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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;



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provides services in a standardized and efficient manner;



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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



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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"