, businesses offering payday cash advances and short-term loans over the internet as well as by phone have begun to compete with us in the business of making payday cash advances.

        Our network of 2,408 payday cash advance centers as of December 31, 2004 represents the largest network of such centers in the United States. The payday cash advance services industry is highly fragmented. In March 2005, Stephens, Inc. estimated that there were approximately 21,500 outlets (including our own centers) in the United States. We believe we operate one of only three single service payday cash advance companies that have more than 1,000 payday cash advance centers, the remaining competitors being local chains and single-unit operators. We believe that our two largest single service payday cash advance company competitors, Check 'n Go and Check into Cash, have over 1,200 and 1,000 payday cash advance centers, respectively. Another competitor is QC Holdings, Inc., which we believe has approximately 370 locations in the United States.

        To a lesser extent, we compete with other companies that offer payday cash advances as an ancillary financial product to complement their primary business of cashing checks, selling money orders, providing money transfer services or offering other similar financial services. These competitors include Cash America International, Inc., Dollar Financial Corp. and ACE Cash Express, Inc.

        Because of the relatively low cost of entry and the regulatory safe harbor that many state statutes provide for payday cash advances, the payday cash advance services industry has experienced significant growth in the number of payday cash advance centers.

        Recently, our payday cash advance centers have also been facing increased competition from banks that offer their account holders payday cash advances as well as other products such as overdraft privileges and bounced check protection, which are similar to our payday cash advance services.

Marketing and Advertising

        We design our marketing efforts to increase our revenues by (1) introducing new customers to our services and (2) creating customer loyalty. We believe that our mass media advertising campaigns (primarily through television, direct mail and the yellow pages) increase demand for our payday cash advance services. Our advertising expenditures occur primarily during key seasonal periods, such as the back-to-school and holiday seasons in the third and fourth quarters of each year, when consumers are most likely to have short-term liquidity needs.

        We utilize marketing promotions at our payday cash advance centers with, we believe, high-impact, consumer relevant, point-of-purchase materials. In addition, we provide our payday cash advance centers with promotional materials such as brochures, pens, keychains and coupons for use in local marketing. Local marketing also includes attendance at, and sponsorship of, community events such as blood drives, food drives, voter registration programs and other charitable events.

        Drawing on statistical data from our transaction database, we use direct marketing strategies to advertise to prospective customers who have demographic characteristics similar to our and the lending banks' existing customers.

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Information Systems

        We employ a proprietary point-of-sale system to record transactions in our payday cash advance centers. The point-of-sale system is also used at our headquarters to develop information for management. We also employ a third-party cash reconciliation software system to reconcile bank accounts and monitor cash receipts and disbursements.

        Each of our payday cash advance centers has approximately two to four networked PCs that run our point-of-sale software to control and record all retail transactions. The point-of-sale system is designed to facilitate customer service and speed the dissemination of information for cash flow purposes. The point-of-sale system:

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records and monitors the details of every transaction, including the transaction type, date and time, amount, fees and/or interest, transaction number and receipt number;



•

provides services in a standardized and efficient manner;



•

reduces the risk of transaction errors by automatically recalling customer data, calculating fees and using pop-up screens to alert operators to items entered that fall outside prescribed parameters; and



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provides automated, integrated transactions that are designed to ensure standardization and compliance with applicable state and federal regulations.

        On a daily basis, transaction data gathered by our point-of-sale system at our payday cash advance centers is transmitted and stored in databases at our headquarters. This data is then integrated into our management information system, general ledger and cash reconciliation software. The systems are designed to provide summary and detailed information to divisional directors, regional directors, zone directors and corporate managers. The point-of-sale system and cash reconciliation software systems allow us to:

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monitor daily revenue, deposits and disbursements on a company, state and per payday cash advance center basis;



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monitor and manage daily payday cash advance center exception reports, which record cash shortages, late deposits, unusual disbursements and other items;



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identify cash differences between bank statements and our point-of-sale system, such as differences resulting from missing disbursements and deposits;



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determine, on a daily basis, the amount of cash needed at each payday cash advance center, enabling centralized treasury personnel to maintain an optimum amount of cash in each banking location;



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electronically transmit information and documents to lending banks as required by our agreements with them;



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facilitate compliance with regulatory requirements and company policies and procedures; and



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post financial transaction information to our general ledger software system.

        We reconcile deposits by and disbursements to our payday cash advance centers on a daily basis. We match the expected deposits reported by our point-of-sale software with the actual deposits reported by the banks receiving the deposits. Most verifications of deposits happen within two days after the actual deposit. Typically about 93% of all deposits and about 99% of all disbursements match electronically. Manual verification of deposits occurs on a daily basis. Manual reconciliation of disbursements occurs on a weekly basis.

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        As of February 28, 2005, our information systems department had a staff of 73, including 16 temporary workers working on a major upgrade to our point-of sale software whose employment will cease as various phases of the upgrade are completed. Our development staff primarily focuses on designing and testing new point-of-sale enhancements as well as ongoing development of the management information systems infrastructure. Our help desk staff provides assistance to our payday cash advance center managers with regard to questions that may arise relating to transaction procedures.

        We maintain and test a disaster recovery plan for our critical networked systems. A copy of the disaster recovery plan documentation is hosted on a third-party vendor website. We periodically update the plan. Our back-up data tapes are housed by a third party at an off-site location. We also own backup computer equipment and real-time data storage that is housed at an off-site facility to provide us with access to needed systems in the event of an emergency that disables our headquarters equipment.

Security

        Security and loss prevention play a critical role in the daily operations of our payday cash advance centers. Each payday cash advance center is provided with 24-hour third-party monitoring that includes individual alarm codes, duress and cancellation codes. Physical security provided to each payday cash advance center includes: digital safes, wired hold-up alarm buttons and "Abloy" brand secure locking systems. Additionally, approximately one-half of our payday cash advance centers are equipped with 24-hour security cameras.

        Employees at our payday cash advance centers are trained on loss prevention techniques ranging from use of the alarm system to how to respond to and/or prevent an armed robbery. New payday cash advance center employees generally complete this training within the first 14 days of employment.

        Because our business requires us to maintain a significant supply of cash in each of our payday cash advance centers, we are subject to the risk of cash shortages resulting from employee and third-party theft and errors. Although we have implemented various programs to reduce these risks, maintain insurance coverage for theft and provide security for our employees and facilities, we cannot assure you that employee and third-party theft and errors will not occur. Cash shortages from employee and third-party theft and errors were approximately $1.2 million (0.21% of total revenues) in the year ended December 31, 2004, $1.7 million (0.4% of total revenues) in 2003 and $2.2 million (0.6% of total revenues) in 2002. Theft and errors could lead to cash shortages and could adversely affect our business, results of operations and financial condition. It is also possible that crimes such as armed robberies may be committed at our payday cash advance centers. We could experience liability or adverse publicity arising out of such crimes. For example, we may be liable if an employee, customer or bystander suffers bodily injury, emotional distress or death. Any such event may have a material adverse effect on our business, results of operations and financial condition.

Human Resources

Cash Advance Center Staffing

        Our payday cash advance centers are divided into zones, regions and divisions, which we believe allows for a more effective management process. A zone has approximately 400 to 650 payday cash advance centers and may include payday cash advance centers in more than one state. There are five zones and each zone has a zone director who reports to our President, Mr. Egeland, and is responsible for the operations, administration, manpower planning, staffing and general supervision of the payday cash advance centers in his or her zone. Regions typically include 50 to 120 payday cash advance centers organized into five to 11 divisions and are supervised by regional directors who report to the zone director responsible for his or her region. Divisions typically include 10 to 15 payday cash advance centers and are supervised by divisional directors who report to the regional director responsible for their division. Determination of region and division alignment is usually based upon geographic

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considerations. Regions and divisions generally do not cross state lines. As of March 15, 2005, our five zones included 30 regions and 211 divisions.

        A typical payday cash advance center is staffed with a manager and an assistant manager. Managers are responsible for the daily operations of the payday cash advance center. As volume increases, additional personnel, called customer service representatives, are added. We typically add a customer service representative once a payday cash advance center has approximately 350 payday cash advances outstanding at one time. Thereafter, one additional customer service representative is typically added for every 100 to 150 additional payday cash advances at a particular payday cash advance center.

Training

        All new hires, payday cash advance center managers and divisional directors are required to complete training programs. Training programs include:

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a 10-day entry level training program that covers new employee orientation, industry regulations and the CFSA's Best Practices, customer service, conducting a payday cash advance transaction from inception to repayment, collections, security, local marketing and the general administration of payday cash advance center operations;



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regular divisional director meetings conducted within each region that focus on operational goal achievement, team building, human resource issues and national and local marketing programs;



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continuing development sessions for the divisional directors and other employees, as needed, which are conducted at our corporate headquarters, covering topics such as employee selection and hiring, training methods, regulatory compliance, customer service, revenue growth and maximizing employee performance (divisional directors are required to attend this program once a year and may attend more often as the development session topics change); and



•

two to three-day semi-annual regional director and zone director conferences held with corporate department heads, covering strategic planning, goal setting and achievement and operational and departmental tactical issues.

        The operations department also coordinates additional ad hoc training for payday cash advance center employees and divisional directors to review customer service, compliance, collections and service-focused issues.

Hiring and Retention

        Divisional directors and payday cash advance center managers are responsible for payday cash advance center employee recruitment. To facilitate the search for applicants meeting positional requirements, we use an internet-based recruitment system, newspaper advertising and local job fairs coordinated by a corporate recruiter. A corporate recruiter will often attend local job fairs and assist in the interview, selection and hiring processes.

