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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from              to             

Commission File Number 000-50840

QC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

(913) 439-1100

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report.)

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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

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

The number of shares outstanding of the registrant’s common stock, as of August 6, 2004:

Common Stock $0.01 per share par value - 20,371,000 Shares

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QC HOLDINGS, INC.

Form 10-Q

June 30, 2004

Ind ex

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QC HOLDINGS, INC.

FORM 10-Q

JUNE 30, 2004

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTRODUCTORY COMMENTS

The Consolidated Financial Statements included herein have been prepared by QC Holdings, Inc. (the “Company” or “QC”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Consolidated Financial Statements should be read in conjunction with the financial statements and the notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Registration Statement on Form S-1, as amended, Registration No. 333-115297, filed on July 9, 2004. Results for the three and six months ended June 30, 2004 are not necessarily indicative of the results expected for the full year 2004.

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QC HOLDINGS, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

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

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QC HOLDINGS, INC.

Consolidated Statements of Income

(in thousands, except per share amounts)

(Unaudited)

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

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QC HOLDINGS, INC.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

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

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QC HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share amounts)

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

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QC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited interim consolidated financial statements are of QC Holdings, Inc. and its wholly-owned subsidiaries, QC Financial Services, Inc. and QC Properties, LLC (collectively known as the Company). QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Advance, Inc. (formerly Title Loans, Inc.) and Cash Title Loans, Inc. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of December 31, 2003 and June 30, 2004, the results of operations for the three and six months ended June 30, 2003 and 2004 and the cash flows for the six months ended June 30, 2003 and 2004. The consolidated balance sheet as of December 31, 2003 was derived from the audited financial statements of the Company, but does not include all disclosures required by generally accepted accounting principles.

The accompanying unaudited interim consolidated financial statements have been prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements that are presented in the Company’s Registration Statement on Form S-1, as amended, Registration No. 333-115297, filed on July 9, 2004 with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year 2004.

Business. QC Holdings, Inc., incorporated in 1998 under the laws of the State of Kansas, was originally formed in 1984 and has provided various retail consumer financial products and services throughout its 20-year history. Since 1998, the Company has been principally engaged in the business of providing short-term consumer loans, known as payday loans. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally 14 days and supported by that customer’s personal check for the aggregate amount of the cash advanced plus a fee, which varies from state to state based on applicable regulations and generally ranges between $15 to $20 per $100 borrowed. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check to be presented to the bank for collection. Certain locations offer payday loans from a third-party financial institution, from which the Company purchases a pro rata participation.

The Company also provides other consumer financial products and services, such as check cashing services, title loans, money transfers and money orders. All of the Company’s loans and other services are made in accordance with state regulation, which vary from state to state. As of June 30, 2004, the Company operates 301 stores with locations in Arizona, California, Colorado, Florida, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, Utah, Virginia, Washington and Wisconsin.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The most significant estimate relates to the allowance for loan losses on loans receivable. This estimate may be adjusted as more current information becomes available, and any adjustments could be significant.

Principles of Consolidation. The accompanying unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications were made to the prior year interim consolidated financial statements to conform to the current year presentation.

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Stock Split. The Company’s Board of Directors effected a 10 for 1 stock split in the form of a stock dividend on June 9, 2004. All share and per share information included in the consolidated financial statements and accompanying notes have been restated to reflect this stock split for all periods presented.

Note 2 – Significant Accounting Policies

Revenue Recognition. The Company records revenue from loans upon issuance. The term of a loan is generally 14 days for a payday loan and 30 days for a title loan. At the end of each period, the Company records an estimate of the unearned revenue, which results in revenues being recognized on a constant-yield basis ratably over the term of each loan.

The Company recognizes revenues for its other consumer financial products and services, including, among others, check cashing, money transfers and money orders, at the time those services are rendered to the customer, which is generally at the point of sale.

The components of “Other” revenues as reported in the statements of income are as follows (in thousands):

Loans Receivable, Provision for Losses and Allowance for Loan Losses. When the Company enters into a payday loan with a customer, the Company records a loan receivable for the amount loaned to the customer plus the fee charged by the Company, which varies from state to state based on applicable regulations.

The following table summarizes certain data with respect to the Company’s payday loans:

When checks are presented to the bank for payment and returned as uncollected, all accrued fees, interest and outstanding principal are charged-off as uncollectible, generally within 15 days of their due date. Accordingly, the loans included in the receivable balance at any give point in time are typically not older than 30 days. These charge-offs are recorded as expense through the provision for losses. Any recoveries on losses previously charged to expense are recorded as a reduction to the provision for losses in the period recovered.