        Employees undergo a criminal background and driving record check before employment. We maintain an updated compensation and employee evaluation program to provide employees with a competitive salary and opportunities for advancement. We offer a competitive benefits package consisting of life insurance, medical, dental and disability insurance coverage and a 401(k) plan to help attract and retain employees.

Employees

        As of February 28, 2005, we had approximately 5,900 total employees, including approximately 5,400 payday cash advance center employees, approximately 200 divisional directors, 30 regional directors, five zone directors and approximately 250 corporate employees and support personnel.

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

Intellectual Property and other Proprietary Rights

        AARC, Inc., one of our subsidiaries, owns all of our intellectual property (trademarks, logos, etc.). Each of our operating subsidiaries has entered into a trademark license agreement with AARC, Inc. to use this intellectual property. AARC, Inc. has ten trademarks on file and/or approved by the U.S. Patent and Trademark Office. These marks include:

"Register in Advance. You Count Because You Vote" and design
"Advance America Cash Advance" and design
"Get Money Now. For Life's Little Emergencies."
"Because You Just Never Know"
"For Life's Little Emergencies"
"Advance America"
Star and $ design
"National Cash Advance" and design
"Money You Can Count On"
"Money More People Count On"

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

Insurance Coverage

        We maintain insurance coverage, including workers' compensation insurance, liability insurance, property insurance, crime insurance, directors' and officers' insurance, employment practices liability insurance and fiduciary liability insurance, to protect us against losses in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice. However, we cannot assure you that our insurance policies will provide us with sufficient coverage to provide adequately for our current or future losses, risks or liabilities.

Other

        Advance America, Cash Advance Centers, Inc. is a Delaware corporation that was incorporated on August 11, 1997. Our principal executive offices are located at 135 North Church Street, Spartanburg, South Carolina 29306. Our telephone number at that location is (864) 342-5600. We maintain an internet website at www.advanceamericacash.com. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we electronically file such material with, or furnish it to, the SEC. Information on our website is not incorporated by reference into this Annual Report.

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Government Regulation

        In most states in which we conduct business we make payday cash advances directly to our customers (which we refer to as the standard business model). In other states in which we conduct business we act as a processing, marketing and servicing agent through our payday cash advance centers for FDIC insured, state-chartered banks that make payday cash advances to their customers pursuant to the authority of the laws of the state in which they are located and federal interstate banking laws, regulations and guidelines (which we refer to as the agency business model). We refer to the banks for which we act as agent as the lending banks. Under federal law, an FDIC insured, state-chartered bank located in one state can make loans to a consumer in another state and charge fees and/or interest allowed by the lending bank's home state even if the fees and/or interest exceed what may be charged in the consumer's state under that state's usury law. As of December 31, 2004, we were making payday cash advances directly to customers under the standard business model in 1,868 of our 2,408 payday cash advance centers in 29 states and serving as agent for the lending banks under the agency business model in 540 of our payday cash advance centers in five states. Until May 2004, we had operated in Georgia under the agency business model as processing, marketing and servicing agent for payday cash advances offered, made and funded by BankWest, the lending bank in that state. However, we have suspended operations at our 89 payday cash advance centers in Georgia.

        Payday cash advances are subject to extensive state and federal regulation. This regulation of payday cash advance companies is intended primarily for the protection of consumers rather than investors in our common stock and our creditors. The scope of state regulation, including the terms on which payday cash advances may be made, varies from state to state. Most states that regulate payday cash advances establish allowable fees and/or interest and other charges to consumers for payday cash advances. In addition, many states regulate the maximum amount, maturity and renewal or extension of payday cash advances. The lending banks and we vary the terms of payday cash advances from state to state in order to comply with the laws and regulations of the states in which we, or the lending banks, operate.

State Regulation

        Our business is regulated under numerous state laws and regulations, which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. As of December 31, 2004, 37 states and the District of Columbia had specific laws that permitted payday cash advances or allowed a form of payday cash advances under small loan laws. As of December 31, 2004, we operated in 29 of these 37 states under the standard business model and in one of these 37 states under the agency business model. We do not currently conduct business in the remaining seven of these 37 states or in the District of Columbia because we do not currently believe it is economically attractive to operate in these jurisdictions due to specific legislative restrictions such as interest rate ceilings, an unattractive population density or undesirable location characteristics. The remaining 13 of the 50 states do not have laws specifically authorizing the payday cash advance business. As of December 31, 2004, we operated in four of these 13 states under the agency business model, serving as processing, marketing and servicing agent through our payday cash advance centers for four lending banks that make payday cash advances to their customers in those states.

        The states with specific payday cash advance laws typically limit the principal amount of a payday cash advance and set maximum fees and interest rates that customers may be charged. Some states also limit a customer's ability to renew a payday cash advance and require various disclosures to consumers. State statutes often specify minimum and maximum maturity dates for payday cash advances and, in some cases, specify mandatory cooling-off periods between transactions. Our collection activities regarding past due payday cash advances are subject to consumer protection laws and state regulations relating to debt collection practices. In addition, some states restrict payday cash advance advertising content.

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        During the last few years, legislation has been adopted in some states that prohibits or severely restricts payday cash advance services. For example, in May 2004, a new law became effective in Georgia that effectively prohibits payday cash advance services in the state and effectively restricts our ability to act as processing, marketing and servicing agent for a lending bank in the state. See "Item 3. Legal Proceedings." As a result, we have suspended operations in Georgia. In addition, Maryland adopted a law in 2001 that purports to prohibit agency relationships between banks and processors, marketers and servicers of payday cash advances. Many bills have also been introduced in state legislatures. Since July 1, 2004, bills that severely restrict or effectively prohibit payday cash advance services have been introduced in Arizona, Arkansas, California, Connecticut, Iowa, Louisiana, Michigan, Mississippi, Montana, Nebraska, Nevada, New Mexico, Oklahoma, Oregon, South Carolina, Texas, Washington and Wisconsin. In addition, Mississippi and Arizona have sunset provisions in their payday cash advance laws that require renewal of the laws by the state legislatures at periodic intervals. Future laws prohibiting payday cash advance services or making them unprofitable could be passed in any other state at any time or existing payday cash advance laws could expire or be amended, any of which could have a material adverse effect on our business, results of operations and financial condition.

        Statutes authorizing payday cash advance services typically provide state agencies that regulate banks and financial institutions with significant regulatory powers to administer and enforce the law. In most states, we are required to apply for a license, file periodic written reports regarding business operations, and undergo comprehensive state audits and examinations to ensure that we comply with applicable consumer protection and other laws. Under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that impact the way we do business and may force us to terminate or modify our operations in particular states. They may also impose rules that are generally adverse to our industry. For example, in 2001, the Illinois Department of Financial Institutions promulgated a set of short-term lending rules that placed more severe restrictions on payday cash advance transactions than those contained in the Illinois statute under which the business was licensed and regulated. Although we were able to modify the terms of our payday cash advances and continue to operate in Illinois, we cannot assure you that similar actions in the future will not force us to terminate our operations in Illinois or in any other jurisdiction. More recently, the New Jersey Department of Banking and Insurance proposed a new rule in September 2004 that would make it illegal for a non-New Jersey bank to offer payday cash advance services through an agent in the state of New Jersey. Although we have no operations in New Jersey, the adoption of such a rule by any state could negatively influence future actions taken by regulators in the states in which we do business.

        In some cases, we may also rely on the interpretations of the staff of state regulatory bodies with respect to the laws and regulations of their respective jurisdictions. These staff interpretations generally cannot be relied upon as binding legal authority and may be subject to challenge in administrative or judicial proceedings. Additionally, as the staff of state regulatory bodies change, it is possible that their interpretations of applicable laws and regulations may also change and negatively affect our business.

        State attorneys general and banking regulators have begun to scrutinize the payday cash advance services industry and may take actions against the industry that could require us to cease or suspend operations in their respective states. For example, on August 26, 2004, the North Carolina Attorney General's office, in conjunction with the Commissioner of Banks for North Carolina, issued a subpoena to us to produce documents, respond to written questions and have a corporate representative appear for testimony regarding the relationship between our North Carolina subsidiary and Republic. See "Item 3. Legal Proceedings." It is possible that the North Carolina investigation or other actions taken against the industry in the future by the North Carolina Attorney General or other state attorneys

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general could require us to suspend or cease operations in such jurisdictions and have a negative effect on our financial condition.

        Legislative or regulatory action in the states in which we operate could cause us to cease or suspend our operations in a state. If we were to close our payday cash advance centers in a state, we would incur closing costs such as severance payments and lease cancellation payments and we would have to write-off assets that we could no longer use. If we were to suspend rather than permanently cease our operations in a state, we may also have continuing costs associated with maintaining our payday cash advance centers and our employees in that state, with little or no offsetting revenues. For example, we have decided to continue to maintain 86 of our payday cash advance centers in Georgia for the foreseeable future until certain litigation currently pending in Georgia is resolved. See "Item 3. Legal Proceedings." From time to time, we may also choose to operate in a state even if legislation or regulations cause us to lose money on our operations in that state. The passage of a 2002 Indiana statute, for example, established a prohibitive rate structure for making payday cash advances in the state. Beginning on May 1, 2002, we provided payday cash advances in that state while experiencing a consistent loss in revenue until a new, less restrictive, law was passed in March 2004. Any of these actions or events could have a material adverse effect on our business, results of operations and financial condition.