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With respect to the loans receivable at each period end, the Company maintains an allowance for loan losses (including fees and interest) for aggregate payday loans and title loans at levels estimated to be adequate to absorb estimated incurred losses in the respective outstanding loan portfolios, which includes for payday loans the Company’s pro rata participation in purchased loans.

Loans receivable are generally no more than 30 days old. The allowance is determined by evaluating the aggregate payday and title loan portfolio based on the historical level of loans charged to expense, the timing of each period end in a typical two-week payday cycle and the Company’s collections experience over the three months as of March 31, six months as of June 30, nine months as of September 30, and twelve months as of December 31 each year. The Company believes that, at any given point in time, its recent collection history reflects general economic conditions. The Company does not specifically reserve for any individual loan. The Company aggregates payday loans and title loans for purposes of computing the allowance based on very similar historical averages of uncollectible amounts as a percentage of volume for each type of loan (generally ranging between 2% and 4% of total volume).

Using this information, the Company records an adjustment to the allowance for loan losses through the provision for losses.

The following table summarizes the activity in the allowance for loan losses and the provision for losses during the three and six months ended June 30, 2003 and 2004 (in thousands):

Earnings per Share. Basic and diluted earnings per share are computed using the two class method by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. The effect of stock options represents the only difference between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented.

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The following table presents the computations of basic and diluted earnings per share for the periods presented (in thousands, except per share data).

All options that were outstanding for the three and six months ended June 30, 2003 and 2004 were included in the computation of diluted earnings per share because the exercise prices were equal to or lower than the average market prices of the common shares.

With respect to the six months ended June 30, 2003, income available to common stockholders is adjusted to reflect the shares subject to redemption as set forth in Emerging Issues Task Force Topic D-98 (EITF Topic D-98), Classification and Measurement of Redeemable Securities. In January 2003, the Stockholders Agreement (the Agreement) with two principal stockholders was amended to increase the Company’s obligation to repurchase shares to $17.0 million from $11.0 million as of December 31, 2002. The amount of the increase in the carrying amount of the shares subject to redemption associated with this obligation that has been charged to retained earnings is included as a reduction to income available to common stockholders.

As set forth in Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which the Company adopted as of July 1, 2003, the shares (approximately 3.6 million) considered to be subject to redemption under the Agreement for which a liability has been recorded have been excluded from the computations of basic and diluted earnings per share for the three and six months ended June 30, 2004. Further, SFAS 150 requires that the portion of net income representing dividend and participation rights associated with the mandatory stock redemption be removed from income available to common stockholders pursuant to the two-class method set forth by Statement of Financial Accounting Standards No. 128, Earnings per Share.

Effective June 30, 2004, the Company terminated the Agreement with the two principal shareholders as discussed above. As a result, the $17 million liability for mandatory stock redemption was reclassified to stockholders’ equity pursuant to SFAS 150 and the computations of earnings per share in future periods will no longer require the adjustments associated with the shares subject to mandatory redemption.

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Stockholders’ Equity. During the six months ended June 30, 2004, the Company issued 189,000 shares of common stock in connection with stock option exercises. The issuance reduced the number of common stock shares held in treasury to 3,716,600 as of June 30, 2004.

Stock Option Plans. As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based Compensation (and as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure), the Company accounts for stock options issued to employees under the recognition and measurement principles (intrinsic-value method) of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and its related Interpretations. There was no stock-based employee compensation expense reflected in the Company’s reported net income for the three and six months ended June 30, 2003 and 2004 because all stock options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant.

In 2002 and in years prior to 2001, the Company granted stock options to non-employees. In accordance with the provisions of SFAS 123, the Company has recorded compensation expense related to these non-employee option grants in the consolidated financial statements.

Had the Company applied the provisions set forth in SFAS 123 with respect to stock options to employees, compensation expense for the three and six months ended June 30, 2003 and 2004 would have been approximately $75,000 and $150,000, respectively, higher than is reported in the consolidated financial statements for each year. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options (in thousands, except per share data):

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Note 3 – Indebtedness

At June 30, 2004, the Company had a revolving credit facility with an available amount of $10.0 million, of which $6.2 million was borrowed as of June 30, 2004. Interest is payable monthly at prime (4.25% at June 30, 2004) plus 1%. The facility is collateralized by substantially all Company assets and guaranteed by the Company’s principal stockholder. The credit facility contains several financial covenants that require, among other things, that the Company maintain a minimum net worth, leverage ratio, current ratio, coverage ratio, and debt-to-revenue ratio as specified in the agreement. As of December 31, 2003 and March 31, 2004, the Company was not in compliance with certain covenants with respect to the minimum net worth requirement after consideration of the impact of shares subject to redemption as discussed in Note 2. With the termination of the stockholders agreement that required consideration of shares subject to redemption as of June 30, 2004, stockholders’ equity was increased by $17 million. Accordingly, the Company was in compliance with respect to all of its covenants as of June 30, 2004. As discussed in Note 6, the Company repaid all indebtedness under the facility in July 2004 and terminated the facility.