        Over the past few years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict payday cash advances. The consumer groups and media reports typically focus on the cost to a consumer for a payday cash advance. The consumer groups and media reports typically characterize these payday cash advances as predatory or abusive toward consumers. If this negative characterization of payday cash advances becomes widely accepted by consumers, demand for payday cash advance services could significantly decrease, which could materially adversely affect our business, results of operations and financial condition. Negative perception of payday cash advances or other activities could also result in increased regulatory scrutiny and increased litigation. Additionally, negative perception of payday cash advances could encourage restrictive local zoning rules and make it more difficult to obtain government approvals necessary to open new payday cash advance centers. These trends could materially adversely affect our business, results of operations and financial condition. A negative impact in any or all of these areas could materially adversely affect our business, results of operations and financial condition.

Federal Regulation

        Our payday cash advance services are subject to federal laws and regulations, such as the Truth-in-Lending Act ("TILA"), the Equal Credit Opportunity Act ("ECOA"), the Fair Credit Reporting Act ("FCRA"), the Gramm-Leach-Bliley Act ("GLBA") and the regulations promulgated for each. Among other things, these laws require disclosure of the principal terms of each transaction to every customer, prohibit misleading advertising, protect against discriminatory lending practices and proscribe unfair credit practices. TILA and Regulation Z promulgated thereunder require disclosure of, among other things, the pertinent elements of consumer credit transactions, including the dollar amount of the finance charge and the charge expressed in terms of an annual percentage rate ("APR"). The ECOA prohibits creditors from discriminating against credit applicants on the basis of race, sex, age or marital status. Pursuant to Regulation B promulgated under the ECOA, creditors are required to provide consumers with certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. The FCRA requires creditors to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. The GLBA and its implementing regulations generally require us to protect the confidentiality of our customers' nonpublic personal information and to disclose to our customers our privacy policy and practices.

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        Our marketing efforts and the representations we make about our payday cash advance services also are subject to federal and state unfair and deceptive practices statutes. The Federal Trade Commission ("FTC") enforces the Federal Trade Commission Act and the state attorneys general and private plaintiffs enforce the analogous state statutes. These statutes generally prohibit unfair or deceptive conduct.

        The FTC has not initiated any formal actions against us. However, in December 2002, the FTC requested that at least two payday cash advance providers, including us, respond to a series of questions and document requests concerning their operations. While it does not appear to us that the FTC intends to become more aggressive in regulating the payday cash advance services industry, these requests may indicate a desire by the FTC to become more involved in the policing and enforcement of the payday cash advance services industry in the future.

        Additionally, since 1999, various anti-payday cash advance legislation has been introduced in the U.S. Congress, with recent legislation specifically targeting the agency relationships between banks and payday cash advance companies. Congressional members continue to receive pressure from consumer advocates and other industry opposition groups to adopt such legislation. Any federal legislative or regulatory action that restricts or prohibits payday cash advance services or our activities as processing, marketing and servicing agent for the lending banks could have a material adverse impact on our business, results of operations and financial condition.

Regulation of the Agency Business Model

        The agency relationships with the lending banks are highly regulated. Currently, only state-chartered banks can be lending banks for payday cash advances, because the federal regulators for national banks and federal savings associations have effectively prohibited such banks and associations from participating in the payday cash advance services industry with agents.

        The four lending banks for which we currently act as processing, marketing and servicing agent are subject to extensive federal and state banking regulations. As FDIC insured, state-chartered banks, the lending banks are subject to supervision by the FDIC. Additionally, the lending banks are subject to regular examination by other state and federal regulatory authorities. Because of our relationships with the lending banks, our own activities regarding the lending banks' payday cash advances are also subject to examination by the FDIC and these other regulatory authorities. In connection with any regulatory examination, the FDIC or other regulatory authority may require us to provide information, grant access to our payday cash advance centers, personnel and records or alter our business practices, perhaps materially, or may prevent the lending banks from providing payday cash advances using agents such as us. Any of these actions could have a material adverse impact on our business, results of operations and financial condition, especially if we are required to materially modify our business practices or terminate our use of the agency business model.

        In July 2003, the FDIC issued guidelines governing permissible agency arrangements between state-chartered banks and processing, marketing and servicing agents for the banks' payday cash advances, such as us. These guidelines address prudent risk-management practices regarding processing, marketing and servicing arrangements, capital requirements, allowances for loan losses and loan classifications, income recognition, collection recovery practices and compliance with consumer protection laws. On March 1, 2005, the FDIC issued revised Payday Lending Guidance (the "Guidance") to FDIC insured institutions that offer payday loans including the lending banks for which we act as an agent. We are currently in the process of reviewing the revised Guidance together with the lending banks, who have until April 15, 2005 to respond to the FDIC. The revised Guidance targets the frequency of borrower usage of payday cash advances offered by FDIC insured institutions and will limit the period that a customer may have payday cash advances outstanding from any lender to three months during the previous twelve-month period. Based on an average term of approximately 15 days,

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this effectively caps the number of payday cash advances to six during any 12-month period. All payday cash advances made from any lender would count against such limit. The revised Guidance also suggests that lending banks may offer alternative longer-term products. There has not yet been any determination of the procedures or alternative products, if any, that may be proposed by the lending banks and accepted by the FDIC. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview" and "—Risk Factors."

        If the FDIC's implementation of these guidelines or the promulgation of any additional guidelines were to ultimately restrict the ability of all or certain state-chartered banks (including the lending banks for whom we act as processing, marketing and servicing agent) to maintain relationships with payday cash advance processors, marketers and servicers (such as us), it would have a material adverse impact on our business, results of operations and financial condition. In addition, if state banking regulators were to take action to restrict the ability of all or certain state-chartered banks, including the lending banks for whom we act as processing, marketing and servicing agent, to provide payday cash advances, our distribution opportunities in those states where we operate as agent for a lending bank would be limited and we could have to permanently cease operations in those states. This would have a material adverse impact on our business, results of operations and financial condition.

        In recent public remarks, a director of the FDIC has questioned whether payday cash advances are predatory and abusive to consumers. The FDIC director also questioned whether agents for lending banks are entitled to the benefit of the federal banking law that permits a lending bank to "export" the lending interest rate on payday cash advances permitted by the state in which it is located to consumers in other states. If agent-assisted payday cash advances made by the lending banks were no longer entitled to the benefit of the federal banking laws permitting the exportation of interest rates, we would no longer be able to conduct business under the agency business model and the resulting decline in our net revenues would have a material adverse effect on our business, results of operations and financial condition.

        Other federal regulators have also increasingly scrutinized agency relationships between banks and payday cash advance companies. During 2002 and 2003, for example, the Office of the Comptroller of the Currency ("OCC"), which supervises national banks, took actions to effectively prohibit certain national banks from offering and making small-denomination, short-term consumer loans, including payday cash advances, through the use of agents such as ourselves. After a notice of charges was issued in 2002 against Peoples National Bank, one of the lending banks whose payday cash advances we processed, marketed and serviced, we entered into a consent agreement with the OCC to terminate our agency relationships with that bank. Future actions against the lending banks whose payday cash advances we process, market and service could result in a significant interruption or curtailment of our business. Any such business disruption or curtailment would have a material adverse effect on our business, results of operations and financial condition.

Local Regulation

        In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning regulations. These local rules and regulations are subject to change and vary widely from state to state and city to city. In 2004, for example, Columbia, South Carolina amended its Code of Ordinances to require that payday cash advance businesses obtain special use permits in order to conduct business in the city. Any actions taken in the future by local zoning boards or other governing bodies could have a material adverse effect on our business, results of operations and financial condition.

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Environmental, Health and Safety Matters

        We are subject to general provisions of federal laws and regulations to ensure a safe and healthful work environment for employees. In addition, we comply with those state laws that require a written health and safety program or other mandated safety requirements. To reduce the possibility of physical injury or property damage resulting from robberies, our Loss Prevention department has established operational procedures, conducts periodic safety training and awareness programs for employees, hires security guards as needed and regularly monitors the marketplace for new technology or methods of improving workplace safety.

        Other than properly using and storing standard cleaning products, we do not use chemicals or other agents governed by federal, state or local environmental laws in conducting business operations. Based upon these measures, we believe that our centers are in substantial compliance with all applicable environmental, health and safety requirements.

ITEM 2.    PROPERTIES.

        Our average payday cash advance center size is approximately 1,500 square feet. We try to locate our payday cash advance centers in highly visible, accessible locations. Our payday cash advance centers, which we design to have the appearance of a mainstream financial institution, are typically located in middle-income shopping areas with high retail activity. Other tenants in these shopping areas typically include grocery stores, discount retailers and national video rental stores. All of our payday cash advance centers are leased, with typical lease terms of three years with an option to renew at the end of the lease term. Our leases usually require that we pay all maintenance costs, insurance costs and property taxes.

        See "Item 1. Business—Payday Cash Advance Center Operations—Payday Cash Advance Centers" for a listing of the number of centers we operated in the various states as of December 31, 2004.

        Our corporate headquarters building in Spartanburg, South Carolina, is approximately 75,000 square feet. We own our headquarters building and related land, which we acquired on December 21, 2004, when we acquired the entity from which we previously had leased the building. Our headquarters building and related land are subject to a mortgage payable to an insurance company, the principal amount of which was approximately $6.5 million at December 31, 2004. The mortgage is payable in 180 monthly installments of approximately $66,400, including principal and interest, and bears interest at a fixed rate of 7.30% over its term. The mortgage matures on June 10, 2017. The carrying amount of our corporate headquarters (land, land improvements and building) was approximately $5.9 million and $5.6 million at December 31, 2003 and 2004, respectively.

        We believe that our facilities, equipment, furniture, fixtures and aircraft are in good condition and well maintained, and that our offices are sufficient to meet our present needs.

ITEM 3.    LEGAL PROCEEDINGS.

        We are involved in several active lawsuits, including lawsuits arising out of actions taken by state regulatory authorities, and are involved in various other legal proceedings with state and federal regulators.

        In July 2002, the Industrial Loan Commissioner for Georgia issued an examination certificate to us seeking to investigate whether we had complied with the Georgia Industrial Loan Act. On August 2, 2002, we and BankWest, the lending bank for whom we acted as processing, marketing and servicing agent in Georgia, filed suit against the Commissioner in the Superior Court for Fulton County, Georgia seeking to enjoin him from enforcing the examination certificate and proceeding with an examination. Later, the Commissioner served BankWest and us with administrative subpoenas seeking the production of loan documents, customer information and contractual and financial documentation

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relating to us regarding BankWest's payday advance program in Georgia. In our lawsuit against the Commissioner we sought a declaration that we, as BankWest's agent, BankWest and BankWest's payday cash advances in Georgia were exempt from the Georgia Industrial Loan Act, and therefore the Commissioner should be enjoined from enforcing the examination certificate and administrative subpoenas. The Georgia Superior Court issued an order granting a motion for summary judgment made by the Commissioner and denying our motion for summary judgment. This order was appealed to and affirmed by the Georgia Court of Appeals. We filed a Petition for Certiorari to the Georgia Supreme Court, which was denied in September 2004, thereby permitting the Commissioner's examination to proceed. If the outcome of the Commissioner's examination is adverse to us, it could have a material adverse effect on our business, results of operation and financial condition by possibly forcing us to permanently cease operations in Georgia.

        In the Spring of 2004, Georgia adopted a statute, which became effective in May 2004, that effectively prohibits payday cash advance services in the state and effectively restricts our ability to act as processing, marketing and servicing agent for a lending bank in the state. On April 9, 2004, we, along with a lending bank, BankWest, and other banks and agents involved in providing payday cash advances in Georgia, filed an action in the U.S. District Court for the Northern District of Georgia against the Attorney General of Georgia and the Georgia Secretary of State (BankWest, et al vs. Baker, et al), seeking declaratory and injunctive relief. The relief sought is a declaration from the District Court that the recently passed Georgia anti-payday cash advance law is unconstitutional and is preempted by federal law and should not be enforceable. The District Court issued a temporary restraining order preventing the Georgia law from taking effect until May 15, 2004. Subsequently, on May 13, 2004, the District Court issued an order denying our motion for an injunction but extending the temporary restraining order until May 25, 2004. On May 25, 2004, upon expiration of the temporary restraining order, the Georgia law took effect. Accordingly, we suspended operations at our payday cash advance centers in Georgia. Net revenues from our Georgia operations were $5.2 million and $19.9 million for the years ended December 31, 2004 and 2003, respectively. The Georgia operations, which comprised 1.1% and 4.7% of our net revenues for the years ended December 31, 2004 and 2003, respectively, were no longer generating revenue at December 31, 2004. We estimate that the cost to keep the Georgia centers open under these limited operating conditions will be approximately $0.3 million per month. Additionally, if necessary, we estimate that it will cost approximately $1.0 million (which includes lease cancellation costs of approximately $0.6 million) to shut down the Georgia operations completely. We have appealed the District Court's order to the U.S. Court of Appeals for the Eleventh Circuit and on July 21, 2004, the Court of Appeals heard oral arguments on the appeal. We are awaiting the decision of the Court of Appeals. We cannot predict when the Court of Appeals will issue a decision on our appeal. An adverse ruling by the Eleventh Circuit regarding our argument that state law is preempted by federal law could have negative consequences not only as controlling authority in the Eleventh Circuit but also as persuasive authority in other jurisdictions presented with similar questions of law. Because the Eleventh Circuit has not yet issued a decision, we recorded in the fourth quarter 2004 an impairment of assets expense of approximately $1.3 million to write-off the undepreciated costs of the remaining 86 centers located in Georgia.

        Currently, we and several of our officers, directors, owners and "stakeholders" are defending two putative class action lawsuits, one in North Carolina (filed in July 2004) and one in Georgia (filed August 2004), where the plaintiffs are alleging, among other things, that we, and not the lending bank, are the "true lender" and are therefore offering usurious payday cash advances in violation of numerous consumer protection statutes. On July 27, 2004, John Kucan, Welsie Torrence and Terry Coates, each of whom is a customer of Republic, the lending bank for whom we process, market and service payday cash advances in North Carolina, filed a putative class action lawsuit in the General Court of Justice for the Superior Court Division for New Hanover County, North Carolina against us, our subsidiary that operates in North Carolina and William M. Webster, IV, our Chief Executive

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Officer, alleging, among other things, that the relationship between our subsidiary that operates in North Carolina and Republic is a "rent a charter" relationship and therefore the bank is not the "true lender" on the payday cash advances. The lawsuit also claims that the payday cash advances are made, administered and collected in violation of numerous North Carolina consumer protection laws. The lawsuit seeks an injunction barring us from continuing to do business in North Carolina, the return of the principal amount of the payday cash advances made to the plaintiff class since August 2001, the return of any interest or fees associated with those advances, treble damages, attorneys' fees and other unspecified costs. The case is in its preliminary stages. Thus far the only substantive motions we have filed are motions to (1) dismiss or stay proceedings and (2) compel arbitration. On November 19, 2004, plaintiffs filed a motion seeking class certification. On November 16, 2004, North Carolina Superior Court Judge Ernest Fulwood denied our motion to have the case designated as a complex business case and assign it to the North Carolina Business Court and instead granted the plaintiffs' motion to designate the case as exceptional and assign it to a specific Superior Court judge. The ruling does not express any opinion on the merits of the case. Plaintiffs' counsel indicated at the hearing held prior to the ruling, and in papers filed in support of their motion for class certification (which has not yet been fully briefed or set for a hearing), that the distributions to our stockholders of substantially all of the net income earned by us in the form of cash dividends may be the subject of a fraudulent conveyance claim. At the hearing, plaintiffs' counsel indicated that they might seek injunctive relief to return such payments or to hold them in escrow pending a judgment in this lawsuit. Plaintiffs' complaint contains a fraudulent conveyance claim but seeks no specific relief with respect to that claim. On December 1, 2004, North Carolina Supreme Court Chief Justice I. Beverly Lake, Jr. signed a commission appointing Special Superior Judge D. Jack Hooks, Jr. to hear the case. On March 10, 2005, Judge Hooks heard arguments on motions to stay discovery pending a decision on arbitrability. We are currently awaiting the judge's ruling on this motion. An adverse ruling in this case could have a material adverse effect on our results of operations and financial condition, including possibly forcing us to cease our operations in North Carolina. In addition, in September 2004, Republic filed an action in federal court in North Carolina against the three plaintiffs who have sued us, seeking a declaratory judgment that all disputes their customers have shall be submitted to arbitration and an injunction preventing the plaintiffs from pursuing disputes in a non-arbitral forum. A motion to dismiss Republic's lawsuit was granted on February 10, 2005 on grounds that Republic lacked standing. On February 18, 2005 Republic filed a motion to alter or amend the judgment and for reconsideration.

        On August 6, 2004, Tahisha King and James E. Strong, who are customers of BankWest, the lending bank for whom we processed, marketed and serviced payday cash advances in Georgia, filed a putative class action lawsuit in the State Court of Cobb County, Georgia against us, our subsidiary in Georgia, William M. Webster, IV and several of our unnamed officers, directors, owners and "stakeholders," alleging many different causes of action, most notably that we have been making illegal payday loans in Georgia in violation of Georgia's usury law, the Georgia Industrial Loan Act and Georgia's Racketeer Influenced and Corrupt Organizations Act. The complaint alleges that BankWest is not the "true lender" on the loans that we process, market and service for BankWest in Georgia and that we are the "de facto" lender. The complaint seeks compensatory damages, attorneys' fees, punitive damages and the trebling of any compensatory damages. We have removed the case to federal court and filed an answer denying the allegations and asserting the defense of arbitration as well as other defenses. The plaintiffs filed a motion in September 2004 to remand the case to Georgia state court to which we have responded. In September 2004, we filed a declaratory judgment action in federal court in Georgia against the Georgia class action plaintiffs seeking a declaratory judgment that all disputes relating to the loans by BankWest shall be submitted to arbitration and plaintiffs shall be prohibited from pursuing loan related disputes in a non-arbitral forum. A hearing was held on December 14, 2004. While no formal opinion was issued, the court indicated it was likely to place the cases on hold until the Eleventh Circuit issues its ruling in BankWest vs. Baker, which challenges the constitutionality of Georgia's payday cash advance law and Jenkins vs. First American, which involves the enforceability of

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an arbitration clause similar to the one at issue in our Georgia case. On February 18, 2005, the Eleventh Circuit held in the Jenkins case that the arbitration ruling was enforceable and binding on the plaintiffs. On March 24, 2005, the court issued a formal opinion indicating that it was staying the case until the Eleventh Circuit issued its decision in BankWest v. Baker.