On May 6, 2004, the Company repaid approximately $2.0 million of its subordinated unsecured notes payable using available cash and borrowings under the revolving credit facility. The Company received a waiver from the financial institution providing the revolving credit facility that allowed for partial repayment of the subordinated obligations. See Note 6 regarding the repayment of all indebtedness in July 2004.

Note 4 – Certain Concentrations of Risk

The Company is subject to regulation by federal and state governments that affect the products and services provided by the Company, particularly payday loans. The Company currently offers payday loans in 22 states throughout the United States. The level and type of regulation of payday loans varies greatly from state to state, ranging from states with no specific regulations or legislation to other states with very strict guidelines and requirements.

Company stores located in the states of Missouri, California, Illinois, Arizona and New Mexico represented approximately 25%, 16%, 9%, 9% and 9%, respectively, of total revenues for the six months ended June 30, 2004. To the extent that laws and regulations are passed that affect the Company’s ability to offer payday loans or the manner by which the Company offers its payday loans in any one of those states, the Company’s financial position, results of operations and cash flows could be affected.

Note 5 – Related Party Transactions

At December 31, 2003, the Company reported the following related party information:

During the six months ended June 30, 2004, all of the receivables and obligations were settled in full.

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In February 2004, the Company purchased property in California for approximately $1.3 million, which was funded with $0.3 million in cash and $1.0 million in borrowings through a note payable with interest at prime plus 1% and due March 2019. The Company expects to sell the property to two principal stockholders during the second half of 2004 based on appraised value. See Note 6 regarding the repayment of all indebtedness in July 2004.

Note 6 – Subsequent Events

Company’s Initial Public Offering. Effective July 21, 2004, the Company completed the initial public offering of 5,000,000 shares its common stock at a price of $14.00 per share. In addition, the underwriters for the Company’s initial public offering exercised the option to purchase from selling stockholders an additional 750,000 shares of common stock to cover over-allotments in the offering. The Company did not receive any of the proceeds from the shares of common stock sold by the selling stockholders. The Company’s common stock trades on the NASDAQ National Market under the symbol “QCCO.”

Repayment of Indebtedness. The Company received net proceeds of approximately $63.6 million after underwriting discounts and offering expenses from its initial public offering of 5,000,000 shares of common stock. The Company used approximately $26 million of the proceeds to repay all of its outstanding indebtedness. The remaining $37.6 million of proceeds will be used by the Company to finance future growth through the opening of new, or de novo, stores and opportunistic acquisitions and to fund working capital requirements. In connection with the repayment of indebtedness in July 2004, the Company terminated the revolving credit facility.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The discussion below includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, our plans, strategies and prospects, both business and financial. All statements other than statements of current or historical fact contained in this discussion are forward-looking statements. The words “believe,” “expect,” “anticipate,” “should,” “would,” “could,” “plan,” “will,” “may,” “intend,” “estimate,” “potential,” “continue” or similar expressions or the negative of these terms are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations and business strategy. They can be affected by inaccurate assumptions, including risks, uncertainties and assumptions that include (1) changes in laws governing consumer protection or payday lending practices, (2) changes in our key management personnel, (3) litigation or regulatory action directed toward the Company or the payday loan industry, (4) the Company’s role as an agent for a national bank in North Carolina for payday loans and changes in federal or state laws affecting that relationship, (5) federal or state litigation challenging the Company’s national bank relationship in North Carolina or in other states in which the Company may use that or a similar arrangement, (6) negative media reports and public perception of the payday loan industry, (7) volatility in the Company’s earnings, primarily as a result of fluctuations in loan loss experience, (8) turnover in our store managers and store-level employees, and (9) the other risks detailed under the caption “Risk Factors” in the Company’s Registration Statement on Form S-1, as amended, Registration No. 333-115297, filed on July 9, 2004 with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward-looking statements in this discussion may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this discussion.

Our forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The discussion herein is intended to clarify and focus on our results of operations, certain changes in financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Form 10-Q. This discussion should be read in conjunction with these consolidated financial statements and the related notes thereto and is qualified by reference thereto.