        We are involved in another case in Georgia that, while not a class action lawsuit, contains essentially the same allegations as the Tahisha King and James Strong case. On March 10, 2003, Angela Glasscock, a customer of BankWest, filed an adversary proceeding in the U.S. Bankruptcy Court for the Southern District of Georgia alleging that our subsidiary in Georgia was making payday cash advances in Georgia in violation of the Georgia Industrial Loan Act. We have filed a motion for Summary Judgment that the court has not yet ruled upon. We expect a ruling will occur once the decision is made by the Eleventh Circuit in the BankWest vs. Baker case. Although the amount in controversy in the case is only $350, the underlying claims of Ms. Glasscock, if agreed with by the Bankruptcy Court, could serve as a basis for future claims against us in Georgia.

        We and certain of our officers, directors and employees are also defendants in two putative class-action lawsuits commenced by three of our former customers, Gerald and Wendy Betts and Donna Reuter, in Florida. The first putative class action was filed by Ms. Betts and Ms. Reuter in February 2001 in the Circuit Court of Palm Beach County against our subsidiary, McKenzie Check Advance of Florida, LLC and certain other parties. The first lawsuit alleges that we engaged in unfair and deceptive trade practices and violated the Florida criminal usury statute, the Florida Consumer Finance Act, and Florida's Racketeer Influenced and Corrupt Organizations Act. We successfully moved to have Ms. Reuter's case sent to arbitration and were awarded summary judgment as to Ms. Betts' claims. The arbitration order in Ms. Reuter's case is currently on appeal to the Florida Supreme Court and the summary judgment order in Ms. Betts' case was reversed on August 11, 2004 by Florida's Fourth District Court of Appeals. We are appealing the Fourth District Court of Appeals' ruling. The suit seeks unspecified damages, and we could be required to refund fees and/or interest collected, refund the principal amount of payday cash advances, pay multiple damages and pay other monetary penalties. We expect to receive an order in the near future reversing the arbitration order as to Ms. Reuter based on another Florida Supreme Court decision on arbitration entitled Cardegna v. Buckeye Check Cashing, Inc.

        A second Florida lawsuit was filed in August 2004 in the Circuit Court of Palm Beach County by Mr. Betts and Ms. Reuter against us, our subsidiary in Florida and officers and directors of the subsidiary. The allegations are nearly identical to those alleged in their first lawsuit discussed in the preceding paragraph. We have filed motions to dismiss, to stay the proceedings pending determination of dispositive actions by the Florida Supreme Court, and to compel arbitration. These motions have not been fully briefed or set for hearing yet.

        We are also a defendant in a lawsuit brought on behalf of a putative class of persons by a former customer, Lois Bennett, in Tennessee. Ms. Bennett, on behalf of herself and others, alleges that our subsidiary, McKenzie Check Advance LLC, violated the terms of a class action settlement order by wrongfully collecting fees and advances from the class members during a period of time when collections were allegedly prohibited. The Tennessee Court of Appeals reversed the findings of the trial judge in the Company's favor and remanded the case for further findings of fact. The suit seeks unspecified damages, and we could be required to refund fees and advances collected and to pay other monetary penalties.

        In August 2004, the North Carolina Attorney General's Office in conjunction with the Commissioner of Banks for North Carolina issued a subpoena to us to produce documents, respond to written questions and have a corporate representative appear for a deposition regarding the relationship between our North Carolina subsidiary and Republic. We believe the primary purpose of the investigation is to determine whether our operations in North Carolina are in compliance with

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North Carolina law. We have cooperated with the investigation. A corporate representative appeared before the Commissioner, in closed session, on November 22, 2004, to provide factual information about the nature of our business. In addition, we have provided written answers to clarifying questions from the Commissioner. Although no final determination has been reached by the Attorney General's office or the Commissioner of Banks in this matter, on February 1, 2005, the Commissioner of Banks issued a Notice that he was going to hold a hearing on this matter on April 19, 2005, or as soon thereafter as possible, regarding our operations in North Carolina. The Attorney General for North Carolina as well as the class action plaintiffs in the North Carolina class action case have moved to intervene and participate in this hearing. The Attorney General has been granted the right to intervene and participate. The class action plaintiffs have been granted the right to submit an amicus brief. It is possible that the North Carolina Attorney General or the Commissioner of Banks for North Carolina may make a determination or finding that is adverse to our business operations in the state. Specifically, the North Carolina Attorney General and Banking Commissioner potentially could bring an action for an injunction and monetary fines or issue a cease and desist order based on the following North Carolina statutes: Consumer Finance Act and/or Check Casher Act or other consumer protection statutes. Also, criminal prosecutions could be commenced for violation of certain North Carolina laws. This could result in the imposition of fines and the alteration or cessation of our use of the agency business model in North Carolina. All North Carolina payday cash advance centers currently operate under the agency business model. Net revenues from our North Carolina operations were $26.5 million and $23.6 million for the years ended December 31, 2004 and 2003, respectively. Our North Carolina operation's net revenues comprised 5.5% and 5.6% of our net revenues for the years ended December 31, 2004 and 2003, respectively. As of December 31, 2004, it would cost approximately $7.8 million (which includes lease cancellation costs of approximately $0.7 million, the charge-off of accounts receivable of $3.5 million, the charge-off of undepreciated cost of assets of approximately $1.4 million and other shut-down costs of approximately $2.2 million) to shut down North Carolina operations completely. We do not believe that the cessation of our North Carolina operations will result in any impairment of goodwill.

        In December 2003 and again in September 2004, we received a letter and subpoena from the Attorney General of West Virginia raising concerns that some of our collection practices may violate the West Virginia Consumer Credit and Protection Act. We are cooperating with this inquiry. Although we do not currently have operations in West Virginia, some West Virginia residents visit our payday cash advance centers in states bordering West Virginia in order to obtain payday cash advances. Since receiving the Attorney General's first letter we have discontinued collection visits in West Virginia and pursue collections there through phone calls and letters to customers.

        We are also involved in other litigation and administrative proceedings. This litigation includes employee claims for workers' compensation, wrongful termination, harassment, discrimination, payment of wages due and customer claims relating to collection practices and violations of state and/or federal consumer protection laws.

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

        During the fourth quarter of 2004, we submitted two matters to a vote of our security holders. In preparation for the initial public offering of our common stock, on November 8, 2004, a unanimous written consent of our stockholders was signed approving an amendment to our certificate of incorporation to effect a reverse stock split by way of reclassification of our outstanding common stock, which amendment was abandoned. Subsequently, a special meeting of our stockholders was held on November 18, 2004 at which 100% of the then outstanding common stock voted to approve the adoption, subject to the subsequent determination of our Board of Directors, of our Amended and Restated Certificate of Incorporation to effect one of six alternate reverse stock splits by way of

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reclassification of our outstanding common stock. Effective November 23, 2004, our Board of Directors declared a reverse stock split of 0.908439145-to-1 of our common stock.

PART II

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

Price Range of Common Stock

        Our common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "AEA." Our common stock was initially offered to the public on December 15, 2004 at a price of $15.00. The high and low sale prices for our common stock during the period December 15, 2004 through December 31, 2004, were $23.74 and $15.00, respectively.

        As of March 15, 2005, there were approximately 2,650 record and beneficial holders of our common stock.

Initial Public Offering

        On December 15, 2004, the Securities and Exchange Commission declared our Registration Statement on Form S-1 (File No. 333-118227) effective and, on December 16, 2004, our common stock, par value $.01 per share, was publicly offered. Under the offering, we sold 14,333,333 shares of our common stock at $15.00 per share (subject to an underwriting discount of $1.05 per share). On December 21, 2004, we received aggregate proceeds from the offering of approximately $200.0 million (net of the underwriting discount). In addition, the selling stockholders identified in the Registration Statement sold an aggregate of 10,391,667 shares of our common stock at an initial public offering price of $15.00 (subject to an underwriting discount of $1.05 per share). The amount sold by the selling stockholders included the exercise of the underwriters' option to purchase up to 3,225,000 shares of our common stock to cover over-allotments.

        The shares that we sold had an aggregate offering price (net of the related underwriting discount) of $199,949,995 and the shares sold by the selling stockholders, including the shares sold pursuant to the over-allotment option, had an aggregate offering price (net of the related underwriting discount) of $144,963,755. Morgan Stanley & Co. Incorporated acted as sole book running manager and lead manager for the offering.

        Our net proceeds were approximately $194.9 million after deducting underwriting discounts of approximately $15.0 million and associated expenses of approximately $5.1 million. We used approximately $126.5 million of our net proceeds to repay borrowings under our revolving credit facility and approximately $68.4 million to repay all of our then outstanding subordinated debt.

Dividend Policy

        Our Board of Directors has adopted a policy of paying a quarterly cash dividend on each share of our common stock of 0.625% of the average of the closing sale prices of our common stock on the New York Stock Exchange on the last ten trading days of the prior quarter, not to exceed $0.09 per share of common stock per quarter unless our Board of Directors determines otherwise, commencing the first quarter of 2005. We are not required to pay any dividends. Any determination to pay dividends, and the amounts of any dividends, will be at the sole discretion of our Board of Directors and will depend on a number of factors, including: our subsidiaries' payment of dividends to us; our net income, results of operations and cash flows and our other cash needs; our financial position and capital requirements; general business conditions and the outlook for our company; any legal, tax, regulatory and any other factors our Board of Directors deems relevant. In addition, our revolving credit facility restricts our ability to pay dividends depending on the absence of any default or event of

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default, our net income, and the ratio of our consolidated senior funded debt to our consolidated EBITDA (as defined in our revolving credit facility). Our Board of Directors may at any time modify or revoke our dividend policy.

        Prior to the initial public offering of our common stock in December 2004, we paid cash dividends to our existing stockholders of approximately all of the income we earned while we were an S corporation and on which the existing stockholders were taxed. These cash dividends included approximately $79.8 million and $101.5 million in the years ended December 31, 2004 and 2003, respectively. Of such cash dividends, approximately $22.7 million and $37.5 million, respectively, were paid to enable our existing stockholders to make tax payments on our income or represented amounts that we paid directly to state taxing authorities on behalf of these stockholders.

        On February 14, 2005, our Board of Directors declared our first quarterly cash dividend as a public company of $0.09 per common share which was paid on March 10, 2005, to stockholders of record on February 28, 2005.

        See "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," for information about our equity compensation plans.

Recent Sales of Unregistered Securities

        Contemporaneously with the pricing of our initial public offering on December 15, 2004, we entered into a contribution agreement with Wyoming Associates, Inc., an entity controlled by the George D. Johnson, Jr. Revocable Trust, pursuant to which we issued 686,217 shares of our common stock to Wyoming Associates, Inc. at the closing of our initial public offering in exchange for two aircraft, a 1985 Canadair Ltd. Challenger aircraft and a 1994 Gates Learjet aircraft. This contribution agreement contained representations, warranties and other provisions that were standard for such a transaction, taking into account our previous use of these aircraft.

        Also, contemporaneously with the pricing of our initial public offering, we entered into a contribution agreement with Church and Commerce, LLC, pursuant to which we issued 38,730 shares of our common stock to the members of Church and Commerce, LLC at the closing of the initial public offering in exchange for all of the membership interests in Church and Commerce, LLC. This contribution agreement contained representations, warranties and other provisions that were customary for a transaction of this nature.

        In each case, the number of shares issued was determined by dividing the total consideration to be paid by the initial public offering price of $15.00 per share in our initial public offering. These shares were issued in reliance upon the exemption from registration in Section 4(2) of the Securities Act of 1933, as amended.

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ITEM 6.    SELECTED FINANCIAL DATA.

        The following tables set forth our summary consolidated financial information and other financial and statistical data for the periods ended and as of the dates indicated. The financial information for the years ended December 31, 2004, 2003 and 2002, and as of December 31, 2004 and 2003, has been derived from our audited financial statements included elsewhere in this report. The financial information for the years ended December 31, 2001 and 2000, and as of December 31, 2002, 2001 and 2000 has been derived from our audited financial statements not included in this report. The historical selected financial information may not be indicative of our future performance and should be read in conjunction with the information contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes in "Item 8. Financial Statements and Supplementary Data."

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(1)

Effective October 1, 2001, we filed an election to convert to S corporation status for federal and most state income tax purposes under Subchapter S of the Internal Revenue Code. Under Subchapter S, our stockholders pay federal and state income tax on our taxable income. In connection with our initial public offering, on December 21, 2004 we revoked our Subchapter S election and once again became a C corporation under Subchapter C of the Internal Revenue Code. We have provided unaudited proforma data as if we were a C corporation for all of the years ended December 31, 2001, 2002, 2003 and 2004.

(2)

In 2000, we changed our accounting for revenue recognition. Prior to 2000, we recognized revenue on our payday cash advances when the customer paid the payday cash advance. Beginning in 2000, we recognized substantially all revenues ratably over the term of the payday cash advance. Accordingly, in 2000, we recorded in income $3.0 million (net of income tax expense of $2.4 million) as the cumulative effect of this change in accounting principle.

(3)

Pro forma income tax expense shown here has been determined as if we had always been a C corporation rather than an S corporation beginning October 1, 2001. Proforma income tax expense for the year ended December 31, 2004 includes actual income tax expense of $3.8 million for subsidiaries that continued to be taxed as C corporations. Proforma income tax expense for 2004 includes income tax expense of $8.4 million due to our conversion to a C Corporation on December 21, 2004. The effective tax rates used are based on the statutory federal income tax rate plus applicable state income taxes (net of federal benefit) plus the non-deductibility of certain expenses (principally lobbying and meals and entertainment) less income from our special purpose entity not included in our tax returns.

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

        The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes in Item 8. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements. Please see "—Risk Factors" and "—Forward-Looking Statements" for discussions of the uncertainties, risks and assumptions associated with these statements.

Overview

        Headquartered in Spartanburg, South Carolina, we are the largest provider of payday cash advance services in the United States as measured by the number of payday cash advance centers operated. As of December 31, 2004, we operated 2,408 payday cash advance centers in 34 states.

        Our payday cash advance centers provide, directly or on behalf of a lending bank, small-denomination, short-term, unsecured cash advances that are typically due on the customers' next payday. In order for a new customer to be approved for a payday cash advance by a lending bank or us, he or she is typically required to have valid identification, a bank account and a regular source of income, such as a job. At the inception of a payday cash advance transaction, the lending bank or we enter into an agreement with the customer governing the terms of the payday cash advance transaction. Typically, the agreement requires that the customer repay the payday cash advance in full on or before a specified due date, which is typically two weeks after the date of the payday cash advance. The customer then writes a personal check for the amount of the advance plus applicable charges for fees and/or interest in exchange for cash or a check drawn on our or the lending bank's account. The agreement with the customer also typically obligates the lending bank or us to defer the presentment or deposit of the customer's personal check until the due date of the payday cash advance. At the specified due date, the customer is required to pay off the payday cash advance in full, which is usually accomplished by the customer returning to the payday cash advance center with cash. If repayment is in full, we return the customer's personal check to the customer. If the customer does not repay the outstanding payday cash advance in full on or before the due date, the payday cash advance center will seek to collect from the customer directly and may deposit the customer's personal check.

        We evaluate our payday cash advance centers based on both center gross profit and center revenue growth, with consideration given as to the length of time the center has been open. We consider a center mature after it has been open for 24 months. Revenue growth in payday cash advance centers open for greater than 24 months may continue; however, the rate of growth diminishes. We believe that mature payday cash advance center growth is a strong indicator of operating efficiency. We monitor newer payday cash advance centers for their progress toward profitability and their rate of growth in advances. Payday cash advances generated through our existing payday cash advance centers and the contribution of advances generated from newly opened centers drive our growth. The primary metrics that we use to monitor profitability are the volume of payday cash advances, which includes the number of payday cash advances, the amount of the average payday cash advance, the rates charged, the number of days outstanding and the collection rate. With respect to our cost structure, salaries and benefits are our largest costs and are driven primarily by the addition of payday cash advance centers throughout the year.

        In the years ended December 31, 2004 and 2003, approximately 69.9% and 69.4%, respectively, of the payday cash advances were repaid in full on or before the due date; approximately 94.8% and 95.4%, respectively, of the payday cash advances were repaid in full on or before the due date or within 14 days thereafter; an additional approximately 0.1% and 0.2%, respectively, of the payday cash advances were repaid in full on or before the date we deposited their checks; and approximately 5.0% and 4.4%, respectively, of the payday cash advances were repaid by depositing the customers' checks.

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Of the deposited checks, approximately 78% in 2004 and 79% in 2003 were returned unpaid because of non-sufficient funds or other reasons.

        In most states in which we conduct business, we make payday cash advances directly to our customers (which we refer to as the standard business model). In other states in which we conduct business, we act as a processing, marketing and servicing agent through our payday cash advance centers for FDIC insured, state-chartered banks that make payday cash advances to their customers pursuant to the authority of the laws of the states in which they are located and federal interstate banking laws, regulations and guidelines (which we refer to as the agency business model). We refer to the banks for which we act as agent as the lending banks. As of December 31, 2004, we were making payday cash advances directly to customers under the standard business model in 1,868 of our 2,408 payday cash advance centers in 29 states and serving as agent for the lending banks under the agency business model in our 540 payday cash advance centers located in Arkansas, Michigan, North Carolina, Pennsylvania and Texas.

        Rollovers and consecutive transactions are regulated by FDIC guidelines, various state laws, CFSA's Best Practices for the payday cash advance services industry and our own internal policies. CFSA is an industry trade group whose members include our company and more than 100 other companies engaged in the payday cash advance services industry. Rollovers are not allowed in any state where we operate using the agency business model. In the 29 states in which we operate under the standard business model, fifteen states do not allow rollovers. In 11 of the 14 states where rollovers are allowed, we limit rollovers to either four transactions or the state limit, whichever is less. We do not allow rollovers in three of the 14 states. In the five states in which we operate under the agency business model, all of the lending banks require at least one 24-hour cooling off period before a customer reaches consecutive transactions aggregating 60 consecutive days. In the states in which we operate under the standard business model, the definition of a consecutive transaction and the related regulations may vary depending upon state law. If there is no specific, lesser requirement in state law regarding consecutive transactions, we require a one-day cooling off period after fifteen consecutive transactions (or ten consecutive transactions in Alabama). During the year ended December 31, 2004, we provided or processed approximately 11.6 million payday cash advances for approximately 1.4 million different customers or an average of 8.2 transactions per customer.