We are the parent company of QC Financial Services, Inc. and its wholly owned subsidiaries. We derive our revenues primarily by providing short-term consumer loans, known as payday loans. We also earn fees for various other financial services, such as check cashing services, title loans, money orders and money transfers. We operate 301 stores in 22 states. In all but one of these states, North Carolina, we fund our payday loans directly to the customer and receive a fee. Fees charged to customers vary from state to state, and in most cases, are limited by state law. In North Carolina, we have an arrangement with County Bank of Delaware to which we provide various services in connection with the bank’s origination of payday loans in our stores and from which we purchase a pro rata participation interest in those loans. For our check cashing services, we charge our customers a fee that is usually equal to a percentage of the amount of the check being cashed and is deducted from the cash provided to the customer.

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Our expenses primarily relate to the operations of our store network, the most significant of which include salaries and benefits for our store employees, provisions for losses and occupancy expenses for our leased real estate. Regional and corporate expenses, including compensation to employees and occupancy expenses, are our other primary costs.

We evaluate our stores based on store gross profit and revenue growth, with consideration given as to the length of time the store has been open. We consider comparable store growth a strong indicator of operating efficiency. We define comparable stores as those stores that are open during the full periods for which a comparison is being made. For example, comparable stores for the six months ended June 30, 2004 have been open at least 18 months. We monitor newer stores for their progress to profitability and rate of loan growth. With respect to our cost structure, salaries and benefits are historically our largest costs and are driven primarily by the addition of stores throughout the year. Our provision for losses is also a significant expense. If a customer’s check is returned by the bank as uncollected, we generally make an immediate charge-off to the provision for losses for the amount of the customer’s loan. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered. We have experienced seasonality in our operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter.

Our industry is highly fragmented. According to the Community Financial Services Association of America (CFSA) and the investment banking firm, Stephens Inc., the industry has grown to approximately 22,000 payday loan stores in 2003, generating over $40 billion in annual loan volume. With this fragmentation and industry growth, we believe there are opportunities to expand through acquisitions and new store openings. We are actively identifying possible store locations in numerous states in which we currently operate and evaluating the regulatory environment and market potential in the various states in which we currently do not have stores. As we consider acquisitions and open new stores, there are various execution risks associated with any such transactions. Since December 31, 1998, however, we have opened 144 new stores, acquired 137 stores and closed 28 stores.

The growth of the payday loan industry has followed, and continues to be significantly affected by, increasing acceptance of payday lending by state legislatures. However, to the extent that states enact legislation that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business could be 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.

SIGNIFICANT DEVELOPMENTS

Company’s Initial Public Offering. Effective July 21, 2004, we completed the initial public offering of 5,000,000 shares of our common stock at a price of $14.00 per share. In addition, the underwriters for our initial public offering exercised the option to purchase from selling stockholders an additional 750,000 shares of our common stock to cover over-allotments in the offering. We did not receive any of the proceeds from the shares of common stock sold by the selling stockholders. Our common stock trades on the NASDAQ National Market under the symbol “QCCO.”

Repayment of Indebtedness. We received net proceeds of approximately $63.6 million after underwriting discounts and offering expenses from our public offering of 5,000,000 shares. We used approximately $26 million of the proceeds to repay all of our outstanding indebtedness. We plan to use the remaining $37.6 million of proceeds to finance future growth through the opening of new, or de novo, stores and opportunistic acquisitions, and to fund working capital requirements.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2004 Compared with the Three Months Ended June 30, 2003

The following table sets forth our results of operations for the three months ended June 30, 2004 compared to the three months ended June 30, 2003:

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The following table sets forth selected financial and statistical information for the three months ended June 30, 2003 and 2004:

We reported net income of $3.8 million in second quarter 2004 compared to $2.7 million in second quarter 2003. The 41% increase in net income quarter to quarter reflects higher revenues, primarily due to growth in payday loan volumes and higher average fees per loan, and operating margin improvements.

Revenues. For the three months ended June 30, 2004, revenues reached $28.9 million, a 24.6% increase from $23.2 million during the three months ended June 30, 2003. This revenue growth was primarily a result of higher payday loan volumes, together with higher average payday loan fees. We originated approximately $181.1 million through payday loans during second quarter 2004 compared to $140.6 million during second quarter 2003. Average fees received from customers per loan increased 6.9%, from $46.68 in second quarter 2003 to $49.90 in second quarter 2004.

Revenues for comparable stores improved $4.2 million, or 18.5%, to $26.9 million in second quarter 2004, largely as a result of higher payday loan volume during the current year period driven by our convenient lending policy and the continued strong demand by consumers for the payday loan product. Second quarter 2004 revenues also benefited from the inclusion of 32 stores that were opened during the last three quarters of 2003, which contributed $1.8 million in revenues, and nine stores that were opened during 2004, which contributed $115,000.

Revenues from check cashing, title loans and other sources totaled $2.8 million during second quarter 2004, a 5.1% decrease from the comparable prior year period. This decrease reflects declining volumes in title loans and check cashing. Check cashing and title loan revenues represented 4.7% and 3.6% of total revenues, respectively, for the three months ended June 30, 2004 versus 6.1% and 4.9%, respectively, for the three months ended June 30, 2003. These declines as a percentage of revenues reflect our reduced emphasis on these products.

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Store Expenses. Total store expenses increased $2.3 million, or 14.7%, from $15.6 million in second quarter 2003 to $17.9 million in second quarter 2004. Salaries and benefits increased by $1.0 million for the three months ended June 30, 2004 compared to prior year primarily as a result of new personnel to operate the 31 stores added subsequent to June 30, 2003.

While absolute loss totals increased from $5.5 million in second quarter 2003 to $6.0 million in second quarter 2004, this rate of increase was lower than revenue growth, resulting in a decline in losses as a percentage of revenues from 23.8% during second quarter 2003 to 20.9% during second quarter 2004. We believe the second quarter loss ratio of 20.9%, which is within the range of 20% to 22% that we believe is reasonable on an annualized basis, improved over prior year’s quarter due to our customer service approach to collections that focuses on maintaining a positive relationship with the customer through efforts to minimize the number of checks presented to the bank for payment. Our business is seasonal due to the impact of fluctuating demand for payday loans throughout the year, with historically higher demand in the month of January and in the fourth quarter of each year. We normally experience improved loan collections in February and March of each year, which reduces our loan losses in the first quarter of each year. Accordingly, the provision for losses as a percentage of revenues is generally higher during the second and third quarters of each year than in the first and fourth quarters.

Other expense components, including occupancy, depreciation and amortization and various other costs, increased $774,000 quarter to quarter. Occupancy costs as a percentage of revenues declined during second quarter 2004 versus 2003, indicative of the fixed nature of these costs.

Expenses related to stores that were opened during the last nine months of 2003 accounted for $1.0 million of the increase in total store expense, primarily due to compensation to employees and higher losses. Comparable store expenses for the current quarter increased over prior year’s quarter by approximately $1.2 million, or 8.2%. The slower rate of growth in expenses versus revenues for comparable stores is partially a result of efforts to implement our Operational Excellence program, which encourages store managers to share successful operating procedures with other locations throughout the organization and seeks to provide a greater opportunity for consistency in critical business drivers across geographic boundaries. The increase in total expenses from stores opened during 2004 was essentially offset by the lack of expenses for stores closed during 2003.

Store Gross Profit. Store gross profit improved $3.4 million, or 44.7%, from $7.6 million in second quarter 2003 to $11.0 million in second quarter 2004. Store gross margin, which is store gross profit as a percentage of revenues, improved to 38.0% from 32.9%. This improvement reflects revenue growth, together with efficient operations and favorable loss experience. Specifically, comparable stores during second quarter 2004 reported a gross margin of 41.0% versus 35.1% in second quarter 2003. Stores opened during the final nine months of 2003, of which 10 were opened during the second quarter and 22 were opened during the last six months, contributed $312,000 in gross profit during second quarter 2004. Stores opened during 2004 reported a modest loss for the three months ended June 30, 2004.

Regional and Corporate Expenses. Regional and corporate expenses were $4.1 million during the three months ended June 30, 2004 compared to $2.9 million in the prior year quarter. This increase reflects higher administrative expenses, such as salaries, benefits and travel, as a result of the increase in the number of stores and the development of support functions. Together, regional and corporate expenses totaled 14.1% of revenues in second quarter 2004, which is below our expected annual range of 15% to 16% of revenues. The higher expected level of regional and corporate expenses reflects the additional costs of being a public company and the anticipated related reporting and compliance expenses.

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Interest Expense. Interest expense increased $138,000 quarter to quarter as a result of higher average debt balances in second quarter 2004, primarily due to the additional $15 million of long-term debt we incurred in fourth quarter 2003 in connection with the repurchase of 3.7 million shares of our common stock.

Income Tax Provision. Our provision for income taxes increased $938,000 to $2.6 million during the three months ended June 30, 2004 from $1.7 million during the same prior year quarter as a result of higher pretax income. Our second quarter 2004 effective income tax rate of 41.0% was higher than the 38.8% in second quarter 2003 due to state and local tax planning strategies that reduced the 2003 provision for income taxes, the benefits of which were limited to 2003.

Six Months Ended June 30, 2004 Compared with the Six Months Ended June 30, 2003