        We have historically derived our revenues from (1) fees and/or interest paid to us directly by our customers under the standard business model and (2) processing, marketing and servicing fees paid to us by the lending banks under the agency business model. On the payday cash advances made and funded by the lending banks from their own bank accounts and processed, marketed, and serviced by us under the agency business model, all payments of principal and fees and/or interest paid by customers are deposited directly to the respective lending bank's bank account. We in turn are paid a processing, marketing and servicing fee by the lending bank after we send it an invoice. Our total revenues for the years ended December 31, 2002, 2003 and 2004 consisted of:

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        On March 1, 2005, the FDIC issued revised Payday Lending Guidance to FDIC insured institutions that offer payday loans including the lending banks for which we act as an agent. We are currently in the process of reviewing the revised Guidance together with the lending banks, who have until April 15, 2005 to respond to the FDIC. The revised Guidance targets the frequency of borrower usage of payday loans offered by FDIC insured institutions and will limit the period a customer may have payday loans outstanding from any lender to three months during the previous twelve-month period. Based on an average term of approximately 15 days, this effectively caps the number of payday cash advances that may be made to any customer to six during any 12-month period. All payday cash advances made from any lender would count against such limit. The revised Guidance also suggests that lending banks may offer alternative longer-term products. At this time we do not know what procedures or alternative products, if any, may be proposed by the lending banks or accepted by the FDIC. It is, therefore, too early to measure the effect, financial or otherwise, the revised Guidance will have on the lending banks and subsequently on the agency business model. Moreover, there can be no assurance that the FDIC will accept any of the revised procedures or alternative products the lending banks may propose. Any of these developments could have a material adverse effect on our business, results of operations and financial condition. Net revenues for states where we conduct business using the agency business model were $96.7 million, $109.1 million and $117.3 million for the years ended December 31, 2002, 2003 and 2004, respectively, and the related center gross profit was $33.0 million, $27.7 million and $37.6 million for the years ended December 31, 2002, 2003 and 2004, respectively.

        Provision for doubtful accounts and agency bank losses.    The provision for doubtful accounts and agency bank losses includes (1) estimated probable losses on advances and fees receivable under the standard business model (which we refer to as provision for doubtful accounts) and (2) agency bank losses, which consisted of (a) those losses for which the lending banks under the agency business model are contractually obligated and (b) an estimate of the amount by which actual losses will differ from the lending banks' contractual obligations (which we refer to as provision for excess bank losses).

        Center expenses.    Our center expenses primarily relate to the operations of our payday cash advance centers, including salaries and related payroll costs, occupancy costs, center depreciation expense and advertising expense. Salaries and related payroll costs consist principally of wages, salaries and benefits for center personnel and district directors, and include allocated charges for workers' compensation and medical coverage. Occupancy costs consist principally of rent, common area maintenance and utilities. Center depreciation expense consists principally of the depreciation of the cost of signage, leasehold improvements, furniture and fixtures over their useful lives, typically five years. Advertising expense consists principally of television advertising, direct mail marketing and yellow pages advertising. Other center expenses are the most variable costs associated with our centers and consist principally of costs related to payday cash advance center openings and closings, communications, delivery, supplies, travel, bank charges, various compliance and collection costs and costs associated with theft.

        Corporate and other expenses.    Our corporate and other expenses primarily include general and administrative expenses, corporate depreciation expense, options purchase expense, lending bank contract termination expense, interest expense, net, and loss on disposal of property and equipment. General and administrative expenses consist primarily of the costs of our corporate overhead, including costs associated with our legal, regulatory, real estate, construction, accounting, marketing, compliance and management information systems departments, costs of our senior management, costs of our headquarters building, costs of leasing and operating our corporate aircraft, our insurance costs and the costs of our zone and regional operating management. Corporate depreciation expense consists primarily of depreciation of furniture and fixtures, our headquarters building and computer equipment. Options purchase expense consists primarily of the compensation expense from the purchase of employee stock options pursuant to a plan adopted by our Board of Directors in 2002. Lending bank contract termination expense consists primarily of the expense associated with the termination of two contracts for us to process, market and service payday cash advances in two states for a former lending

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bank. Interest expense, includes interest on our revolving credit facility and subordinated debt, interest on the mortgage payable secured by our headquarters building and amortization of debt issuance costs. Loss on disposal of property and equipment consists primarily of the expense of the remaining value of disposed property and equipment. Loss on impairment of assets represents the write-off of the undepreciated cost of assets considered impaired. Transaction expense represents expenses associated with our initial public offering.

        New payday cash advance centers.    We opened 224, 330 and 469 new payday cash advance centers in the years ended December 31, 2002, 2003 and 2004, respectively. The capital cost of opening a new payday cash advance center varies depending on the size and type of payday cash advance center, but typically averages approximately $37,000. This capital cost includes leasehold improvements, signage, fixtures, furniture, computer equipment and a security system. In addition, the typical payday cash advance center that has been operating for at least 24 months under the standard business model requires average working capital of approximately $95,000 to fund the payday cash advance center's payday cash advance portfolio.

        For centers opened in 2001, 2002 and 2003, it has taken approximately nine to eleven months for one of our payday cash advance centers to generate sufficient revenues to cover the center's expenses not including corporate overhead. Cumulative losses during these periods, which have been increasing and are expected to increase, averaged approximately $51,000 per payday cash advance center for payday cash advance centers opened in 2001, 2002 and 2003.

        The capital cost for each new payday cash advance center has not increased substantially and is not expected to increase substantially in the short-term. Additionally, the working capital required to fund each new payday cash advance center's operations has not increased and is not projected to increase. However, the losses incurred until each new payday cash advance center breaks even have been increasing and average approximately $51,000 per payday cash advance center. We will need to generate adequate capital internally or have adequate availability under our revolving credit facility to fund our growth. In addition, depending upon when and how many new payday cash advance centers open during any period, the losses incurred before a new payday cash advance center breaks even may significantly impact our results of operations.

        Closed payday cash advance centers.    We closed 41, 32 and 14 (excluding suspended operations in Georgia) payday cash advance centers in the years ended December 31, 2002, 2003 and 2004, respectively. The expenses related to closing centers typically include the undepreciated costs of fixtures and signage that cannot be moved and reused at another center, moving costs, severance payments and any lease cancellation costs. The expenses associated with closings of payday cash advance centers were approximately $0.9 million, $0.8 million and $0.1 million in the years ended December 31, 2002, 2003 and 2004, respectively. The expenses associated with closing centers during the year ended December 31, 2004 do not include the impact of suspending payday cash advance processing at our 86 centers in Georgia.

        In May 2004, a Georgia law became effective that effectively prohibits payday cash advance services in the state and effectively restricts our ability to act as processing, marketing and servicing agent for a lending bank in the state. Accordingly, we suspended operations at our 89 (three of which were subsequently closed in 2004) payday cash advance centers in Georgia. Our Georgia operations, which comprised 4.7% and 1.1% of our net revenues for the years ended December 31, 2003 and 2004, have not generated revenue since operations were ceased in May 2004. We estimate that the cost to keep the Georgia centers open under these limited operating conditions will be approximately $0.3 million per month. Additionally, if necessary, we estimate that, as of December 31, 2004, it will cost approximately $1.0 million (including lease cancellation costs of approximately $0.6 million) to shut down the Georgia operations completely. Because the Eleventh Circuit has not yet issued a decision, we recorded in the fourth quarter 2004 an impairment of assets expense of approximately $1.3 million to write-off the undepreciated costs of the remaining 86 centers located in Georgia. See "Item 3. Legal

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Proceedings." After suspending our operations in Georgia, we attempted to collect unpaid payday cash advances made prior to the suspension of operations utilizing a much smaller, limited staff. We conducted collection efforts in accordance with our standard collection procedures. Because of a lack of clarity regarding the effective date of the law, in certain instances we did not attempt to collect fees and interest. We ceased all collection efforts on September 14, 2004. As of December 31, 2004, there are no advances and fees receivable in Georgia. Actual charge-offs from June 30, 2004 through December 31, 2004 were approximately $1.3 million. Recoveries of these charged-off accounts totaled approximately $0.2 million from June 30, 2004 through December 31, 2004.

        A summary of financial information for our operations in Georgia for the years ended December 31, 2002, 2003 and 2004 are as follows:

        On August 26, 2004, the North Carolina Attorney General's office in conjunction with the Commissioner of Banks for North Carolina issued us a subpoena to produce documents, respond to written questions and have a corporate representative appear for testimony regarding the relationship between our North Carolina subsidiary and Republic, the lending bank for whom we act as processing, marketing and servicing agent in North Carolina. We believe the primary purpose of the investigation is to determine whether our operations in North Carolina are in compliance with North Carolina law. We have cooperated with the investigation. A corporate representative appeared before the Commissioner, in closed session, on November 22, 2004, to provide factual information about the nature of our business. In addition, we have provided written answers to clarifying questions from the Commissioner. Although no final determination has been reached by the Attorney General's office or the Commissioner of Banks in this matter, on February 1, 2005, the Commissioner of Banks issued a Notice that he was going to hold a hearing on this matter on April 19, 2005, or as soon thereafter as possible, regarding our operations in North Carolina. The Attorney General for North Carolina as well as the class action plaintiffs in the North Carolina case have moved to intervene and participate in this hearing. The Attorney General has been granted the right to intervene and participate. The class action plaintiffs have been granted the right to submit an amicus brief. It is possible that the North Carolina Attorney General or the Commissioner of Banks for North Carolina may make a determination or finding and initiate an administrative or civil action that is adverse to our business operations in that state. Specifically, the North Carolina Attorney General and Commissioner of Banks could potentially bring an action for an injunction and monetary fines or issue a cease and desist order based on the following North Carolina statutes: Consumer Finance Act and/or Check Casher Act or other consumer protection statutes. Also, criminal prosecutions could be commenced for violation of certain North Carolina laws. This could result in the imposition of fines and the alteration or cessation of our use of the agency business model in North Carolina. All North Carolina payday cash advance centers currently

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operate under the agency business model. Our North Carolina operation's net revenues comprised 5.6% and 5.5% of our net revenues for the years ended December 31, 2003 and 2004, respectively. Additionally, we estimate it would cost approximately $7.8 million (including lease cancellation costs of approximately $0.7 million, the charge-off of accounts receivable of $3.5 million, the charge-off of undepreciated cost of assets of approximately $1.4 million and other shut-down costs of approximately $2.2 million) to shut down our North Carolina operations completely. We do not believe that the cessation of our North Carolina operations will result in any impairment of goodwill. These actions could have a material negative impact on our operations in North Carolina and in other states where we operate under the agency business model as well as on our financial condition.

        The following is a summary of financial information for our operations in North Carolina for the years ended December 31, 2002, 2003 and 2004:

        Principles of consolidation.    Our consolidated financial statements include the accounts of Advance America, Cash Advance Centers, Inc., all of our wholly owned subsidiaries and, through December 21, 2004, our one consolidated special purpose entity related to our corporate headquarters. All significant inter-company balances and transactions have been eliminated. Minority interest in the consolidated variable interest entity represents equity that other investors have contributed to the special purpose entity. As the cumulative distributions of the special purpose entity exceed its cumulative net income, the excess distributions are recorded in our consolidated financial statements.

        Seasonality.    Our business is seasonal due to the impact of fluctuating demand for payday cash advances and fluctuating collection rates throughout the year. Demand has historically been highest in the third and fourth quarters of each year, corresponding to the back-to-school and holiday seasons, and lowest in the first quarter of each year, corresponding to our customers' receipt of income tax refunds. Our provision for doubtful accounts and agency bank losses, allowance for doubtful accounts and accrual for excess bank losses are historically lowest as a percentage of revenues in the first quarter of each year, corresponding to customers' receipt of income tax refunds, and increase as a percentage of revenues for the remainder of each year.

        The growth of the payday cash advance industry has been and continues to be significantly affected by increasing acceptance of payday cash advances by state legislatures. However, to the extent that states enact legislation that negatively impacts payday cash advances, whether through preclusion, interest rate ceilings, fee reductions, mandatory extensions of term length, limits on the amount or term of payday cash advances or limits on consumers' use of the service, our business could be materially adversely affected. We are very active in monitoring and evaluating regulatory initiatives in all of the states and are closely involved with the efforts of the CFSA.

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Prior S Corporation Status

        From October 1, 2001 through December 20, 2004, we were treated for federal and certain state income tax purposes as an S corporation under the Internal Revenue Code and comparable state laws. As a result, our earnings were taxed for federal and most state income tax purposes directly to our stockholders rather than to us. On December 21, 2004 we revoked our status as an S corporation and are now taxed as a C corporation. As a result of the revocation of our S corporation status, we recorded a net deferred tax liability and corresponding income tax expense on the revocation date of $8.4 million.

        The revocation of our S corporation election will have an impact on our results of operations, financial condition and cash flows. Our effective income tax rate will increase and our net income will decrease because we will once again be subject to taxes on our earnings. From a cash flow standpoint, our income tax payments will increase, but our distributions to stockholders for the purpose of paying income tax on our earnings will cease. We believe the combination of these two items will increase our cash flow because the corporate tax payments should be less than the distributions historically made to enable our stockholders to pay their income tax on our earnings.

Discussion of Critical Accounting Policies and Use of Estimates

        In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of our results of operations and financial condition in the preparation of our financial statements in conformity with generally accepted accounting principles in the United States ("GAAP"). We evaluate these estimates on an ongoing basis, including those related to provision for doubtful accounts and agency bank losses, allowance for doubtful accounts, accrual for excess bank losses and intangible assets. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions.

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        We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our financial statements:

Provision for Doubtful Accounts and Agency Bank Losses, Allowance for Doubtful Accounts and Accrual for Excess Bank Losses

        We believe the most significant estimates made in the preparation of our accompanying consolidated financial statements relate to the determination of (1) an allowance for doubtful accounts for estimated probable losses for payday cash advances under the standard business model (which is shown as a reduction in our advances and fees receivable, net on our balance sheet) and (2) the amount we accrue for probable excess bank losses, as described below, for our share of the losses on payday cash advances we process, market and service for the lending banks under the agency business model (which is reported as a current liability on our balance sheet in our accrual for excess bank losses). The provision for doubtful accounts and agency bank losses, allowance for doubtful accounts and accrual for excess bank losses are primarily based upon models that analyze specific portfolio statistics and also reflect, to a lesser extent, management's judgment regarding overall accuracy. The analytic models take into account several factors, including the number of transactions customers complete, historical charge-off and recovery rates, and economic conditions (plant closings, changes in state laws impacting advance amounts and fees, weather related tragedies, etc.) within our markets. The payday cash advances made and funded by the lending banks under the agency business model are not reflected on our balance sheet within our advances and fees receivable, net because these advances are repayable solely to the lending banks and are assets of the lending banks. The lending banks are contractually obligated for the losses on payday cash advances in an amount established as a percentage of the fees and/or interest charged by the banks to their customers on their payday cash advances. Depending upon the lending bank, this percentage currently ranges from 8.0% to 20.0%. In aggregate, this percentage was 7.3%, 10.1% and 13.2% for the years ended December 31, 2002, 2003 and 2004, respectively. Under the agency business model, estimated losses consist of (1) those losses for which the lending banks are contractually obligated and (2) an estimate of the amount by which actual losses will differ from the lending banks' contractual obligations (which we refer to as excess bank losses). The portion of payday cash advances and fees deemed to be uncollectible is charged against the allowance for doubtful accounts or the accrual for excess bank losses, as appropriate, and subsequent recoveries, if any, are credited to the allowance for doubtful accounts or the accrual for excess bank losses, as appropriate.

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        The following table shows the activity in the allowance for doubtful accounts and in the accrual for excess bank losses as of and for the periods specified:

(1)

The provision for agency bank losses consists of (1) those losses for which the lending banks under the agency business model are contractually obligated and (2) an estimate of the amount by which actual losses will differ from the lending banks' contractual obligations (which we refer to as provision for excess bank losses). The provision for excess bank losses was $7.1 million, $1.7 million and $1.3 million for the years ended December 31, 2002, 2003 and 2004, respectively.

        The allowance for doubtful accounts and the accrual for excess bank losses are determined based upon a review of historical and recent losses on our payday cash advances and the lending banks' payday cash advance portfolios. The allowance for doubtful accounts and the accrual for excess bank losses are periodically reviewed by our management with any changes reflected in current operations. Actual losses may be materially different from the recorded allowance for doubtful accounts or the accrual for excess bank losses.

        Under the standard business model, the amount of the unpaid payday cash advances and the related fees and/or interest are generally charged off if a customer does not make payment of at least 15% of his or her outstanding balance within 60 days of the due date. Under the agency business model, the amount of the unpaid payday cash advances and the related fees and/or interest are generally charged off 60 days from inception. Although management uses the best information available to make evaluations, future adjustments to the allowance for doubtful accounts and accrual for excess bank losses may be necessary if conditions differ substantially from our assumptions used in assessing their adequacy.

        To estimate the appropriate allowance for doubtful accounts and accrual for excess bank losses, we utilize the following methodology:

•

on a state-by-state basis, we apply our historical charge-off rate applicable in a particular state for a trailing 24-month period to that state's currently outstanding payday cash advances and fees and/or interest receivable;

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•

we evaluate the need for additional reserves on receivables for deposited customer checks that are returned because of non-sufficient funds using historical collection patterns; and



•

we consider the potential impact of (i) new payday cash advance centers within the state and (ii) specific economic and regulatory conditions on collections at the state and local level.

For advances and fees receivable under the standard business model, our estimate of what we believe will be uncollectible is calculated pursuant to the foregoing methodology and is recorded as the allowance for doubtful accounts. Under the agency business model and pursuant to our agreements with the lending banks, our estimate of what we believe will be uncollectible is reduced by the amount of losses for which lending banks are contractually obligated and is recorded as an accrual for excess bank losses.

        To the extent historic credit experience is not indicative of future performance or other assumptions used by management do not prevail, our loss experience could differ significantly, resulting in either higher or lower future provisions for doubtful accounts and agency bank losses. As of December 31, 2004, if average default rates were 5% higher or lower, the allowance for doubtful accounts and accrual for excess bank losses would change by approximately $1.6 million.

Intangible Assets

        As a result of our acquisition of the National Cash Advance group of affiliated companies in October 1999, we created approximately $143.0 million of goodwill. Due to the significance of goodwill and the reduction of net income that would occur if goodwill were impaired, we assess the impairment of our long-lived and intangible assets annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of the acquired assets or the strategy of the overall business and significant negative industry trends. To identify potential impairment, we compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit does not exceed its carrying amount, we measure the amount of impairment loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The amount of any impairment would lower our net income.

Accrued Healthcare and Workers' Compensation Expenses

        Accrued liabilities in our December 31, 2003 and 2004 financial statements include accruals of approximately $2.9 million and $3.4 million, respectively, for the self-insured portion of our health and dental insurance and $3.3 million and $3.5 million, respectively, for workers' compensation. We recognize our obligations associated with those benefits in the period the claim is incurred. The costs of both reported claims and claims incurred but not reported, up to specified deductible limits, are estimated based on historical data, current enrollment, employee statistics and other information. Our estimates and the resulting reserves are reviewed and updated periodically and any necessary adjustments are reflected in earnings currently. To the extent historical claim history is not indicative of future claim history, there are changes in enrollment or employee history, workers' compensation loss development factors change or other assumptions used by management do not prevail, our expense and related accrued liabilities could increase or decrease.

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Results of Operations

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

        The following tables set forth our results of operations for the year ended December 31, 2003 compared to the year ended December 31, 2004: