**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

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

**Forthe fiscal year ended December 31, 2006**

**OR**

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

**Forthe transition period from                 to                **

**COMMISSIONFILE NUMBER 001-32363**

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

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **58-2332639**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)           |   |                                  |
| **135 North Church Street**               |   |                                  |
| **Spartanburg,  South Carolina**          |   | **29306**                             |
| (Address of  principal executive offices) |   | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:  **864-342-5600**

**Securitiesregistered pursuant to Section 12(b) of the Act:**

|                                         |       | **Name of Each Exchange** |
|-----------------------------------------|------------|---------------------------|
| **Title of Each Class**                 | ** ** | **on which Registered**   |
| Common Stock, par  value $.01 per share |       | New York Stock  Exchange  |

 

**Securities registeredpursuant to Section 12(g) of the Act: None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes x No o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

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

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

 

Indicate by a check markwhether the registrant is a shell company (as defined by Rule 12b-2 of theExchange Act). Yes o  Nox

As of June 30, 2006,the aggregate market value of voting stock (based upon the last reported salesprice on the New York Stock Exchange) held by nonaffiliates of the registrantwas $1,187,751,093.

At February 26, 2007,there were 79,543,637 shares of the registrant’s Common Stock, par value $.01per share, outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

Certaininformation required by Part III of this report is incorporated herein byreference from the registrant’s proxy statement for the registrant’s AnnualMeeting of Stockholders to be held on May 24, 2007.

 

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

**Form 10-K**

**Forthe year ended December 31, 2006**

| **PART I**   |   |                                                                                                               |   |   |   |
|-------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item 1.           |   | Business                                                                                                           |   | 4      |   |
| Item  1A.         |   | Risk  Factors                                                                                                      |   | 17     |   |
| Item 1B.          |   | Unresolved Staff Comments                                                                                          |   | 29     |   |
| Item 2.           |   | Properties                                                                                                         |   | 29     |   |
| Item  3.          |   | Legal  Proceedings                                                                                                 |   | 29     |   |
| Item 4.           |   | Submission of Matters to a Vote of Security Holders                                                                |   | 32     |   |
| **PART II**  |   |                                                                                                               |   |   |   |
| Item 5.           |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 33     |   |
| Item 6.           |   | Selected Financial Data                                                                                            |   | 36     |   |
| Item 7.           |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   | 39     |   |
| Item 7A.          |   | Quantitative and Qualitative Disclosures About Market  Risk                                                        |   | 64     |   |
| Item 8.           |   | Financial Statements and Supplementary Data                                                                        |   | 65     |   |
| Item 9.           |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |   | 102    |   |
| Item 9A.          |   | Controls and Procedures                                                                                            |   | 102    |   |
| Item  9B.         |   | Other  Information                                                                                                 |   | 103    |   |
| **PART III** |   |                                                                                                               |   |   |   |
| Item 10.          |   | Directors and Executive Officers of the Registrant                                                                 |   | 103    |   |
| Item 11.          |   | Executive Compensation                                                                                             |   | 104    |   |
| Item 12.          |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |   | 104    |   |
| Item 13.          |   | Certain Relationships and Related Transactions,  and Director Independence                                         |   | 104    |   |
| Item 14.          |   | Principal Accountant Fees and Services                                                                             |   | 104    |   |
| **PART IV**  |   |                                                                                                               |   |   |   |
| Item 15.          |   | Exhibits and Financial Statement Schedules                                                                         |   | 105    |   |
| **SIGNATURES**    |   | 108                                                                                                                |   |

 

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**FORWARD-LOOKINGSTATEMENTS**

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

The factors listed in “Item 1A. Risk Factors,” as wellas any cautionary language in this Annual Report, provide examples of risks,uncertainties and events that may cause our actual results to differ materiallyfrom the expectations we describe in our forward-looking statements. Althoughwe believe that our expectations are based on reasonable assumptions, actualresults may differ materially from those in the forward-looking statements as aresult of various factors, including, but not limited to, those described in “Item1A. Risk Factors.”

Forward-looking statements speak only as of the dateof this Annual Report. Except as required under federal securities laws and therules and regulations of the U.S. Securities and Exchange Commission, wedo not have any intention, and do not undertake, to update any forward-lookingstatements to reflect events or circumstances arising after the date of thisAnnual Report, whether as a result of new information, future events orotherwise. As a result of these risks and uncertainties, readers are cautionednot to place undue reliance on the forward-looking statements included in thisAnnual Report or that may be made elsewhere from time to time by, or on behalfof, us. All forward-looking statements attributable to us are expresslyqualified by these cautionary statements.

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**PART I**

**ITEM 1. BUSINESS.**

**Overview**

We arethe largest provider of payday cash advance services in the United States, asmeasured by the number of centers operated. As of December 31, 2006, weoperated 2,853 centers in 36 states. We do not franchise any of our centers.Payday cash advances are small-denomination, short-term, unsecured advancesthat are typically due on the customer’s next payday. We focus primarily onproviding payday advance services to middle-income working individuals and donot provide pawn lending, title lending or similar services. During 2006, webegan offering customers in Pennsylvania the Advance America Choice-Line ofCredit product. We previously marketed, processed and serviced installmentloans made by lending banks under our former agency business model, and during2006 we began offering installment loans directly to customers in Illinois. Inthe fall of 2006, we introduced a prepaid debit card as an additional productin our centers. In the future we intend to expand further our product andservice offerings. The table below shows selected demographics of the customerswe serve:

| ** **                           | ** ** | **Customers(1)** | ** ** | **U.S. Census 2000** | ** ** |
|--------------------------------------|------------|------------------|------------|--------------------------------|------------|
| Average age  (years)                 |       |             | 39         |                           |       |   | 35.8 |   |   |
| Percentage  between 18-44            |       |             | 66         | %                              |       |   | 40 | % |   |
| Median household  income             |       |             | $          | 40,557                         |       |   |   | $ | 41,994 |   |   |
| Percentage  homeowners               |       |             | 45         | %                              |       |   | 66 | % |   |
| Percentage with high  school degrees |       |             | 86         | %                              |       |   | 80 | %(2) |   |
|                                      |            |                  |            |                                |            |  |  |  |  |  |  |

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(1)         Based on a studyperformed for us of the approximately 52% of customers served during the twelvemonths ended April 2005 for whom this information was available.

(2)         Percentage of population25 years old and older who are high school graduates or higher.

Our goal is to attract customers by offeringstraightforward, rapid access to temporary funding while providinghigh-quality, professional customer service. We believe that our servicesrepresent a competitive source of liquidity to the customer relative to othercredit alternatives, which typically include overdraft privileges or bouncedcheck protection, late bill payments, checks returned for insufficient fundsand short-term collateralized loans.

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The followingtable presents key operating data for our business:

| ** **                                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of centers open  at end of period                                                             |       | 2,408                                      |       | 2,604 |   | 2,853 |   |
| Number of customers  served—all credit products (thousands)                                     |       | 1,412                                      |       | 1,534 |   | 1,494 |   |
| Number of payday cash  advances originated (thousands)                                               |       | 11,586                                     |       | 11,620 |   | 11,539 |   |
| Aggregate principal  amount of payday cash advances originated (thousands)                           |       | $                                          | 3,804,096  |   | $ | 3,943,815 |   | $ | 4,082,865 |   |
| Average amount of payday  cash advance originated                                                    |       | $                                          | 328        |   | $ | 339 |   | $ | 353 |   |
| Average charge to  customers for providing and processing a payday cash advance                      |       | $                                          | 52         |   | $ | 55 |   | $ | 55 |   |
| Average duration of a  payday cash advance (days)                                                    |       | 15.4                                       |       | 15.8 |   | 16.2 |   |
| Average number of lines  of credit outstanding during the period (thousands)                         |       | —                                     |       | — |   | 20 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) |       | —                                     |       | — |   | $ | 8,963 |   |
| Average principal amount  on lines of credit outstanding during the period                           |       | —                                     |       | — |   | $ | 448 |   |
| Number of installment  loans originated (thousands)                                                  |       | —                                     |       | 68 |   | 29 |   |
| Aggregate principal  amount of installment loans originated (thousands)                              |       | —                                     |       | $ | 34,541 |   | $ | 13,905 |   |
| Average amount of  installment loan originated                                                       |       | —                                     |       | $ | 508 |   | $ | 486 |   |
| Average charge to customers for providing and  processing an installment loan(1)                     |       | —                                     |       | $ | 337 |   | $ | 357 |   |

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(1)          Thiscalculation for 2006 excludes the Illinois installment loan product which wasrolled out in October 2006 because that product was not available longenough for an average charge in Illinois to be determined.

Our centers, which wedesign to have the appearance of a mainstream financial institution, aretypically located in middle-income shopping areas with high retail activity. Asof December 31, 2006, we operated 2,769 centers under the “AdvanceAmerica” brand and 84 centers under the “National Cash Advance” brand.

**Our Industry**

The payday cash advanceservices industry has grown steadily since the early 1990s in response to ashortage of available short-term consumer credit alternatives from traditionalbanking institutions. The rapid increase in the charges associated with havinginsufficient funds in one’s bank account, as well as other late/penalty feescharged by financial institutions and merchants, have also helped increasecustomer demand for advances. An advance typically involves a single charge,unlike other alternatives that often require collateral, origination andadministration fees, interest payments, additional incremental charges andprepayment penalties and charges for other services such as credit lifeinsurance. Other alternatives, such as bounced checks and late bill payments,may also have negative credit consequences. We believe customers use short-termadvances as a simple, quick and confidential way to meet short-term cash needsbetween paydays while avoiding the potentially higher costs and negative creditconsequences of other alternatives.

We believe many banks andother traditional financial institutions reduced or eliminated their provisionof small-denomination, short-term consumer loans, in part due to the costsassociated with originating these loans. As a result, a significant number ofcompanies now offer short-term consumer loans, or advances, to lower-income andmiddle-income individuals. The providers of these types of services arefragmented and range from specialty finance offices, like our centers, toretail stores in other industries that offer short-term consumer loans asancillary services. Because of the relatively low cost of 

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entryand the regulatory safe harbor that many state statutes provide for advances,the industry has experienced significant growth in the number of centers. Otherentrants to the industry offer advances and short-term loans over the internetas well as by telephone.

We believe the payday cashadvance services industry is growing, fueled by overall increases in thepopulation and increased consumer and legislative acceptance of payday cashadvances. The number of jurisdictions with specific legislation and/orregulations permitting payday cash advances or small loans has grown from 16states in 1997, the year in which we commenced operations, to 39 states and theDistrict of Columbia as of December 31, 2006.

**Competitive Strengths**

*Market Leader with Economies ofScale.  *With 2,853 centers located in 36 states as ofDecember 31, 2006, we are the largest provider of payday cash advanceservices in the United States, as measured by the number of centers operated,with approximately twice as many centers as the next largest provider of paydaycash advance services. We believe our scale provides us with a leadershipposition in the industry, allows us to leverage our brand name in openingcenters in existing and new markets and enables us to benefit from economies ofscale and to enter favorable relationships with landlords, strategic vendorsand other suppliers. We have centralized most center support functions,including marketing and advertising, accounting and finance, treasurymanagement, human resources, regulatory compliance, information technologysupport and customer support systems. We believe these centralization effortswill enable us to continue to expand our network of centers while controllingour costs.

*Successful Execution of GrowthStrategy.*   We believe we have successfully executed aneffective growth strategy, including identifying attractive locations for newcenters, rapidly entering into new leases and establishing the necessary proceduresand systems to manage the overall growth process. We use our database of over4.0 million customer records to analyze market opportunities and makemanagement decisions regarding expanding our network of centers. In 2006, weopened 302 new centers in 32 states, and in 2005, we opened 361 new centers in32 states.

*Continued Focus on GovernmentAffairs.*   We have experience with the legislative andregulatory environment in all of the states in which we operate as well as atthe federal level. We are a founding member of the Community Financial ServicesAssociation of America (“CFSA”), an industry trade group comprised of ourcompany and more than 100 other companies engaged in the payday cash advanceservices industry. Our internal government affairs team, together with theCFSA, seeks to encourage favorable legislation that permits us to operateprofitably within a balanced regulatory framework. In 2006, 2005 and 2004,payday cash advance legislation we supported was adopted in 3 states, 9 statesand 15 states, respectively. Our approach is to continue to work withpolicymakers and grass roots organizations to provide a predictable andfavorable legislative environment for the payday cash advance servicesindustry.

*Ability to Respond Rapidly toRegulatory Changes.*   Our regulatory department, alongwith our internal government affairs team and outside counsel, monitors thevarious state and federal legislatures and rule-making bodies to keep abreastof changes in laws and regulations relevant to our business. Our organizationis designed to be able to respond rapidly to these regulatory developments. Webelieve that our strong internal regulatory team enables us to seizeopportunities for growth in new jurisdictions, permits us to conduct ourbusiness in compliance with often changing laws and regulations and allows usto react quickly to those changes.

*Rigorous Implementation of CenterLevel Controls.*   We believe that our managementinformation systems, our cash management systems and our internal compliancesystems are critical to our success and continued growth. We employ aproprietary point-of-sale system used to record transactions in our centers.This information is recorded daily and analyzed at our centers and at ourheadquarters. We also employ a third-party cash reconciliation software systemto balance and monitor cash receipts and disbursements. The principal benefitsfrom our use of these two systems are our quick recognition of variances from 

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expected operatingresults, our early detection of theft and fraud and our ability to monitorcompliance with various federal and state laws.

*Geographical Diversification ofOur Centers.*   With centers located in 36 states as ofDecember 31, 2006, we believe we have developed a significant presencethroughout the United States that helps us to mitigate the risk and possiblefinancial impact of unfavorable changes in state legislation or in the economicenvironment of a particular region or state and allows us to take advantage ofcompetitive opportunities in those markets. For the year endedDecember 31, 2006, California and Texas, which accounted for approximately10.5% and 11.6%, respectively, of our total revenues, were the only states thataccounted for more than 10% of our total revenues.

**Business Strategy**

*Continue to Open CentersSystematically.  *A key objective of our growth strategyis to become the leading provider of payday cash advance services in eachmarket we enter by rapidly opening proprietary, wholly owned centers. We do notintend to franchise our centers. We opened 302 centers in 2006, and we expectto continue our rapid roll-out of new centers. We believe that internaldevelopment of new centers is currently generally more economical thanacquiring and integrating existing centers. However, from time to time, we alsomay consider opportunities to acquire payday cash advance companies orbusinesses, particularly in markets we do not currently serve. We believe thatby offering the convenience of a high density of centers, as well asexceptional customer service, we will maintain a high level of customersatisfaction.

*Drive New Center OperatingPerformance.*   In our operating centers that opened in2006 and 2005, we are striving to match the operating performance of ourcenters that have been open at least 24 months. To do this, our employees areevaluated and compensated, in part, based on their achievement of operationalgoals, which we adjust each year to account for the continued improvement inour business. The three key metrics we reward are (1) maintaining a highlevel of compliance with applicable laws and regulations, (2) meetingstated growth objectives and (3) meeting collection targets. We believethat by focusing on these specific goals and tying them to employeecompensation, we can achieve operating performance in our newer centerscomparable to the operating performance at our mature centers.

*Maximize the Efficiency of OurInfrastructure.*   We have made significant investments intechnology, infrastructure and monitoring/compliance systems that we believeare highly scalable. As we continue to expand our network of centers, we expectthat our general and administrative expenses will decline as a percentage ofour net revenues.

*Support Improvement of theLegislative and Regulatory Environment.  *As ofDecember 31, 2006, 39 states and the District of Columbia had specificlaws that permitted payday cash advances or allowed a form of payday cashadvances under small loan laws. Our goal is to work with policymakers and grassroots organizations to facilitate the implementation of a balanced, visible andpredictable regulatory framework that protects the interests of the customerswe serve while allowing us to operate profitably in every state.

*Expand Our Product and ServiceOfferings.*   We are actively exploring complementaryproduct and service offerings to take advantage of our brand name and national footprint.During 2006, we introduced a prepaid debit card called the CashVantage Card. Webelieve this and other new offerings will increase customer satisfaction anddrive incremental revenue.

**Our Services**

Historically, we have conducted our business in moststates under the authority of a variety of enabling state statutes includingpayday advance, deferred presentment, check-cashing, small loan, credit serviceorganization and other state laws (which we refer to as the standard businessmodel). In certain states, we previously conducted business as a marketing,processing and servicing agent for Federal Deposit Insurance Corporation(“FDIC”) supervised, state-chartered banks that made payday cash advances andinstallment loans to their customers pursuant to the authority of the laws ofthe states in 

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which they were locatedand federal interstate banking laws, regulations and guidelines (which we referto as the agency business model). We refer to the banks for which we acted asan agent under the agency business model as lending banks. Our advance servicesconsist primarily of payday cash advances. We currently also offer lines ofcredit in Pennsylvania and installment loans in Illinois.

We provide advances and charge fees and/or interest asspecified by the laws of the states where we operate under the standardbusiness model. In the states where we previously operated under the agencybusiness model, the lending banks provided advances and installment loans andcharged fees and/or interest as specified by the laws of the states in whichthey were located and consistent with the regulatory authority of the FDIC andfederal banking law. The permitted size of an advance varies by state andranges from $50 to $1,000. The permitted fees and/or interest on an advancealso vary by state and range from 10% to 22% of the amount of a payday cash advance.Fees and interest for installment loans are larger relative to the size of theadvance because of the longer term of this product. Fees and interest for theline of credit product consist of a monthly service fee for the line of creditplus interest on the average outstanding balance.

Additional fees that we may collect include fees forreturned checks and late fees. The returned check fee varies by state andranges up to $30. We charge a customer this fee if a deposited check isreturned due to non-sufficient funds (“NSF”) in the customer’s account or otherreasons. In three states, we are also permitted to charge a late fee, theamount of which varies by state. In Texas, where we provide credit services asa Credit Services Organization (“CSO”), the third-party lender charges a latefee on its loan in accordance with state law. In two other states, a late feewas charged by the lending bank on the installment loan, the amount of whichwas determined by the lending bank. For the years ended December 31, 2006and 2005, total NSF fees collected by us, the third-party lender in Texas andthe lending banks were approximately $3.3 million and $2.8 million,respectively, and total late fees collected by us, the third-party lender in Texasand the lending banks were approximately $768,000 and $254,000, respectively.

We provide advance services and small-denomination,short-term unsecured consumer credit because we believe that many consumershave limited access to alternative sources of liquidity. To obtain an advance,a new customer first completes an application that includes personalinformation such as his or her name, address, phone number, employmentinformation or source of income, and references. This information is enteredinto our information system. The new customer then presents the requireddocumentation, usually proof of identification, a pay stub or other evidence ofincome, and a bank statement, to our center employee. In order for a newcustomer to be approved for an advance, he or she is required to have a bankaccount and a regular source of income, such as a job.

Under the standard business model, we determinewhether to approve an advance to our customers. Using this model, we do notundertake any evaluation of the creditworthiness of our customers indetermining whether to approve customers for advances, other than requiringproof of identification, bank account and income source, as described above. Wealso consider the customer’s income in determining the amount of the advance.Under the agency business model, the lending banks used third-party creditscores to evaluate and approve each customer’s application. We currently act asa CSO in our centers in Texas. As a CSO, we offer a fee-based credit servicespackage to assist customers in trying to improve their credit and in obtainingan extension of consumer credit through a third-party lender, who determineswhether to approve the loan and establishes all of the loan underwritingcriteria and terms, conditions and features of the loan agreement with thecustomer.

After the documents presented by the customer havebeen reviewed for completeness and accuracy, copied for record-keeping purposesand the advance has been approved, the customer enters into an agreement governingthe terms of the advance. The customer then writes a personal check to coverthe amount of the advance plus charges for applicable fees and/or interest, andmakes an appointment to return on a specified due date, typically his or hernext payday for payday cash advances, to repay the advance plus the applicablecharges. At the specified due date, the customer is required to pay off theadvance in full, which is usually accomplished by the customer returning to thecenter with cash.

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In our CSO centers, wealso assist the customer by agreeing to reimburse the lender for the fullamount of the loan and all related fees that are not collected from thecustomers. If the customer has chosen the consumer-reporting option, we reportthe repayment information from the lender to Payment Reporting BuildsCredit, Inc. (“PRBC”), a consumer credit reporting agency. Reporting toPRBC may assist the customer in improving his or her credit if the customerrepays the loan in accordance with its terms and if that positive repayment isviewed favorably by users of the PRBC report. In addition, we provide access tofree financial tools, services and information to help customers with theirpersonal finances, budgets and credit ratings.

Upon a repayment in full,we are obligated to return the customer’s personal check to the customer. Ifthe customer does not repay the outstanding advance or loan in full on orbefore the due date, we will seek to collect from the customer the amount ofthe advance or loan and any applicable fees, including late and NSF fees due,and may deposit the customer’s personal check.

In the fall of 2006, webegan selling a prepaid debit card called the CashVantage Card in selectstates. The CashVantage Card allows a cardholder to “load” cash onto the cardand use it wherever VISA debit cards are accepted. We earn a fee from theoriginal purchase of the card by the customer and a convenience fee for loadson the cards. In addition, we earn fees and incur expenses related tocardholder transactions such as purchases, ATM withdrawals made with the cards,account maintenance and subscription fees. For the year ended December 31,2006, we sold approximately 40,000 prepaid cards on which we loadedapproximately $11.6 million.

**Seasonality**

Our business is seasonaldue to the impact of fluctuating demand for advances and fluctuating collectionrates throughout the year. Demand has historically been higher in the third andfourth quarters of each year, corresponding to the back-to-school and holiday seasons,and lowest in the first quarter of each year, corresponding to our customers’receipt of income tax refunds.

**Collection Procedures**

As part of the closingprocess for each advance, we typically establish the expectation with thecustomer that they will return by scheduling an appointment for them to returnto our center to repay their advance on its due date. The day before the duedate, we generally call the customer to confirm their appointment.

If a customer does notreturn to repay the amount due, the center manager has the discretion to either(1) commence past-due collection efforts, which typically may proceed forup to 14 days in most states, or (2) deposit the customer’s personalcheck. If the center manager has decided to commence past-due collectionefforts in place of depositing the customer’s personal check, center employeestypically contact the customer by telephone or in person to obtain a payment ora promise to pay and attempt to exchange the customer’s check for a cashier’scheck, if funds are available. We also may permit a customer to enter into anextended payment plan if the customer is not able to meet his or her currentrepayment obligation.

If at the end of thispast-due collection period, the center has been unable to collect the amountdue, the customer’s check is then deposited. Additional collection efforts arenot required if the customer’s deposited check clears. If the customer’s checkdoes not clear and is returned because of non-sufficient funds in thecustomer’s account or because of a closed account or a stop-payment order,additional collection efforts begin. These additional collection efforts arecarried out by the center employees and typically include contacting thecustomer by telephone or in person to obtain payment or a promise to pay andattempting to exchange the customer’s check for a cashier’s check if fundsbecome available. We also send out a series of collection letters centrallywhich are automatically triggered based on a set of pre-determined criteria.

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**Center Operations**

***Centers***

With 2,853 centers as ofDecember 31, 2006, we operate the largest network of payday cash advancecenters in the United States. The following table illustrates the growth of ourcenter network since December 31, 2004:

| ** **        | ** ** | **As of December 31,** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| **State**         | ** ** | ** **                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Alabama           |       | 127                                   |       | 140 |   | 140 |   |
| Arizona           |       | 49                                    |       | 53 |   | 60 |   |
| Arkansas          |       | 30                                    |       | 30 |   | 30 |   |
| California        |       | 290                                   |       | 298 |   | 302 |   |
| Colorado          |       | 56                                    |       | 62 |   | 67 |   |
| Delaware          |       | 10                                    |       | 13 |   | 14 |   |
| Florida           |       | 173                                   |       | 211 |   | 248 |   |
| Idaho             |       | 8                                     |       | 13 |   | 15 |   |
| Illinois          |       | 61                                    |       | 60 |   | 72 |   |
| Indiana           |       | 91                                    |       | 116 |   | 123 |   |
| Iowa              |       | 21                                    |       | 35 |   | 37 |   |
| Kansas            |       | —                                |       | 42 |   | 56 |   |
| Kentucky          |       | 33                                    |       | 39 |   | 43 |   |
| Louisiana         |       | 64                                    |       | 75 |   | 76 |   |
| Michigan          |       | 87                                    |       | 111 |   | 137 |   |
| Mississippi       |       | 51                                    |       | 53 |   | 53 |   |
| Missouri          |       | 62                                    |       | 70 |   | 84 |   |
| Montana           |       | 8                                     |       | 9 |   | 8 |   |
| Nebraska          |       | 25                                    |       | 25 |   | 24 |   |
| Nevada            |       | 10                                    |       | 10 |   | 11 |   |
| New Hampshire     |       | 15                                    |       | 16 |   | 20 |   |
| New Mexico        |       | 12                                    |       | 12 |   | 12 |   |
| North Carolina(1) |       | 118                                   |       | — |   | — |   |
| North Dakota      |       | —                                |       | 7 |   | 8 |   |
| Ohio              |       | 178                                   |       | 210 |   | 231 |   |
| Oklahoma          |       | 68                                    |       | 67 |   | 67 |   |
| Oregon            |       | 42                                    |       | 56 |   | 53 |   |
| Pennsylvania      |       | 101                                   |       | 101 |   | 99 |   |
| Rhode Island      |       | —                                |       | 3 |   | 15 |   |
| South Carolina    |       | 105                                   |       | 112 |   | 129 |   |
| South Dakota      |       | 10                                    |       | 11 |   | 12 |   |
| Tennessee         |       | 59                                    |       | 62 |   | 65 |   |
| Texas             |       | 204                                   |       | 207 |   | 231 |   |
| Virginia          |       | 109                                   |       | 120 |   | 142 |   |
| Washington        |       | 90                                    |       | 105 |   | 110 |   |
| Wisconsin         |       | 37                                    |       | 45 |   | 52 |   |
| Wyoming           |       | 4                                     |       | 5 |   | 7 |   |
| Total             |       | 2,408                                 |       | 2,604 |   | 2,853 |   |
|                   |            |                                       |            |  |  |  |  |  |  |

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(1)     We suspended operations and closed all our centers in NorthCarolina in December 2005.

 

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***Internal ComplianceAudit***

We have a staff ofinternal regulatory auditors based throughout the United States whose functionis to monitor compliance by our centers with applicable federal and state lawsand regulations, the CFSA’s Best Practices and our company policies andprocedures. The auditors conduct periodic unannounced audits of our centers.They typically spend one to two days in each center, although the time may varyif a more extensive investigation is needed. The auditors typically reviewcustomer files, reports, held checks, cash controls and compliance with statespecific legal requirements and disclosures. Upon completion of an audit, theauditor will conduct an exit interview with the center personnel and/or thedivisional director and discuss issues found during the review. As part of theinternal audit program, reports for management regarding audit results areprepared to help identify compliance issues that need to be addressed and areasfor further training.

**Prior Relationshipswith the Lending Banks**

Under marketing, processing and servicing agreements(“MP&S Agreements”) with the lending banks under the former agency businessmodel, we were compensated by the lending banks for marketing, processing andservicing the payday cash advances and installment loans the lending banks madeto their customers. Approximately 1.8%, 15.9% and 24.4% of our total revenuesin the years ended December 31, 2006, 2005 and 2004, respectively, werederived from the agency business model. As of December 31, 2004, weoperated as a marketing, processing and servicing agent for lending banks inArkansas, Michigan, North Carolina, Pennsylvania and Texas. In response torevised guidance issued by the FDIC in March 2005 (the “RevisedGuidance”), we began instead to offer check-cashing and deferred-presentmentservices in our centers in Michigan in June 2005 and CSO services in ourcenters in Texas in July 2005. Additionally, the lending bank in NorthCarolina ceased operations in December 2005. In response to acommunication from the FDIC in February 2006, the lending banks inPennsylvania and Arkansas ceased originating payday cash advances andinstallment loans during the first and second quarters of 2006. DuringJune 2006, we began operating in Pennsylvania and Arkansas pursuant toexisting state-based legislation. As a result, we now operate under thestandard business model in all of our centers.

Although we marketed, processed and serviced paydaycash advances and installment loans offered, made and funded by the lendingbanks under the former agency business model, each lending bank was responsiblefor evaluating each of its customers’ applications and determining whether thepayday cash advance or installment loan was approved. The lending banksutilized an automated third-party credit scoring system to evaluate andapprove each customer application. We were not involved in the lending banks’approval process or in determining their approval procedures or criteria and,in the normal course of business, we generally did not fund or acquire anypayday cash advances or installment loans from the lending banks. The paydaycash advances and installment loans were repayable solely to the lending banksand were assets of the lending banks. Consequently, the lending banks’ paydaycash advances and installment loans have never been included in our balancesheet within our advances and fees receivable, net.

Under the MP&SAgreements, the lending banks were contractually obligated for all or aspecified portion of the losses on their advances and loans. Therefore, our marketing,processing and servicing fees increased by the lending bank’s contractualobligation for losses. If actual losses by a lending bank exceeded thepercentage specified in its MP&S Agreement, we were potentially obligatedto pay the lending bank the outstanding amount of the advances and loans plusthe lending bank’s fees and/or interest receivable on the advances and loans,less the lending bank’s contractually obligated portion of the losses.

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**Competition**

We believe that the principal competitive factors inthe payday cash advance services industry are location, customer service,convenience, speed and confidentiality. We face intense competition in anindustry with low barriers to entry, and we believe that the payday cashadvance market is becoming more competitive as the industry matures andconsolidates. We also compete with services offered by traditional financialinstitutions, such as overdraft protection, and with other payday cash advanceproviders, small loan providers, credit unions, short-term consumerlenders and other financial services entities and retail businesses that offerconsumer loans or other products and services that are similar to ours.Businesses offering payday cash advances and short-term loans over theinternet as well as by phone also compete with us.

The payday cash advance services industry is highlyfragmented. In March 2006, Stephens, Inc. estimated that there wereapproximately 23,000 outlets (including our own centers) in the United States.Our network of 2,853 centers as of December 31, 2006 represents thelargest network of such centers in the United States. We believe that our twolargest single service payday cash advance company competitors, Check ‘n Go andCheck into Cash, have over 1,400 and 1,200 payday cash advance centers,respectively. Another competitor is QC Holdings, Inc., which we believehas over 500 locations in the United States.****The remainingcompetitors are local chains and single-unit operators.

To a lesser extent, we compete with other companiesthat offer payday cash advances as an ancillary financial product to complementtheir primary business of cashing checks, selling money orders, providing moneytransfer services or offering similar financial services. These competitorsinclude Dollar Financial Corp. and ACE Cash Express, Inc.

Our centers also have been facing increasedcompetition from banks that offer their account holders payday cash advances aswell as other products such as overdraft privileges and bounced checkprotection, which are similar to our advance services.

Because of the relativelylow cost of entry and the regulatory safe harbor that many state statutesprovide for payday cash advances, the payday cash advance services industry hasexperienced significant growth in the number of centers.

**Marketing andAdvertising**

We design our marketing efforts to increase ourrevenues by (1) introducing new customers to our services and(2) creating customer loyalty. We believe that our mass media advertisingcampaigns (primarily through television, direct mail and the yellow pages)increase awareness and acceptance of our services. Our advertising expendituresoccur primarily during key seasonal periods, such as the back-to-schooland holiday seasons in the third and fourth quarters of each year, whenconsumers are most likely to have short-term liquidity needs.

We utilize marketing promotions at our centers with,we believe, high-impact, consumer relevant, point-of-purchase materials. Inaddition, we provide our centers with promotional materials such as brochures,pens, key chains and coupons for use in local marketing. Local marketing alsoincludes attendance at, and sponsorship of, community events such as blooddrives, food drives, voter registration programs and other charitable events.

Drawing on statisticaldata from our transaction database, we use direct marketing strategies toadvertise to prospective customers who have demographic characteristics similarto the customers we serve.

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**Information Systems**

We employ a proprietary point-of-sale system that isused to record transactions in our centers. The point-of-sale system is alsoused at our headquarters to develop information for management. We also employa third-party cash reconciliation software system to reconcile bankaccounts and monitor cash receipts and disbursements.

The point-of-sale system is designed to facilitatecustomer service and speed the dissemination of information for cash flowpurposes. This system records and monitors the details of every transaction,reduces the risk of transaction errors, and provides automated, integratedtransactions that are designed to ensure standardization and compliance withapplicable state and federal regulations.

Transaction data gathered by our point-of-sale systemis integrated into our management information system, general ledger and cashreconciliation software. Our point-of-sale system and cash reconciliationsoftware systems allow us to:

·       monitordaily revenue, deposits and disbursements on a company, state and center basis;

·       monitorand manage daily exception reports, which record cash shortages, late deposits,unusual disbursements and other items;

·       determine,on a daily basis, the amount of cash needed at each center, enablingcentralized treasury personnel to maintain an optimum amount of cash in eachlocation; and

·       facilitatecompliance with regulatory requirements and company policies and procedures.

We maintain and test adisaster recovery plan for our critical networked systems, the documentationfor which is hosted on a third-party vendor website. Our back-up datatapes are housed by a third party at an off-site location. We also own backupcomputer equipment and real-time data storage that is housed at an off-sitefacility to provide us with access to needed systems in the event of anemergency that disables our headquarters’ equipment.

**Security**

Security and loss prevention play a critical role inthe daily operations of our centers. Each center is provided with 24-hourthird-party monitoring. Physical security provided to each centerincludes: digital safes, wired hold-up alarm buttons and secure lockingsystems. Additionally, most of our centers are equipped with 24-hoursecurity cameras.

Because our businessrequires us to maintain a significant supply of cash in each of our centers, weare subject to the risk of cash shortages resulting from employee and third-partytheft and errors. Cash shortages from employee and third-party theft anderrors were approximately $2.0 million (0.29% of total revenues) in 2006, $1.6million (0.25% of total revenues) in 2005 and $1.2 million (0.21% of totalrevenues) in 2004.

**Human Resources**

Our center operations are divided into zones, regionsand divisions, which we believe allows for a more effective management process.A zone has approximately 500 to 675 centers and includes centers in more thanone state. As of December 31, 2006, we had five zones, each with a zonedirector responsible for the operations, administration, staffing and generalsupervision of the centers in his or her zone. Regions include 30 to 145centers organized into three to 11 divisions and are supervised by regionaldirectors who report to a zone director. Divisions include seven to 23 centersand are supervised by divisional directors who report to a regional director.Determination of region and division alignment is usually based upon geographicconsiderations. Regions and divisions generally do not cross state lines. As ofDecember 31, 2006, our five zones included 29 regions and 223 divisions.

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A typical center isstaffed with a manager and an assistant manager. Managers are responsible forthe daily operations of the center. As volume increases, additional personnel,called customer service representatives, are added. Our policy is to add a customerservice representative once a center has approximately 350 advances outstandingat one time. Thereafter, one additional customer service representative isadded for every 100 to 150 additional outstanding advances at a particularcenter.

**Employees**

As of January 31,2007, we had approximately 7,000 employees, including approximately 6,500center employees, 228 divisional directors, 29 regional directors, five zonedirectors and approximately 250 corporate employees and support personnel.

We consider our employeerelations to be satisfactory. Our employees are not covered by acollective-bargaining agreement and we have never experienced any organizedwork stoppage, strike or labor dispute.

**Intellectual Property and other Proprietary Rights**

We use a number oftrademarks, logos and slogans in our business. AARC, Inc., one of oursubsidiaries, owns all of our intellectual property and has entered into atrademark license agreement with each of our operating subsidiaries to use thisintellectual property. Unauthorized use of our intellectual property by thirdparties may damage our brand and our reputation and could result in a loss ofcustomers. It may be possible for third parties to obtain and use ourintellectual property without our authorization. Third parties have in the pastinfringed or misappropriated our intellectual property or similar proprietaryrights. For example, competitors of ours have used our name and othertrademarks of ours on their websites to advertise their financial services. Webelieve infringements and misappropriations will continue to occur in thefuture.

**Other**

AdvanceAmerica, Cash Advance Centers, Inc. is a Delaware corporation that wasincorporated on August 11, 1997. Our principal executive offices arelocated at 135 North Church Street, Spartanburg, South Carolina 29306. Ourtelephone number at that location is (864) 342-5600. We maintain aninternet website at www.advanceamericacash.com. We make available free ofcharge on our website our Annual Report on Form 10-K, Quarterly Reportson Form 10-Q, Current Reports on Form 8-K, and amendmentsto those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934 as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the U.S. Securities and Exchange Commission (the “SEC”). Information on ourwebsite is not incorporated by reference into this Annual Report. The SEC alsomaintains a website that contains reports, proxy and information statements, andother information regarding us at www.sec.gov. In addition, any materials wefile with the SEC may be read and copied at the SEC’s Public ReferenceRoom at 100 F Street, N.E., Washington, D.C. 20549. Information on theoperation of the Public Reference Room may be obtained by calling the SECat 1-800-SEC-0330.

**Government Regulation**

Payday cash advances aresubject to extensive state and federal regulation. The regulation of paydaycash advance companies is intended primarily for the protection of consumersrather than investors in our common stock and our creditors and is constantlychanging as new regulations are introduced at the federal, state and locallevel and existing regulations are repealed, amended and modified. This evolvingregulatory landscape creates various uncertainties and risks for the operationof our business, any of which 

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couldhave a material adverse effect on our business, results of operations orfinancial condition. See “Item 1A. Risk Factors” and “Item 3. LegalProceedings.”

**State Regulation**

Our business is regulatedunder a variety of enabling state statutes, including payday cash advance,deferred presentment, check-cashing, money transmission, small loan and creditservices organization state laws, all of which are subject to change and whichmay impose significant costs or limitations on the way we conduct or expand ourbusiness. As of December 31, 2006, 39 states and the District of Columbiahad specific laws that permitted payday cash advances or a similar form ofshort-term consumer credit. As of December 31, 2006, we operated in 35 ofthese 39 states. We do not currently conduct business in the remaining fourstates or in the District of Columbia because we do not believe it iseconomically attractive to operate in these jurisdictions due to specificlegislative restrictions, such as interest rate ceilings, an unattractivepopulation density or unattractive location characteristics. However, we mayfind it becomes economically attractive to open centers in any of these fourstates or the District of Columbia if any of these variables change. Theremaining 11 states do not have laws specifically authorizing the payday cashadvance or short-term consumer finance business. Despite the lack ofspecific laws, other laws may permit us to do business in these states. As ofDecember 31, 2006, we operated in one of these 11 states.

The scope of stateregulation, including the terms on which advances may be made, varies fromstate to state. Most states that directly regulate advances establish allowablefees and/or interest and other charges to consumers for advances. In addition,many states regulate the maximum amount, maturity and renewal or extension ofadvances. The terms of our advances vary from state to state in order to complywith the laws and regulations of the states in which we operate.

The states with specificadvance laws typically limit the principal amount of an advance and set maximumfees and interest rates that customers may be charged. Some states also limit acustomer’s ability to renew an advance and require various disclosures toconsumers. State statutes often specify minimum and maximum maturity dates foradvances and, in some cases, specify mandatory cooling-off periods betweentransactions. Our collection activities regarding past due amounts are subjectto consumer protection laws and state regulations relating to debt collectionpractices. In addition, some states restrict advertising content.

During the last few years,legislation has been adopted in some states that prohibits or severelyrestricts advance services. Many bills have also been introduced in statelegislatures. In 2006, bills that severely restrict or effectively prohibitadvance services were introduced in 18 states. In addition, two states havesunset provisions in their advance laws that require renewal of the laws by thestate legislatures at periodic intervals. Rules currently underconsideration in New Mexico may effectively prohibit, or at least significantlyrestrict, our operations there. Oregon has enacted legislation that is currentlyslated to become effective in July 2007 that will provide for significantadditional restrictions on the offering of advances. Similar laws prohibitingadvance services or making them unprofitable could be passed in any other stateat any time or existing payday cash advance laws could expire or be amended.

Statutes authorizingadvance services typically provide the state agencies that regulate banks andfinancial institutions with significant regulatory powers to administer andenforce the law. In most states, we are required to apply for a license, fileperiodic written reports regarding business operations and undergocomprehensive state examinations to ensure that we comply with applicable laws.Under statutory authority, state regulators have broad discretionary power andmay impose new licensing requirements, interpret or enforce existing regulatoryrequirements in different ways or issue new administrative rules, even if notcontained in state statutes, that impact the way we do business and may forceus to terminate or modify our operations in particular states. They may alsoimpose rules that are generally adverse to our industry.

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In some cases, we rely onthe interpretations of the staff of state regulatory bodies with respect to thelaws and regulations of their respective jurisdictions. These staffinterpretations generally are not binding legal authority and may be subject tochallenge in administrative or judicial proceedings. Additionally, as the staffof state regulatory bodies change, it is possible that their interpretations ofapplicable laws and regulations may also change and negatively affect ourbusiness.

State attorneys generaland banking regulators have begun to scrutinize payday cash advances and otheralternative financial products and take actions that could require us tomodify, suspend or cease operations in their respective states. InDecember 2005, after the conclusion of a contested case, the Commissionerof Banks for North Carolina ordered our North Carolina subsidiary toimmediately cease all business operations. As a result, we closed all of ourcenters in North Carolina. In addition, the newly introduced Advance AmericaChoice-Line of Credit is being challenged by the Office of the PennsylvaniaSecretary of Banking in a lawsuit filed in the Commonwealth Court ofPennsylvania. See “Item 3. Legal Proceedings.” It is possible that otheractions taken against the industry in the future by other state attorneysgeneral and banking regulators could require us to suspend or cease operationsin such jurisdictions and have a negative effect on our financial condition.

State-specific legislativeor regulatory action can reduce our revenues and/or margins in a state, causeus to temporarily operate at a loss in a state, or even cause us to cease orsuspend our operations in a state. From time to time, we may also choose tooperate in a state even if legislation or regulations cause us to lose money onour operations in that state.

**Federal Regulation**

Our advance services aresubject to a variety of federal laws and regulations, such as theTruth-in-Lending Act (“TILA”), the Equal Credit Opportunity Act (“ECOA”), theFair Credit Reporting Act (“FCRA”), the Fair Debt Collection Practices Act(“FDCPA”), the Gramm-Leach-Bliley Act (“GLBA”) and the regulationspromulgated for each. Among other things, these laws require disclosure of theprincipal terms of each transaction to every customer, prohibit misleadingadvertising, protect against discriminatory lending practices and proscribeunfair credit practices. TILA and Regulation Z, adopted under TILA,require disclosure of, among other things, the pertinent elements of consumercredit transactions, including the dollar amount of the finance charge and thecharge expressed in terms of an annual percentage rate (“APR”).

Our marketing efforts andthe representations we make about our advances also are subject to federal andstate unfair and deceptive practices statutes. The Federal Trade Commission(“FTC”) enforces the Federal Trade Commission Act and the state attorneysgeneral and private plaintiffs enforce the analogous state statutes.

Additionally, since 1999,various anti-payday cash advance legislation has been introduced in theU.S. Congress. Congressional members continue to receive pressure fromconsumer advocates and other industry opposition groups to adopt suchlegislation. Recent attention has focused on the use of short-term lending andpayday cash advances by military personnel. In October 2006, a federal lawpassed that places, among other restrictions, a limit on the effective annualpercentage rate of 36% on extensions of credit, including payday cash advances,to active members of the military and their dependents. In October 2006,we voluntarily ceased qualifying customers for advances based on income frommilitary service.

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The lending banks forwhich we acted as marketing, processing and servicing agent were subject toextensive federal and state banking regulations. As state-charteredbanks, the lending banks were subject to supervision by the FDIC as well asregular examination by other state and federal regulatory authorities.

In July 2003 andMarch 2005, the FDIC issued guidance governing permissible agencyarrangements between state-chartered banks and marketing, processing andservicing agents for the banks’ payday cash advances, such as us. InJuly 2005, the lending banks implemented new procedures and limits inresponse to the FDIC guidance and began offering installment loans as analternative credit product. In February 2006, the FDIC instructed certainlending banks, including the lending banks for which we acted as a marketing,processing and servicing agent, to discontinue offering payday cash advancesand alternative credit products if they could not adequately address the FDIC’scontinuing concerns regarding those products. In response to this communicationfrom the FDIC, the lending bank in Pennsylvania discontinued offering paydaycash advances and installment loans in March 2006, and the lending bank inArkansas discontinued offering installment loans in April 2006 and paydaycash advances in June 2006. In June 2006, we began operating inPennsylvania and Arkansas pursuant to existing state-based legislation.

**Local Regulation**

In addition to state andfederal laws and regulations, our business is subject to various localrules and regulations such as local zoning regulations. These localrules and regulations are subject to change and vary widely from state tostate and city to city. For example, several cities in Oregon have recentlyadopted local ordinances that have the effect of limiting our business.

**Environmental, Health and Safety Matters**

We are subject to generalprovisions of federal laws and regulations to ensure a safe and healthful workenvironment for employees. In addition, we comply with those state laws thatrequire a written health and safety program or other mandated safetyrequirements. To reduce the possibility of physical injury or property damageresulting from robberies, our Loss Prevention department has establishedoperational procedures, conducts periodic safety training and awarenessprograms for employees, hires security guards as needed and regularly monitorsthe marketplace for new technology or methods of improving workplace safety.

Other than standardcleaning products, we do not use chemicals or other agents governed by federal,state or local environmental laws in conducting business operations. Based uponthese measures, we believe that our centers are in substantial compliance withall applicable environmental, health and safety requirements.

**ITEM1A. RISK FACTORS.**

**Risks Related to Our Business and Industry**

***Our business is highly regulated. Changes inapplicable laws and regulations, or our failure to comply with such laws andregulations, could have a material adverse effect on our business, results ofoperations and financial condition.***

Our business is subject tonumerous federal, state and local laws and regulations, which are subject tochange and which may impose significant costs or limitations on the way weconduct or expand our business. These regulations govern or affect, among otherthings, interest rates and other fees, check cashing fees, lending practices,recording and reporting of certain financial transactions, privacy of personalconsumer information and collection practices. As we develop new product andservice offerings, we may become subject to additional federal, state and localregulations. If we expand our business to include international operations, wewill become subject to foreign laws and regulations. State and local 

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governmentsmay also seek to impose new licensing requirements or interpret or enforceexisting requirements in new ways. In addition, changes in current laws andfuture laws or regulations may restrict our ability to continue our currentmethods of operation or expand our operations. Changes in laws or regulations,or our failure to comply with such laws and regulations, may have a materialadverse effect on our business, results of operations and financial condition.

***Our industry is highly regulated under state law.Changes in state laws and regulations, or our failure to comply with such lawsand regulations, could have a material adverse effect on our business, resultsof operations and financial condition.***

Our business is regulatedunder a variety of enabling state statutes, including payday advance, deferredpresentment, check-cashing, money transmission, small loan and credit servicesorganization state laws, all of which are subject to change and which mayimpose significant costs or limitations on the way we conduct or expand ourbusiness. As of December 31, 2006, 39 states and the District of Columbiahad specific laws that permitted payday cash advances or a similar form ofshort-term consumer loans. As of December 31, 2006, we operated in35 of these 39 states. We do not currently conduct business in the remainingfour states or in the District of Columbia because we do not believe it iseconomically attractive to operate in these jurisdictions due to specificlegislative restrictions, such as interest rate ceilings, an unattractivepopulation density or unattractive location characteristics. However, we mayopen centers in any of these states or the District of Columbia if we believedoing so may become economically attractive because of a change in any of thesevariables. The remaining 11 states do not have laws specifically authorizingthe payday cash advance or short-term consumer finance business. Despitethe lack of specific laws, other laws may permit us to do business in thesestates. As of December 31, 2006, we operated in one of these 11 states.

During the last few years,legislation has been adopted in some states that prohibits or severelyrestricts payday cash advance and similar services. Many bills have also beenintroduced in state legislatures. In 2006, bills that severely restrict oreffectively prohibit payday cash advances were introduced in 18 states. Inaddition, two states have sunset provisions in their payday cash advance lawsthat require renewal of the laws by the state legislatures at periodicintervals. Rules currently under consideration in New Mexico mayeffectively prohibit, or at least significantly restrict, our operations there.Oregon has enacted legislation that is currently slated to become effective inJuly 2007 that will provide for significant additional restrictions on theindustry. Any such legislation could have a material adverse impact on ourresults from operations. Laws prohibiting payday cash advance and similar servicesor making them unprofitable could be passed in any other state at any time orexisting enabling laws could expire or be amended, any of which would have amaterial adverse effect on our business, results of operations and financialcondition.

Statutes authorizingpayday cash advance and similar services typically provide the state agenciesthat regulate banks and financial institutions with significant regulatorypowers to administer and enforce the law. In most states, we are required toapply for a license, file periodic written reports regarding businessoperations and undergo comprehensive state examinations to ensure that wecomply with applicable laws. Under statutory authority, state regulators havebroad discretionary power and may impose new licensing requirements, interpretor enforce existing regulatory requirements in different ways or issue newadministrative rules, even if not contained in state statutes, that impact theway we do business and may force us to terminate or modify our operations inparticular states. They may also impose rules that are generally adverseto our industry. Any new licensing requirements or rules could have amaterial adverse effect on our business, results of operations and financialcondition.

In some cases, we rely onthe interpretations of the staff of state regulatory bodies with respect to thelaws and regulations of their respective jurisdictions. These staffinterpretations generally are not binding legal authority and may be subject tochallenge in administrative or judicial proceedings. Additionally, as 

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thestaff of state regulatory bodies change, it is possible that theirinterpretations of applicable laws and regulations also may change andnegatively affect our business. As a result, our reliance on staffinterpretations could have a material adverse effect on our business, resultsof operations and financial condition.

Additionally, stateattorneys general and banking regulators have begun to scrutinize payday cashadvances and other alternative financial products and take actions that couldrequire us to modify, suspend or cease operations in their respective states.In December 2005, after the conclusion of a contested case, theCommissioner of Banks for North Carolina ordered our North Carolina subsidiaryto immediately cease all business operations. See“Item 3. Legal Proceedings.” As a result, we closed all of our centers in NorthCarolina. The lost revenues from these closures had a negative impact on ourresults of operations and financial condition. In addition, the newlyintroduced Advance America Choice-Line of Credit is being challenged by theOffice of the Pennsylvania Secretary of Banking in a lawsuit filed in theCommonwealth Court of Pennsylvania. See “Item 3. Legal Proceedings.” An adverseruling in this case could significantly impair our business or force us tocease offering that new product in Pennsylvania.

***Our industry is regulated under federal law andsubject to federal and state unfair and deceptive practices statutes. Ourfailure to comply with such regulations or changes in federal laws andregulations, or changes to such laws, could have a material adverse effect onour business, results of operations and financial condition.***

Although states providethe primary regulatory framework under which we offer advances, certain federallaws also impact our business. See “Item 1. Business—Federal Regulation.”Because advances are viewed as extensions of credit, we must comply with thefederal Truth-in-Lending Act and Regulation Z adopted under that Act.Additionally, we are subject to the Equal Credit Opportunity Act, the Fair DebtCollection Practices Act, the Fair Credit Reporting Act and theGramm-Leach-Bliley Act. Any failure to comply with any of these federal lawsand regulations could have a material adverse effect on our business, resultsof operations and financial condition.

Additionally, since 1999,various anti-payday cash advance legislation has been introduced in the U.S.Congress. Congressional members continue to receive pressure from consumeradvocates and other industry opposition groups to adopt such legislation.Recent attention has focused on the use of short-term lending and payday cashadvances by military personnel. On September 29, 2006, the John WarnerNational Defense Authorization Act for Fiscal Year 2007 (the “Act”) conferencereport was filed and the Act was signed into law on October 17, 2006. TheAct places, among other restrictions, a limit on the effective annualpercentage rate of 36% on extensions of credit, including payday cash advances,to active members of the military and their dependents. Any federal legislativeor regulatory action that restricts or prohibits payday cash advance andsimilar services could have a material adverse impact on our business, resultsof operations and financial condition. On October 15, 2006, we voluntarilyceased qualifying customers for advances based on income from military service.

Our marketing efforts andthe representations we make about our advances also are subject to federal andstate unfair and deceptive practices statutes. The Federal Trade Commission(“FTC”) enforces the Federal Trade Commission Act and the state attorneysgeneral and private plaintiffs enforce the analogous state statutes. If we arefound to have violated any of these statutes, that violation could have amaterial adverse effect on our business, results of operations and financialcondition.

***Our industry is subject to various localrules and regulations. Changes in these local regulations could have amaterial adverse effect on our business, results of operations and financialcondition.***

In addition to state andfederal laws and regulations, our business can be subject to various localrules and regulations such as local zoning regulations. For example,several cities in Oregon have recently adopted local ordinances that have theeffect of limiting our business. Any actions taken in the future by 

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localzoning boards or other local governing bodies to require special use permitsfor, or impose other restrictions on, providers of payday cash advances and similarservices could have a material adverse effect on our business, results ofoperations and financial condition.

From time to time, we mayalso choose to operate in a state even if legislation or regulations cause usto lose money on our operations in that state. The passage of a 2002 Indianastatute established a rate structure at which we could not operate on aprofitable basis. However, we continued to provide payday cash advances in thestate while experiencing operating losses until a new, less restrictive, lawwas passed in March 2004. Further regulatory changes in Indiana andrecently adopted legislation in Illinois have also reduced our revenue andprofitability in those states. Any similar actions or events could have amaterial adverse effect on our business, results of operations and financialcondition.

***Current and future litigation and regulatoryproceedings against us could have a material adverse effect on our business,results of operations and financial condition.***

Our business is subject tolawsuits and regulatory proceedings that could generate adverse publicity andcause us to incur substantial expenditures. See “Item 3. Legal Proceedings.”Adverse rulings in some of these lawsuits or regulatory proceedings couldsignificantly impair our business or force us to cease doing business in one ormore states.

We are likely to besubject to further litigation and proceedings in the future. The consequencesof an adverse ruling in any current or future litigation or proceeding couldcause us to have to refund fees and/or interest collected, refund the principalamount of advances, pay treble or other multiple damages, pay monetarypenalties and/or modify or terminate our operations in particular states. Wemay also be subject to adverse publicity. Defense of any lawsuits orproceedings, even if successful, requires substantial time and attention of oursenior officers and other management personnel that would otherwise be spent onother aspects of our business and requires the expenditure of significantamounts for legal fees and other related costs. Any of these events could havea material adverse effect on our business, results of operations and financialcondition.

***Competition in our industry could cause us to losemarket share or reduce our interest and fees, possibly resulting in a declinein our future revenues and earnings.***

The industry in which weoperate has low barriers to entry and is highly fragmented and very competitive.We believe that the market may become even more competitive as the industrygrows and/or consolidates. We compete with services provided by traditionalfinancial institutions, such as overdraft protection, and with other paydaycash advance providers, small loan providers, credit unions, short-termconsumer lenders, other financial service entities and other retail businessesthat offer consumer loans or other products and services that are similar toours. We also compete with companies offering payday cash advances andshort-term loans over the internet as well as by phone. Some of thesecompetitors have larger local or regional customer bases, more locations andsubstantially greater financial, marketing and other resources than we have.Most recently, we are experiencing competition from governmental agenciesthemselves, such as the Pennsylvania Department of Banking, which is supportingthe Pennsylvania Credit Union Association and Pennsylvania State Treasurer inthe offering of unsecured 90 day loans. As a result of this increasingcompetition, we could lose market share or we may need to reduce our interestand fees, possibly resulting in a decline in our future revenues and earnings.

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

Our centers operated in 36states during the year ended December 31, 2006, and our five largeststates (measured by total revenues) accounted for approximately 47% of ourtotal revenues. While we believe we have a diverse geographic presence, for thenear term we expect that significant revenues will continue to 

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begenerated by certain states, largely due to the currently prevailing economic,demographic, regulatory, competitive and other conditions in those states. Forexample, during 2006, California and Texas each accounted for more than 10% ofour total revenues. Changes to prevailing economic, demographic, regulatory orany other conditions in the markets in which we operate could lead to areduction in demand for our products and services, a decline in our revenues oran increase in our provision for doubtful accounts that could result in adeterioration of our financial condition.

***Media reports and public perception of payday cashadvances and similar loans as being predatory or abusive could adversely affectour business, results of operations and financial condition.***

Consumer advocacy groupsand certain media reports advocate for governmental and regulatory action toprohibit or severely restrict payday cash advances and similar loans. Theconsumer groups and media reports typically focus on the cost to a consumer foran advance and typically characterize these advances as predatory or abusivetoward consumers. If this negative characterization of advances becomes widelyaccepted by consumers, demand for advance services could significantlydecrease, which could materially adversely affect our business, results ofoperations and financial condition. Negative perception of advances or ourother activities could also result in increased regulatory scrutiny andlitigation, encourage restrictive local zoning rules, make it moredifficult to obtain government approvals necessary to open new centers andcause payday cash advance industry trade groups, such as the CSFA, to promotepolices that cause our business to be less profitable. These trends couldmaterially adversely affect our business, results of operations and financialcondition.

***The provision for doubtful accounts may increase andnet income may decrease if we are unable to collect customers’ personal checksthat are returned due to non-sufficient funds (“NSF”) in the customers’accounts or other reasons.***

For the years endedDecember 31, 2006 and 2005, we deposited approximately 5.7% and 5.5%,respectively, of all the customer checks we received and approximately 78% and79%, respectively, of these deposited customer checks were returned unpaidbecause of non-sufficient funds in the customers’ bank accounts or because ofclosed accounts or stop-payment orders. Total charge-offs, net of recoveries,for the years ended December 31, 2006 and 2005 were approximately $110.4million and $100.5 million, respectively. If the number of customer checks thatwe deposit increases or the percent of the customers’ returned checks that wecharge-off increases, our provision for doubtful accounts will increase and ournet income will decrease.

***If our estimates of losses are not adequate, ourprovision for doubtful accounts would increase. This would result in a declinein our future revenues and earnings, which could have a material adverse effecton our stock price.***

We maintain an allowancefor doubtful accounts for estimated losses for advances we make directly toconsumers and check-cashing, deferred-presentment and other credit services. Toestimate the appropriate allowance for doubtful accounts, we consider theamount of outstanding advances owed to us, historical charge-offs, our currentcollection patterns and the current economic trends in the markets we serve.

As of December 31, 2006, our allowance fordoubtful accounts was $57.4 million. This amount, however, is an estimate, andwe have less experience upon which to base our estimates of losses fromcheck-cashing, deferred-presentment, credit services, installment loans andlines of credit than with payday cash advances. If our actual losses aregreater than our allowance for doubtful accounts, our provision for doubtfulaccounts would increase. This would result in a decline in our future revenuesand earnings, which could have a material adverse effect on our stock price.

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

Our primary businessactivity is offering payday cash advance services. If we are unable to maintainand grow our advance services business, our future revenues and earnings coulddecline. Our current lack of product and business diversification could inhibitour opportunities for growth, reduce our revenues and profits and make us moresusceptible to earnings fluctuations than many of our competitors who are morediversified and provide other services such as pawn lending, title lending orother similar services. External factors, such as changes in laws andregulations, new entrants and enhanced competition, could also make it moredifficult for us to operate as profitably as a more diversified company couldoperate. Any internal or external change in our industry could result in adecline in our future revenues and earnings, which could have a materialadverse effect on our stock price.

***Our inability to efficiently and profitably introduceor manage new products or alternative methods for conducting business could havea material adverse effect on our business, results of operations and financialcondition.***

In June 2006, webegan offering consumers in Pennsylvania a new financial service called theAdvance America Choice-Line of Credit, operating under an existing state checkcashing law in Arkansas, and offering advances under a deferred presentmentservice transactions act in Michigan. In October 2006, we began offeringinstallment loans in Illinois and selling a prepaid debit card called theCashVantage Card in select states. We also intend to introduce additional servicesand products in the future. In order to offer new products, we will need tocomply with additional regulatory and licensing requirements. Each of thesechanges, alternative methods of conducting business and new services and productsare subject to risk and uncertainty and require significant investment in timeand capital. Due to our lack of experience in offering some of thesealternative services and products, we cannot assure you that we will be able tosuccessfully implement any of these changes or successfully introduce any new servicesor products, or to do so in a timely manner. Furthermore, we cannot predict thedemand for any of these new services or products, nor do we know if we will beable to offer these new services or products in an efficient manner or on aprofitable basis. Our failure to do so, or low customer demand for any of thesenew services or products, could have a material adverse effect on our business,results of operations and financial condition.

***Our ability to manage our growth may deteriorate andour ability to execute our growth strategy may be adversely affected.***

We have experiencedsubstantial growth in recent years. Our growth strategy, which is based onopening centers in existing and new markets, such as foreign markets or stateswhere we do not currently operate, is subject to significant risks. We cannotassure you that we will be able to expand our market presence in our currentmarkets or successfully enter new markets through the opening of new centers oracquisitions. Moreover, the start-up costs and the losses from initialoperations attributable to each newly opened center place demands upon ourliquidity and cash flow, and we cannot assure you that we will be able tosatisfy these demands.

Inaddition, our ability to execute our growth strategy will depend on a number ofother factors, some of which may be beyond our control, including:

·       theprevailing laws and regulatory environment of each jurisdiction in which weoperate or seek to operate, which are subject to change at any time;

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

·       ourability to identify, implement and manage new products and services that arecompatible with our business;

·       thedegree of competition in new markets and for new products and services and ourability to attract new customers;

·       ourability to compete for expansion opportunities in suitable locations;

·       ourability to recruit, train and retain qualified personnel;

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

·       ourability to obtain adequate financing for our expansion plans.

We cannot assure you thatour systems, procedures, controls and existing space will be adequate tosupport expansion of our operations. Our growth has placed significant demandson all aspects of our business, including our administrative, technical andfinancial personnel and systems. Additional growth or expansion may furtherstrain our management, financial and other resources. Any internationaloperations would increase the complexity of our organization, ouradministrative costs and the regulatory risks we face and therefore coulddestabilize our business, results of operations and financial condition. Ourfuture results of operations will substantially depend on the ability of ourofficers and key employees to manage changing business conditions and toimplement and improve our technical, administrative, financial control andreporting systems. In addition, we cannot assure you that we will be able toimplement our business strategy profitably in geographic areas or product lineswe do not currently serve.

***We may incur substantial additional debt, which couldadversely affect our business, results of operations and financial condition bylimiting our ability to obtain financing in the future and react to changes inour business.***

We mayincur substantial additional debt in the future. As of December 31, 2006,our total debt was approximately $111.1 million and our stockholders’equity was approximately $299.9 million. The total availability under ourcurrent credit facility is $265.0 million, which we may borrow at anytime, subject to compliance with certain covenants and conditions. Due to theseasonal nature of our business, our total debt is historically the lowestduring the first calendar quarter and then increases during the remainder ofthe year. If we incur substantial additional debt, it could have importantconsequences to our business. For example, it could:

·       restrictour operational flexibility through restrictive covenants that will limit ourability to make acquisitions, explore certain business opportunities, disposeof assets and take other actions;

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

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

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

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

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

The terms of our debtlimit our ability to incur additional debt but do not prohibit us fromincurring additional debt. When debt levels increase, the related risks that wenow face will also increase.

If we fail to generatesufficient cash flow from future operations to meet our debt serviceobligations, we may need to seek refinancing of all or a portion of ourindebtedness or obtain additional financing in order to meet our obligationswith respect to our indebtedness. We cannot assure you that we will be able torefinance any of our indebtedness or obtain additional financing onsatisfactory terms or at all.

***We depend on loans and cash management services frombanks to operate our business. If banks decide to stop making loans and/or providingcash management services to companies in our industry, it could have a materialadverse affect on our business, results of operations and financial condition.***

We depend on borrowingsunder our revolving credit facility to fund advances, capital expenditures tobuild new centers and other needs. If our current or potential credit banksdecide not to lend money to companies in our industry, we could face higherborrowing costs, limitations on our ability to grow our business as well aspossible cash shortages, any of which could have a material adverse effect onour business, results of operations and financial condition. Certain banks havenotified us and other companies in the payday cash advance and check-cashingindustries, that they will no longer maintain bank accounts for these companiesdue to reputational risks and increased compliance costs of servicing moneyservices businesses and other cash intensive industries. While none of ourlarger depository banks has requested that we close our bank accounts or putother restrictions on how we use their services, if any of our larger currentor future depository banks were to take such action, we could face higher costsof managing our cash and limitations on our ability to grow our business, bothof which could have a material adverse effect on our business, results ofoperations and financial condition.

***We depend to a substantial extent on borrowings underour revolving credit facility to fund our liquidity needs.***

We have an existingrevolving credit facility that allows us to borrow up to $265.0 million,assuming we are in compliance with a number of covenants and conditions.Because we typically use substantially all of our available cash generated fromour operations to repay borrowings on our revolving credit facility on acurrent basis, we have limited cash balances and we expect that a substantialportion of our liquidity needs, including any amounts to pay any future cashdividends on our common stock, will be funded primarily from borrowings underour revolving credit facility. As of December 31, 2006, we hadapproximately $156.3 million available for future borrowings under this facility.Due to the seasonal nature of our business, our borrowings are historically thelowest during the first calendar quarter and increase during the remainder ofthe year. If our existing sources of liquidity are insufficient to satisfy ourfinancial needs, we may need to raise additional debt or equity in the future.

***Our revolving credit facility contains restrictionsand limitations that could significantly affect our ability to operate ourbusiness.***

Ourrevolving credit facility contains a number of significant covenants that couldadversely affect our business. These covenants restrict our ability, and theability of our subsidiaries to, among other things:

·       incuradditional debt;

·       createliens;

·       effectmergers or consolidations;

·       makeinvestments, acquisitions or dispositions;

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·       paydividends, repurchase stock or make other payments;

·       enterinto certain sale and leaseback transactions; and

·       becomesubject to further restrictions on the creation of liens.

The breach of any covenantor obligation in our revolving credit facility will result in a default. Ifthere is an event of default under our revolving credit facility, the lendersunder the revolving credit facility could cause all amounts outstandingthereunder to be due and payable, subject to applicable grace periods. Thiscould trigger cross-defaults under our other existing or future debtinstruments. As a result, our ability to respond to changing business andeconomic conditions and to secure additional financing, if needed, may be significantlyrestricted, and we may be prevented from engaging in transactions that mightfurther our growth strategy. If we are unable to repay, refinance orrestructure our indebtedness under our revolving credit facility, the lendersunder that facility could proceed against the collateral securing thatindebtedness. Our obligations under the revolving credit facility areguaranteed by each of our existing and future domestic subsidiaries. Theborrowings under the revolving credit facility and the subsidiary guaranteesare secured by substantially all of our assets and the assets of the subsidiaryguarantors. In addition, borrowings under the revolving credit facility aresecured by a pledge of substantially all of the capital stock, or similarequity interests, of the subsidiary guarantors. In the event of our insolvency,liquidation, dissolution or reorganization, the lenders under our revolvingcredit facility and any other existing or future debt of ours would be entitledto payment in full from our assets before distributions, if any, were made toour stockholders.

***Our business is seasonal in nature, which causes ourrevenues, collection rates and earnings to fluctuate. These fluctuations couldhave a material adverse effect on our results of operations and stock price.***

Our business is seasonaldue to the impact of fluctuating demand for advances and fluctuating collectionrates throughout the year. Demand has historically been highest in the thirdand fourth quarters of each year, corresponding to the back-to-school andholiday seasons, and lowest in the first quarter of each year, corresponding toour customers’ receipt of income tax refunds. Typically, our provision fordoubtful accounts and allowance for doubtful accounts are lowest as apercentage of revenues in the first quarter of each year, corresponding to ourcustomers’ receipt of income tax refunds, and increase as a percentage ofrevenues for the remainder of each year. This seasonality requires us to manageour cash flows over the course of the year. If our revenues or collections wereto fall substantially below what we would normally expect during certainperiods, our ability to service our debt, pay dividends on our common stock,repurchase our common stock and meet our other liquidity requirements may beadversely affected, which could have a material adverse effect on our resultsof operations and stock price.

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

***Because we maintain a significant supply of cash inour centers, we may be subject to cash shortages due to employee andthird-party theft and errors. We also may be subject to liability as a resultof crimes at our centers.***

Because our businessrequires us to maintain a significant supply of cash in each of our centers, weare subject to the risk of cash shortages resulting from employee andthird-party theft and errors. Although we have implemented various programs toreduce these risks, maintain insurance coverage for theft and provide securityfor our employees and facilities, we cannot assure you that employee andthird-party theft 

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anderrors will not occur. Cash shortages from employee and third-party theft anderrors were approximately $2.0 million (0.29% of total revenues) in 2006,$1.6 million (0.25% of total revenues) in 2005 and $1.2 million(0.21% of total revenues) in 2004. Theft and errors could lead to cashshortages and could adversely affect our business, results of operations andfinancial condition. It is also possible that crimes such as armed robberiesmay be committed at our centers. We could experience liability or adversepublicity arising from such crimes. For example, we may be liable if anemployee, customer or bystander suffers bodily injury, emotional distress ordeath. Any such event may have a material adverse effect on our business,results of operations and financial condition.

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

We rely upon ourinformation systems to manage and operate our centers and business. Each centeris part of an information network that is designed to permit us to maintainadequate cash inventory, reconcile cash balances on a daily basis and reportrevenues and expenses to our headquarters. Our back-up systems and securitymeasures could fail to prevent a disruption in our information systems. Anydisruption in our information systems could adversely affect our business,results of operations and financial condition.

***Our centralized headquarters functions are susceptibleto disruption by catastrophic events, which could have a material adverse effecton our business, results of operations and financial condition.***

Our headquarters buildingis located in Spartanburg, South Carolina. Our information systems andadministrative and management processes are primarily provided to our zone andregional management and to our centers from this centralized location, and theycould be disrupted if a catastrophic event, such as a tornado, power outage oract of terror, destroyed or severely damaged our headquarters. Any of thesecatastrophic events could have a material adverse effect on our business,results of operations and financial condition.

***Potential future acquisitions could be difficult tointegrate, divert the attention of key management personnel, disrupt ourbusiness, dilute stockholder value and adversely affect our business, resultsof operations and financial condition.***

We mayconsider acquisitions of companies, technologies and products that we feelcould accelerate our ability to compete or allow us to enter new markets.Acquisitions involve numerous risks, including:

·       difficultiesin integrating operations, technologies, accounting and personnel;

·       difficultiesin supporting and transitioning customers of our acquired companies;

·       diversionof financial and management resources from existing operations;

·       risksof entering new markets;

·       potentialloss of key employees; and

·       inabilityto generate sufficient revenues to offset acquisition costs.

Acquisitions alsofrequently result in the recording of goodwill and other intangible assets thatare subject to potential impairments in the future that could harm ourfinancial results. In addition, if we finance acquisitions by issuingconvertible debt or equity securities, our existing stockholders may bediluted, which could affect the market price of our stock. As a result, if wefail to properly evaluate acquisitions or investments, we may not achieve theanticipated benefits of any such acquisitions, and we 

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mayincur costs in excess of what we anticipate, either of which could have amaterial adverse effect on our business, results of operations and financialcondition.

***Regular turnover among our managers and employees atour centers makes it more difficult for us to operate our centers and increasesour costs of operations, which could have an adverse effect on our business,results of operations and financial condition.***

The annual turnover as ofDecember 31, 2006, among our center managers was approximately 53% andamong our other center employees was approximately 106%. Approximately 50% ofthe turnover has traditionally occurred in the first six months following thehire date of our center managers and employees. This turnover increases ourcost of operations and makes it more difficult to operate our centers. If weare unable to retain our employees in the future, our business, results ofoperations and financial condition could be adversely affected.

***We were formerly taxed as an S corporation underSubchapter S of the Internal Revenue Code and claims of taxing authoritiesrelated to our prior status as an S corporation could harm us.***

Between October 1,2001, and the closing of our initial public offering (“IPO”) onDecember 21, 2004, we were taxed as a “pass-through” entity underSubchapter S of the Internal Revenue Code. Currently, we are taxed as a Ccorporation under Subchapter C of the Internal Revenue Code, which isapplicable to most corporations and treats the corporation as an entity that isseparate and distinct from its stockholders. If our tax returns for the yearsin which we were an S corporation were to be audited by the Internal RevenueService or another taxing authority and we were determined not to havequalified for, or to have violated, our S corporation status, we could beobligated to pay back taxes, interest and penalties. These amounts couldinclude taxes on all of our net income while we were an S corporation. Taxableincome during the period we were an S corporation was $211.0 million. Anysuch claims could result in additional costs to us and could have a materialadverse effect on our business, results of operations and financial condition.

**Risks Related to Our Common Stock**

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

Our executive officers anddirectors, together with certain family members and trusts for their benefit,control approximately 24%****of ouroutstanding common stock. As a result, these stockholders, if they acttogether, may be able to influence any matter requiring our stockholders’approval, including the election of directors and approval of significantcorporate transactions. As a result, this concentration of ownership may delay,prevent or deter a change in control, could deprive our stockholders of anopportunity to receive a premium for their common stock as part of a sale ofour company or its assets and might reduce the market price of our commonstock.

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***Applicable laws and our certificate of incorporationand bylaws may discourage takeovers and business combinations that ourstockholders might consider in their best interest.***

State laws and ourcertificate of incorporation and bylaws may delay, defer, prevent or rendermore difficult a takeover attempt that our stockholders might consider in theirbest interests. For instance, they may prevent our stockholders from receivingthe benefit from any premium to the market price of our common stock offered bya bidder in a takeover context. Even in the absence of a takeover attempt, theexistence of these provisions may adversely affect the prevailing market priceof our common stock if they are viewed as discouraging takeover attempts in thefuture.

State laws and ourcertificate of incorporation and bylaws may also make it difficult forstockholders to replace or remove our directors. These provisions mayfacilitate entrenchment of directors that may delay, defer or prevent a changein our control, which may not be in the best interests of our stockholders.

Thefollowing provisions that are included in our certificate of incorporation andbylaws have anti-takeover effects and may delay, defer or prevent a takeoverattempt that our stockholders might consider in their best interests. Inparticular, our certificate of incorporation and bylaws:

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

·       prohibitstockholders from filling vacancies on our Board of Directors;

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

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

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

In addition, many of oursubsidiaries are licensed by, and subject to, the regulatory and supervisoryjurisdiction of the states where they do business. Under change in controlstatutes of some of these states, any person, acting alone or with others, whois seeking to acquire, directly or indirectly, 5% or more of our outstandingcommon stock may need to be approved by the authorities within those states. Asa result, prospective investors who intend to acquire a substantial portion ofour common stock may need to be aware of and to comply with those staterequirements, to the extent applicable.

In addition,Section 203 of the General Corporation Law of the State of Delaware maylimit the ability of an “interested stockholder” to engage in businesscombinations with us. An interested stockholder is defined to include personsowning 15% or more of our outstanding voting stock.

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

Federal and state laws andregulations applicable to providers of payday cash advance services or otherfinancial products or services that we may introduce in the future may now orin the future restrict direct or indirect ownership or control of providers ofsuch products or services by disqualified persons (such as convicted felons).Our certificate of incorporation provides that we may redeem shares of yourcommon stock to the extent deemed necessary or advisable, in the sole judgmentof our Board of Directors, to prevent the loss of, or to secure thereinstatement or renewal of, any license or permit from any governmental agencythat is conditioned upon some or all of the holders of our common stockpossessing prescribed qualifications or not possessing prescribed disqualifications.The redemption price will be the average closing sale price per share of ourcommon stock during the 20-trading-day period ending on the secondbusiness day preceding the redemption date fixed by our Board of Directors. Atthe discretion of our Board of Directors, the redemption price may be paid incash, debt or equity securities or a combination of cash and debt or equitysecurities.

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**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS.

None.

**ITEM2.**                PROPERTIES.

Our average center size isapproximately 1,500 square feet. We try to locate our centers in highlyvisible, accessible locations. Our centers, which we design to have theappearance of a mainstream financial institution, are typically located inmiddle-income shopping areas with high retail activity. Other tenants inthese shopping areas typically include grocery stores, discount retailers andnational video rental stores. All of our centers are leased, with typical leaseterms of three years with an option to renew at the end of the lease term. Ourleases usually require that we pay all maintenance costs, insurance costs andproperty taxes.

See “Item 1. Business—CenterOperations—Centers” for a listing of the number of centers we operated in thevarious states as of December 31, 2006.

Weown our corporate headquarters in Spartanburg, South Carolina. Ourheadquarters building, which is approximately 75,000 square feet, and relatedland are subject to a mortgage payable to a lender, the principal amount ofwhich was approximately $5.8 million at December 31, 2006. Themortgage is payable in 180 monthly installments of approximately $66,400,including principal and interest, and bears interest at a fixed rate of 7.30%over its term. The mortgage matures on June 10, 2017. The carrying amountof our corporate headquarters (land, land improvements and building) wasapproximately $5.4 million and $5.2 million at December 31, 2005 and2006, respectively.

We believe that ourfacilities, equipment, furniture and fixtures and aircraft are in goodcondition and well maintained, and that our offices are sufficient to meet ourpresent needs.

**ITEM3.**                LEGAL PROCEEDINGS.

We are involved in severalactive lawsuits, including lawsuits arising out of actions taken by stateregulatory authorities, and are involved in various other legal proceedingswith state and federal regulators.

*Bettsand Reuter v. McKenzie Check Advance of Florida, LLC et al.*

We, our subsidiary,McKenzie Check Advance of Florida, LLC (“McKenzie”), and certain officers,directors and employees are defendants in a putative class-action lawsuitcommenced by former customers, Wendy Betts and Donna Reuter, in Florida. Thisputative class action was filed by Ms. Betts and Ms. Reuter inFebruary 2001 in the Circuit Court of Palm Beach County and alleges thatMcKenzie, by and through the actions of certain officers, directors andemployees, engaged in unfair and deceptive trade practices and violatedFlorida’s criminal usury statute, the Florida Consumer Finance Act and theFlorida Racketeer Influenced and Corrupt Organizations Act. The suit seeksunspecified damages, and McKenzie or the other defendants could be required torefund fees and/or interest collected, refund the principal amount of paydaycash advances, pay multiple damages and pay other monetary penalties.

Defendants’ motion forsummary judgment was originally granted as to Ms. Betts’ claims but laterreversed by a Florida appellate court. On appeal, the Florida Supreme Courtissued an opinion in April 2006, holding that the deferred presentment transactionsbetween Betts and us were governed by Florida’s usury laws and not governed bythe Florida Money Transmitters’ Code as we asserted. The case has been remandedto the Circuit Court by the Fourth District Court of Appeals where discovery isnow ongoing. Although this ruling by the Florida Supreme Court was adverse tous, it is too early in this proceeding to identify the amount of potentiallosses to us, if any, since the case is still in its early stages and severalmaterial issues have yet to be addressed by the courts.

Ms. Reuter’s claims weresubject to an arbitration agreement contained in the contract; defendants’motion to compel arbitration was granted by the state trial court, upheld bythe state appeals court and 

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affirmedby the Florida Supreme Court declining to accept certiorari. Thus, the order tocompel arbitration is final as to Ms. Reuter. The arbitration andlitigation will likely proceed in parallel.

*Reuterand Betts v. Advance America, Cash Advance Centers of Florida, Inc. et al.*

A second Florida lawsuitwas filed in August 2004 in the Circuit Court of Palm Beach County byformer customers Gerald Betts and Ms. Reuter against us, our subsidiary,Advance America, Cash Advance Centers of Florida, Inc., and certainofficers and directors. The allegations are nearly identical to those allegedin the first Betts and Reuter lawsuit. We filed motions to dismiss, to stay theproceedings pending determination of dispositive actions by the Florida SupremeCourt in the original Betts and Reuter case and to compel arbitration.Proceedings in this case were stayed pending the disposition of the appeals inthe original Betts and Reuter case. Now that those appeals have been resolved,the stay of proceedings has been lifted and we will proceed with defending thissecond lawsuit. Discovery is now ongoing.

*PennsylvaniaDepartment of Banking v. NCAS of Delaware, LLC*

In September 2006, thePennsylvania Department of Banking filed a lawsuit in the Commonwealth Court ofPennsylvania alleging that our Delaware subsidiary is providing lines of creditto borrowers in Pennsylvania without a license required under Pennsylvania lawand with interest and fees in excess of the amounts permitted by Pennsylvanialaw. The Pennsylvania Department of Banking has filed a Motion for Judgment onthe Pleadings for Declaratory Relief and Permanent Injunction, seeking:(1) a declaration as a matter of law that our Delaware subsidiary isviolating Pennsylvania lending laws and (2) a permanent injunctionenjoining the Delaware subsidiary from issuing new lines of credit and fromcollecting on or enforcing currently outstanding lines of credit or other loanproducts in Pennsylvania. We filed a brief in opposition and a cross motion forjudgment on the pleadings. Further briefing has been scheduled and oralargument for both parties’ motions is scheduled for April 2007.

*RaymondKing v. Advance America, Cash Advance Centers of Pennsylvania, Inc.*

In April 2006, RaymondKing, who was a customer of the lending bank in Pennsylvania, filed adeclaratory judgment action in the Court of Common Pleas in Philadelphia Countyagainst our Pennsylvania subsidiary. The parties have mutually agreed to endthis lawsuit because the plaintiff (and another party) filed another separateputative class action lawsuit in the United States District Court for theEastern District of Pennsylvania. The parties notified the court of theirmutual agreement and the Court of Commons Pleas discontinued this action inFebruary 2007.

*RaymondKing and Sandra Coates v. Advance America, Cash Advance Centers ofPennsylvania, LLC*

In January2007, Raymond King and Sandra Coates, who were customers of BankWest, thelending bank for which we marketed, processed and serviced payday cash advancesin Pennsylvania, filed a putative class action lawsuit in the United StatesDistrict Court, Eastern District of Pennsylvania against us alleging variouscauses of action, including that the Pennsylvania subsidiary made illegalpayday loans in Pennsylvania in violation of Pennsylvania’s usury law, thePennsylvania Consumer Discount Company Act, the Pennsylvania Unfair TradePractices and Consumer Protection Law, the Pennsylvania Fair Credit ExtensionUniformity Act and the Pennsylvania Credit Services Act. The complaint allegesthat BankWest was not the “true lender” on the advances that we marketed,processed and serviced for BankWest in Pennsylvania and that we were the“lender in fact.” The complaint seeks compensatory damages, attorneys’ fees,punitive damages and the trebling of any compensatory damages. We intend tofile our response to the Complaint in March 2007.

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*King and Strong v. Advance America, Cash AdvanceCenters of Georgia, Inc. et al.*

In August 2004, TahishaKing and James E. Strong, who were customers of BankWest, the lending bank forwhich we marketed, processed and serviced payday cash advances in Georgia,filed a putative class action lawsuit in the State Court of Cobb County,Georgia against us, William M. Webster IV, our Vice Chairman, and other unnamedofficers, directors, owners and “stakeholders,” alleging various causes ofaction including that the Georgia subsidiary made illegal payday loans inGeorgia in violation of Georgia’s usury law, the Georgia Industrial Loan Actand Georgia’s Racketeer Influenced and Corrupt Organizations Act. The complaintalleges that BankWest was not the “true lender” on the advances that wemarketed, processed and serviced for BankWest in Georgia and that we were the“de facto” lender. The complaint seeks compensatory damages, attorneys’ fees,punitive damages and the trebling of any compensatory damages. We and the otherdefendants denied the plaintiffs’ claims and asserted that all of the claimsare subject to mandatory and binding individual arbitration pursuant toarbitration agreements signed by each plaintiff. In April 2006, the StateCourt of Cobb County entered a consent order, which was jointly submitted bythe parties, whereby the parties agreed and consented to arbitration of allclaims raised by plaintiffs in this action and to stay all proceedings pendingthe outcome of arbitration on plaintiffs’ claims. The plaintiffs filed a demandfor arbitration seeking to arbitrate their claims in a class action orrepresentative status. An arbitrator was appointed, initial briefs were filed,and oral arguments were held regarding the enforceability of the arbitrationprovision and the class action waiver contained in the bank’s consumer loanagreement. We intend to continue to deny plaintiffs’ claims and resistplaintiffs’ efforts to conduct class arbitration.

*Glasscock v. Advance America, Cash Advance Centers ofGeorgia, Inc. et al.*

Our Georgia subsidiary isinvolved in another case in Georgia that, although not a class action lawsuit,contains essentially the same allegations as the King and Strong case. In March2003, Angela Glasscock, a customer of BankWest, filed an adversary proceedingin the U.S. Bankruptcy Court for the Southern District of Georgia alleging thatthe Georgia subsidiary was making payday cash advances in Georgia in violationof the Georgia Industrial Loan Act. BankWest intervened into the case andsubsequently both the subsidiary and BankWest filed a motion for summaryjudgment which was granted in September 2005. In its holding, the courtruled that BankWest was the “true lender.” Plaintiffs have appealed this rulingto the United States District Court where it is now pending. Although theamount in controversy in the case is only $350, the underlying claims ofMs. Glasscock, if validated by the appellate court, could serve as a basisfor future claims against us.

*Kucan et al. v. Advance America, Cash Advance Centersof North Carolina, Inc. et al.*

In July 2004, John Kucan, Welsie Torrence and TerryCoates, each of whom was a customer of Republic Bank & Trust Company(“Republic”), the lending bank for which we marketed, processed and servicedpayday cash advances in North Carolina, filed a putative class action lawsuitin the General Court of Justice for the Superior Court Division for New HanoverCounty, North Carolina against us and Mr. Webster, alleging, among otherthings, that the relationship between our North Carolina subsidiary andRepublic was a “rent a charter” relationship and therefore Republic was not the“true lender” on the payday cash advances it offered. The lawsuit also claimsthat the payday cash advances were made, administered and collected inviolation of numerous North Carolina consumer protection laws. The lawsuitseeks an injunction barring the subsidiary from continuing to do business inNorth Carolina, the return of the principal amount of the payday cash advancesmade to the plaintiff class since August 2001, the return of any interestor fees associated with those advances, treble damages, attorneys’ fees andother unspecified costs. In December 2005, the court issued an Order grantingdefendants’ motion for arbitration, staying the proceedings and denying classcertification. The plaintiffs have appealed this Order to the North CarolinaCourt of Appeals. The plaintiffs in this case and two other North Carolinacases 

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currently before the Courtof Appeals filed a petition, which we have opposed, for discretionary reviewand consolidation of the cases. The Court of Appeals heard oral argument on theconsolidated cases in January 2007. We are awaiting a ruling from theCourt of Appeals.

*North Carolina Commissioner of Banks Order*

In August 2004, theNorth Carolina Attorney General’s Office, in conjunction with the Commissionerof Banks for North Carolina, issued a subpoena to us to produce documents,respond to written questions and have a corporate representative appear for adeposition regarding the relationship between our North Carolina subsidiary andthe lending bank in North Carolina, Republic, to determine whether ouroperations in North Carolina were in compliance with North Carolina law. InFebruary 2005, the Commissioner of Banks initiated a contested caseagainst our North Carolina subsidiary for alleged violations of the NorthCarolina Consumer Finance Act. In December 2005, at the conclusion of thecontested case, the Commissioner of Banks ordered that our North Carolinasubsidiary immediately cease and desist operating. In accordance with theCommissioner of Banks’ Order, our North Carolina subsidiary ceased all businessoperations on December 22, 2005. The full North Carolina State Banking Commissionhas since affirmed the Commissioner of Banks’ Order and we filed an appeal withthe North Carolina Superior Court. The appeal was dismissed and we arecurrently appealing the dismissal to the North Carolina Court of Appeals.

*New Mexico Proposed Rules and RegulationsGoverning the Extension of Credit For Small Loans*

In February 2006, wejoined four other payday lenders in a lawsuit against the New Mexico AttorneyGeneral requesting immediate injunctive relief from the enforcement of theAttorney General’s Proposed Rules and Regulations Governing the Extensionof Credit for Small Loans, which would have severely limited the payday loanindustry in New Mexico. The parties mutually agreed to stay any furtherproceedings pending the adoption of new proposed regulations published by theFinancial Institutions Division of the New Mexico Regulation and LicensingDepartment (“FID”) in June 2006. In August 2006, in a lawsuit filedby several other payday loan companies, the second judicial district court of NewMexico issued a preliminary injunction enjoining the enforcement of the FIDproposed regulations. As a result of the Court’s order, we have not made anychanges in our New Mexico operations and are monitoring the litigation todetermine what, if any, changes may be required to our New Mexico operations inthe future.

*Department of Labor Investigations*

The United StatesDepartment of Labor has periodically initiated investigations of our practicesregarding the payment of overtime wages to certain employees. The Department ofLabor recently concluded some of these investigations and we are cooperatingwith the ongoing investigations, any of which could result in the payment ofback wages, civil monetary penalties and other enforcement action.

*Other Matters*

We are also involved inother litigation and administrative proceedings. This litigation includescontractual disputes, employee claims for workers’ compensation, wrongfultermination, harassment, discrimination, payment of wages due and customerclaims relating to collection practices and violations of state and/or federalconsumer protections laws.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.

Ourcommon stock is traded on the New York Stock Exchange (the “NYSE”) under thesymbol “AEA.” Our common stock was initially offered to the public onDecember 15, 2004 at a price of $15.00. The following table sets forth thequarterly high and low sales prices of our common stock as reported by NYSE aswell as the quarterly cash dividend declared per share for 2005 and 2006:

| ** **                             | ** ** | **Sales Prices** | ** ** | **Cash** | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------|------------|
| ** **                             | ** ** | **High**              | ** ** | **Low**  | ** ** | **Dividend** | ** ** |
| **2005:**                              |       |                  |       |     |       |   |   |   |   |
| Quarter ended  March 31, 2005     |       | $                     | 23.94      |     | $          | 14.20 |   |   | $ | 0.09 |   |   |
| Quarter ended  June 30, 2005.     |       | 16.85                 |       | 11.45    |       |   | 0.09 |   |   |
| Quarter ended  September 30, 2005 |       | 17.85                 |       | 12.06    |       |   | 0.09 |   |   |
| Quarter ended  December 31, 2005  |       | 14.17                 |       | 11.58    |       |   | 0.11 |   |   |
| **2006:**                              |       |                  |       |     |       |   |   |   |   |
| Quarter ended  March 31, 2006     |       | $                     | 15.02      |     | $          | 12.29 |   |   | $ | 0.11 |   |   |
| Quarter ended  June 30, 2006.     |       | 17.71                 |       | 14.03    |       |   | 0.11 |   |   |
| Quarter ended  September 30, 2006 |       | 18.33                 |       | 12.97    |       |   | 0.11 |   |   |
| Quarter ended  December 31, 2006  |       | 15.47                 |       | 13.84    |       |   | 0.11 |   |   |

 

At February 21, 2007, there were approximately 143holders of record of our common stock, and there were approximately 6,900beneficial holders of the common stock held in nominee or street name.

We are not required to pay any dividends. Anydetermination to pay dividends, and the amounts of any dividends, will be atthe sole discretion of our Board of Directors and will depend on a number offactors, including: our subsidiaries’ payment of dividends to us; our netincome, results of operations and cash flows and our other cash needs; ourfinancial position and capital requirements; general business conditions andthe outlook for our company; any legal, tax, regulatory and any other factorsour Board of Directors deems relevant. In addition, our revolving creditfacility restricts our ability to pay dividends depending on the absence of anydefault or event of default, our net income, and the ratio of our consolidatedsenior funded debt to our consolidated EBITDA and our consolidated fixed chargecoverage ratio (as defined in our revolving credit facility). Our Board ofDirectors may at any time modify or revoke our dividend policy.

On January 24, 2007,our Board of Directors declared a quarterly cash dividend of $0.125 per commonshare, payable on March 9, 2007, to stockholders of record onFebruary 28, 2007.

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**PERFORMANCE GRAPH**

The following graphcompares the change in the cumulative value of $100 invested for the periodbeginning on December 16, 2004, the first day of trading following ourIPO, and ending on December 29, 2006, in (1) our Common Stock,(2) the Standard & Poor’s 500 Index, (3) the NASDAQ OtherFinancial Index and (4) the NYSE Financial Sector Index. The values ofeach investment are based upon the share price appreciation and reinvestment ofdividends, on a quarterly basis.

| ** ** | ** ** | **Advance America,  Cash Advance Centers, Inc.  (AEA)** | ** ** | **Standard & Poors 500  Index (S&P 500)** | ** ** | **NASDAQ Other  Financial Index  (IXFN)** | ** ** | **NYSE Financial Sector  Index (NYK.ID)** | ** ** |
|------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------|------------|
| 12/16/04   |       |                                                                        | $          | 100.00                                                                     |       |                                                |       | $                                                        | 100.00     |   |   |   | $ | 100.00 |   |   |   | $ | 100.00 |   |   |
| 12/31/04   |       |                                                                        | $          | 111.71                                                                     |       |                                                |       | $                                                        | 100.72     |   |   |   | $ | 103.18 |   |   |   | $ | 102.30 |   |   |
| 3/31/05    |       |                                                                        | $          | 74.29                                                                      |       |                                                |       | $                                                        | 98.12      |   |   |   | $ | 92.29 |   |   |   | $ | 96.83 |   |   |
| 6/30/05    |       |                                                                        | $          | 77.78                                                                      |       |                                                |       | $                                                        | 99.01      |   |   |   | $ | 102.31 |   |   |   | $ | 98.67 |   |   |
| 9/30/05    |       |                                                                        | $          | 65.24                                                                      |       |                                                |       | $                                                        | 102.13     |   |   |   | $ | 108.37 |   |   |   | $ | 102.36 |   |   |
| 12/30/05   |       |                                                                        | $          | 62.16                                                                      |       |                                                |       | $                                                        | 103.75     |   |   |   | $ | 115.50 |   |   |   | $ | 109.17 |   |   |
| 3/31/06    |       |                                                                        | $          | 72.64                                                                      |       |                                                |       | $                                                        | 107.62     |   |   |   | $ | 128.22 |   |   |   | $ | 115.96 |   |   |
| 6/30/06    |       |                                                                        | $          | 89.16                                                                      |       |                                                |       | $                                                        | 105.57     |   |   |   | $ | 118.53 |   |   |   | $ | 114.24 |   |   |
| 9/29/06    |       |                                                                        | $          | 73.86                                                                      |       |                                                |       | $                                                        | 111.02     |   |   |   | $ | 131.13 |   |   |   | $ | 121.69 |   |   |
| 12/29/06   |       |                                                                        | $          | 75.60                                                                      |       |                                                |       | $                                                        | 117.88     |   |   |   | $ | 135.64 |   |   |   | $ | 130.40 |   |   |

 

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The following table setsforth information about our stock repurchases for the three months endedDecember 31, 2006:

| **Period(1)**                        | ** ** | ** ** | ** ** | **Total  Number of  Shares Purchased(2)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(2)** | ** ** | **Approximate Dollar  Value of Shares That  May Yet Be  Purchased Under the  Plans or Programs(3)** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 1 to  October 31   |       |       | 323,100    |                                                |       |                                         | $          | 14.56                                                                                                                               |       |                                                                                                                                                  |       | 323,100 |   |   |   | $ | 80,517,685 |   |   |
| November 1  to November 30 |       |       | —     |                                                |       |                                         | —     |                                                                                                                                |       |                                                                                                                                                  | —     |   |   |   | $ | 80,517,685 |   |   |
| December 1  to December 31 |       |       | 5,482      |                                                |       |                                         | $          | 14.67                                                                                                                               |       |                                                                                                                                                  |       | 5,482 |   |   |   | $ | 80,437,292 |   |   |
| Total                                |       |       | 328,582    |                                                |       |                                         | $          | 14.56                                                                                                                               |       |                                                                                                                                                  |       | 328,582 |   |   |   | $ | 80,437,292 |   |   |

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(1)          Based on trade date.

(2)          Includes 5,482 sharesthat were surrendered by employees to satisfy their tax obligations withrespect to the vesting of shares of restricted stock awarded pursuant to our2004 Omnibus Stock Plan.

(3)          On August 16, 2006,we announced an extension of our stock repurchase program pursuant to which wewere authorized to repurchase up to $100.0 million of our outstanding commonstock beginning on that date.

See “Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters,” for information aboutour equity compensation plans.

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**ITEM6.**                SELECTED FINANCIALDATA.

Thefollowing tables set forth our summary consolidated financial information andother financial and statistical data for the periods ended and as of the datesindicated. The financial information for the years ended December 31,2006, 2005 and 2004, and as of December 31, 2006 and 2005, has beenderived from our audited financial statements included elsewhere in thisreport. The financial information for the years ended December 31, 2003and 2002, and as of December 31, 2004, 2003 and 2002 has been derived fromour audited financial statements not included in this report. The historicalselected financial information may not be indicative of our future performanceand should be read in conjunction with the information contained in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the consolidated financial statements and related notes in“Item 8. Financial Statements and Supplementary Data.”

| ** **                                                     | ** ** | **Year ended December 31,**                                                                               | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| **Consolidated Financial Information**               | ** ** | ** **                                                                                                               | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands, except per share data  and other financial data)** | ** ** |
| **Statement of Operations Data:**                              |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Revenues:                                                      |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Fees and interest charged to customers                         |       | $                                                                                                                        | 298,432    |   | $ | 362,262 |   | $ | 430,859 |   | $ | 529,953 |   | $ | 659,876 |   |
| Marketing, processing and servicing fees                       |       | 113,894                                                                                                                  |       | 127,272 |   | 139,329 |   | 100,113 |   | 12,418 |   |
| Total revenues                                                 |       | 412,326                                                                                                                  |       | 489,534 |   | 570,188 |   | 630,066 |   | 672,294 |   |
| Provision for doubtful accounts and agency bank  losses        |       | (54,842                                                                                                                  | )          | (64,681 | ) | (89,236 | ) | (115,060 | ) | (120,855 | ) |
| Net revenues                                                   |       | 357,484                                                                                                                  |       | 424,853 |   | 480,952 |   | 515,006 |   | 551,439 |   |
| Center expenses:                                               |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                             |       | 117,036                                                                                                                  |       | 131,369 |   | 160,047 |   | 171,092 |   | 185,938 |   |
| Occupancy costs                                                |       | 43,620                                                                                                                   |       | 51,798 |   | 67,305 |   | 80,540 |   | 87,276 |   |
| Center depreciation expense                                    |       | 10,416                                                                                                                   |       | 11,603 |   | 13,719 |   | 14,902 |   | 16,233 |   |
| Advertising expense                                            |       | 23,921                                                                                                                   |       | 23,857 |   | 26,082 |   | 24,137 |   | 20,375 |   |
| Other center expenses                                          |       | 35,078                                                                                                                   |       | 41,300 |   | 47,087 |   | 52,712 |   | 54,986 |   |
| Total center  expenses                                         |       | 230,071                                                                                                                  |       | 259,927 |   | 314,240 |   | 343,383 |   | 364,808 |   |
| Center gross  profit                                           |       | 127,413                                                                                                                  |       | 164,926 |   | 166,712 |   | 171,623 |   | 186,631 |   |
| Corporate and other  expenses (income):                        |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |
| General and administrative expenses                            |       | 33,578                                                                                                                   |       | 36,434 |   | 44,102 |   | 51,758 |   | 53,363 |   |
| Corporate depreciation expense                                 |       | 2,796                                                                                                                    |       | 3,433 |   | 3,942 |   | 4,483 |   | 3,661 |   |
| Options purchase expense                                       |       | 21,462                                                                                                                   |       | 3,547 |   | — |   | — |   | — |   |
| Lending bank contract termination expense                      |       | —                                                                                                                   |       | 6,525 |   | — |   | — |   | — |   |
| Interest expense                                               |       | 14,973                                                                                                                   |       | 15,983 |   | 17,165 |   | 4,331 |   | 7,129 |   |
| Interest income                                                |       | (318                                                                                                                     | )          | (86 | ) | (161 | ) | (351 | ) | (538 | ) |
| Loss on disposal of property and equipment                     |       | 739                                                                                                                      |       | 990 |   | 814 |   | 715 |   | 960 |   |
| Loss on impairment of assets                                   |       | —                                                                                                                   |       | — |   | 1,288 |   | 2,918 |   | — |   |
| Transaction related expense                                    |       | —                                                                                                                   |       | — |   | 2,466 |   | — |   | — |   |
| Income before  income taxes                                    |       | 54,183                                                                                                                   |       | 98,100 |   | 97,096 |   | 107,769 |   | 122,056 |   |
| Income tax  expense(1)                                         |       | 638                                                                                                                      |       | 1,925 |   | 14,041 |   | 43,776 |   | 48,858 |   |
| Income before  income of consolidated variable interest entity |       | 53,545                                                                                                                   |       | 96,175 |   | 83,055 |   | 63,993 |   | 73,198 |   |
| Income of  consolidated variable interest entity               |       | —                                                                                                                   |       | — |   | — |   | (1,003 | ) | (3,047 | ) |
| Net income                                                     |       | $                                                                                                                        | 53,545     |   | $ | 96,175 |   | $ | 83,055 |   | $ | 62,990 |   | $ | 70,151 |   |
|                                                                |            |                                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                    | ** ** | **Year Ended December 31,**                                     | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Consolidated Financial Information  (Continued)** | ** ** | ** **                                                                     | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands, except per share data** | ** ** |
| ** **                                                    | ** ** | **and other financial data)**                                   | ** ** |
| **Per Share  Data:**                                          |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net income per  common share:                                 |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       | $                                                                              | 0.78       |   | $ | 1.40 |   | $ | 1.20 |   | $ | 0.76 |   | $ | 0.87 |   |
| Diluted                                                       |       | $                                                                              | 0.71       |   | $ | 1.40 |   | $ | 1.20 |   | $ | 0.76 |   | $ | 0.87 |   |
| Cash dividends paid per common share                          |       | $                                                                              | 0.58       |   | $ | 1.48 |   | $ | 1.15 |   | $ | 0.38 |   | $ | 0.44 |   |
| Weighted average number of shares outstanding:                |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       | 69,042                                                                         |       | 68,667 |   | 69,126 |   | 83,124 |   | 80,889 |   |
| Effect of dilutive options and unvested restricted  stock     |       | 5,896                                                                          |       | 120 |   | — |   | — |   | 28 |   |
| Diluted                                                       |       | 74,938                                                                         |       | 68,787 |   | 69,126 |   | 83,124 |   | 80,917 |   |
| **Pro Forma Data (unaudited)(1):**                            |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Historical income  before taxes                               |       |                                                                           |       |   |   | $ | 97,096 |   |   |   |   |   |
| Pro forma income  tax expense(2)                              |       |                                                                           |       |   |   | 39,247 |   |   |   |   |   |
| Net income  adjusted for pro forma income tax expense         |       |                                                                           |       |   |   | $ | 57,849 |   |   |   |   |   |
| Pro forma net income per common share—basic              |       |                                                                           |       |   |   | $ | 0.84 |   |   |   |   |   |
| Pro forma net income per common share—diluted            |       |                                                                           |       |   |   | $ | 0.84 |   |   |   |   |   |
| Weighted average pro forma number of shares  outstanding:     |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       |                                                                           |       |   |   | 69,126 |   |   |   |   |   |
| Effect of dilutive options                                    |       |                                                                           |       |   |   | — |   |   |   |   |   |
| Diluted                                                       |       |                                                                           |       |   |   | 69,126 |   |   |   |   |   |
| **Balance Sheet Data (at end of period):**                    |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents.                                   |       | $                                                                              | 6,675      |   | $ | 10,484 |   | $ | 18,224 |   | $ | 27,259 |   | $ | 67,245 |   |
| Advances and fees  receivable, net                            |       | 116,941                                                                        |       | 138,204 |   | 155,009 |   | 193,468 |   | 237,725 |   |
| Goodwill                                                      |       | 122,324                                                                        |       | 122,324 |   | 122,324 |   | 122,586 |   | 122,627 |   |
| Total assets                                                  |       | 316,455                                                                        |       | 348,043 |   | 397,539 |   | 436,388 |   | 525,092 |   |
| Total debt                                                    |       | 184,589                                                                        |       | 219,259 |   | 46,637 |   | 44,621 |   | 111,050 |   |
| Total  stockholders’ equity                              |       | 95,007                                                                         |       | 91,039 |   | 296,290 |   | 303,025 |   | 299,897 |   |
| **Cash Flow Data:**                                           |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Cash flows  provided by operating activities                  |       | $                                                                              | 113,818    |   | $ | 153,670 |   | $ | 163,910 |   | $ | 189,382 |   | $ | 186,125 |   |
| Cash flows used  in investing activities                      |       | (81,991                                                                        | )          | (83,544 | ) | (97,055 | ) | (139,880 | ) | (156,216 | ) |
| Cash flows (used in)  provided by financing activities        |       | (43,204                                                                        | )          | (66,317 | ) | (59,115 | ) | (40,467 | ) | 10,077 |   |
|                                                               |            |                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Consolidated  Financial Information (Continued)**                                                  | ** ** | ** **                                 | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Other  Financial and Statistical Data:**                                                           |       |                                       |       |   |   |   |   |   |   |   |   |
| Number of centers  open at end of period                                                             |       | 1,741                                      |       | 2,039 |   | 2,408 |   | 2,604 |   | 2,853 |   |
| Number of payday  cash advances originated (thousands)                                               |       | 8,766                                      |       | 10,179 |   | 11,586 |   | 11,620 |   | 11,539 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)                           |       | $                                          | 2,743,847  |   | $ | 3,271,235 |   | $ | 3,804,096 |   | $ | 3,943,815 |   | $ | 4,082,865 |   |
| Average amount of  payday cash advance originated                                                    |       | $                                          | 313        |   | $ | 321 |   | $ | 328 |   | $ | 339 |   | $ | 353 |   |
| Average charge to  customers for providing and processing a payday cash advance                      |       | $                                          | 51         |   | $ | 52 |   | $ | 52 |   | $ | 55 |   | $ | 55 |   |
| Average duration  of a payday cash advance (days)                                               |       | 14.5                                       |       | 15.1 |   | 15.4 |   | 15.8 |   | 16.2 |   |
| Average number of  lines of credit outstanding during the period (thousands)                         |       | —                                     |       | — |   | — |   | — |   | 20 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) |       | —                                     |       | — |   | — |   | — |   | $ | 8,963 |   |
| Average principal  amount on lines of credit outstanding during the period                           |       | —                                     |       | — |   | — |   | — |   | $ | 448 |   |
| Number of  installment loans originated (thousands)                                                  |       | —                                     |       | — |   | — |   | 68 |   | 29 |   |
| Aggregate  principal amount of installment loans originated (thousands)                              |       | —                                     |       | — |   | — |   | $ | 34,541 |   | $ | 13,905 |   |
| Average amount of  installment loan originated                                                       |       | —                                     |       | — |   | — |   | $ | 508 |   | $ | 486 |   |
| Average charge to  customers for providing and processing an installment loan(3)                     |       | —                                     |       | — |   | — |   | $ | 337 |   | $ | 357 |   |
|                                                                                                      |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          EffectiveOctober 1, 2001, we filed an election to convert to S corporationstatus for federal and most state income tax purposes under Subchapter S of theInternal Revenue Code. Under Subchapter S, our stockholders pay federaland state income tax on our taxable income. In connection with our initialpublic offering on December 21, 2004 we revoked our Subchapter S electionand once again became a C corporation taxed under Subchapter C of theInternal Revenue Code. We have provided unaudited proforma data as if we were aC corporation for the year ended December 31, 2004.

(2)          Pro forma income taxexpense shown here has been determined as if we had been a C corporation ratherthan an S corporation in 2004. Proforma income tax expense for the yearended December 31, 2004 includes actual income tax expense of $3.8 millionfor subsidiaries that continued to be taxed as C corporations and $8.4 milliondue to our conversion to a C Corporation on December 21, 2004. Theeffective tax rates used are based on the statutory federal income tax rateplus applicable state income taxes (net of federal benefit) plus the non-deductibilityof certain expenses (principally lobbying and meals and entertainment) lessincome from our special purpose entity not included in our tax returns.

(3)          Thiscalculation for 2006 excludes the Illinois installment loan product which wasrolled out in October 2006 because that product was not available longenough for an average charge in Illinois to be determined.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

*The followingdiscussion of our financial condition and results of operations should be readin conjunction with our consolidated financial statements and the related notesin “Item 8. Financial Statements and Supplementary Data.” This discussioncontains forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated by these forward-lookingstatements. Please see “Item 1A. Risk Factors” and “—Forward-LookingStatements” for discussions of the uncertainties, risks and assumptionsassociated with these statements.*

**Overview**

Headquartered in Spartanburg, South Carolina, we arethe largest provider of payday cash advance services in the United States asmeasured by the number of centers operated. Our centers provide short-term,unsecured cash advances that are typically due on the customers’ next payday.As of December 31, 2006, we operated 2,853 centers in 36 states.

Historically, we have conducted our business in moststates under the authority of a variety of enabling state statutes includingpayday advance, deferred presentment, check-cashing, small loan, credit serviceorganization and other state laws (which we refer to as the standard businessmodel). In certain states, we previously conducted business as a marketing,processing and servicing agent for FDIC supervised, state-chartered banksthat made payday cash advances and installment loans to their customerspursuant to the authority of the laws of the states in which they were locatedand federal interstate banking laws, regulations and guidelines (which we referto as the agency business model). We refer to the banks for which we acted asan agent under the agency business model as lending banks. We currently operateall of our centers under the standard business model. During 2006, we beganoffering the Advance America Choice-Line of Credit to customers in Pennsylvaniaand installment loans to customers in Illinois.

We provide advances and charge fees and/or interest asspecified by the laws of the states where we operate under the standardbusiness model. In the states where we previously operated under the agencybusiness model, the lending banks provided advances and installment loans andcharged fees and/or interest as specified by the laws of the states in whichthey were located and consistent with the regulatory authority of the FDIC andfederal banking law. The permitted size of an advance varies by state andranges from $50 to $1,000. The permitted fees and/or interest on an advancealso vary by state and range from 10% to 22% of the amount of a payday cash advance.Fees and interest for installment loans are larger relative to the size of theadvance because of the longer term of this product. Fees and interest for theline of credit product consist of a monthly service fee for the line of creditplus interest on the average outstanding balance.

Additional fees that we may collect include fees forreturned checks and late fees. The returned check fee varies by state andranges up to $30. We charge a customer this fee if a deposited check isreturned due to non-sufficient funds (“NSF”) in the customer’s account or otherreasons. In three states, we are also permitted to charge a late fee, theamount of which varies by state. In Texas, where we provide credit services asa Credit Services Organization (“CSO”), the third-party lender charges a latefee on its loan in accordance with state law. In two other states, a late feewas charged by the lending bank on the installment loan, the amount of whichwas determined by the lending bank. For the years ended December 31, 2006and 2005, total NSF fees collected by us, the third-party lender in Texas andthe lending banks were approximately $3.3 million and $2.8 million,respectively, and total late fees collected by us, the third-party lender inTexas and the lending banks were approximately $768,000 and $254,000,respectively.

*The growth of the payday cashadvance industry has been and continues to be significantly affected byincreasing acceptance of payday cash advances by state legislatures. However,to the extent that states enact legislation that negatively impacts payday cashadvances and similar services, whether through preclusions, interest rateceilings, fee reductions, mandatory extensions of term length, limits on theamount or term of payday cash advances or limits on consumers’ use of the service,our business could be materially adversely affected. We are very active inmonitoring and evaluating regulatory initiatives in all of the states and areclosely involved with the efforts of the Community Financial ServicesAssociation of America (“CFSA”).*

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Despite numerousdifferences under the various enabling regulations, the application andapproval process, underwriting criteria, delivery method, repayment andcollection practices, customer and market characteristics and underlyingeconomics are substantially similar under the standard and agency businessmodels.

Thefollowing table summarizes the most significant differences between thestandard business model and the agency business model, including the applicableseparation of obligations, fees and risks:

|                                                | ** ** | **Standard Business Model**                                                                                                                                                                | ** ** | **Agency Business Model**                                                                                                                                                                                                                                                                                                        |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Approval:**                                  |       | We determine whether to approve an advance to a  customer.                                                                                                                                 |       | The lending banks determined whether to approve an  advance or installment loan to a customer and established all of the  underwriting criteria.                                                                                                                                                                                 |
| **Customer Agreements:**                       |       | We determine the terms,  conditions and features of the advances in accordance with applicable state  and federal law. The contractual advance documents are between us and the  customer. |       | All terms, conditions  and features of the advances and installment loans were determined by the  lending banks in accordance with applicable state and federal law and the  FDIC’s guidelines to examiners relating to advances and installment loans.  The agreements were between the lending banks and their customers. |
| **Funding:**                                   |       | We fund all advances  from our operating cash and/or our revolving credit facility.                                                                                                        |       | The lending banks funded  all advances and installment loans. We typically did not repurchase or  participate in the advances or installment loans.                                                                                                                                                                              |
| **Collection of Advances, Fees and Interest:** |       | We deposit all payments  and receive 100% of the revenue.                                                                                                                                  |       | The lending banks  received 100% of repayments of advances, installment loans, interest and fees  that were deposited in their bank accounts. Marketing, processing and  servicing fees were remitted to us twice per month by the lending banks.                                                                                |

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| **Risks:** |   | We are responsible for  all losses associated with advances. |   | The lending banks were  contractually obligated for all or a portion of the losses on advances and  installment loans. In those circumstances where the lending banks were  contractually obligated for a percentage of the fees and/or interest charged  by the lending banks to their customers, our marketing, processing and  servicing fees were reduced if actual losses exceeded that percentage. |
|------------|--------|--------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In Texas, where we operateunder our standard business model as a credit services organization, we refercustomers to a third-party lender that may approve and fund advances tocustomers. Under the terms of our agreement with this lender, we processcustomer applications and are contractually obligated for all losses.

***Approval Process***

In order for a newcustomer to be approved for an advance, he or she is required to have a bankaccount and a regular source of income, such as a job.

Toobtain an advance, a customer typically:

·       completesan application and presents the required documentation: usually proof ofidentification, a pay stub or other evidence of income and a bank statement;

·       entersinto an agreement governing the terms of the advance, including the customer’sagreement to repay the advance in full on or before a specified due date(usually the customer’s next payday), and our agreement to defer thepresentment or deposit of the customer’s check until the due date of theadvance;

·       writesa personal check to cover the amount of the advance plus charges for applicablefees and/or interest; and

·       makesan appointment to return on the specified due date of the advance to repay theadvance plus the applicable charges and to reclaim his or her check.

Under the standard business model, we determinewhether to approve an advance to our customers (except in Texas, where thethird-party lender makes this determination). We do not undertake anyevaluation of the creditworthiness of our customers in determining whether toapprove customers for advances, other than requiring proof of identification,bank account and income source, as described above. We also consider thecustomer’s income in determining the amount of the advance. Under the agencybusiness model, the lending banks determined whether to approve an advance orinstallment loan utilizing third-party credit scoresto evaluate andapprove the customer’s application.

***Repayment and Collection Process***

If a customer does notreturn to repay the amount due, the center manager has the discretion to either(1) commence past-due collection efforts, which typically may proceed forup to 14 days in most states, or (2) deposit the customer’s personalcheck. If the center manager has decided to commence past-due 

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collectionefforts in place of depositing the customer’s personal check, center employeestypically contact the customer by telephone or in person to obtain a payment ora promise to pay and attempt to exchange the customer’s check for a cashier’scheck, if funds are available. We may also permit a customer to enter into an extended payment plan if thecustomer is unable to meet his or her current repayment obligation.

If at the end of thispast-due collection period, the center has been unable to collect the amountdue, the customer’s check is then deposited. For the year endedDecember 31, 2006, approximately 5.7% of total customer checks weredeposited. Additional collection efforts are not required if the customer’sdeposited check clears. For the year ended December 31, 2006,approximately 22% of deposited customer checks cleared (i.e., were not returnedNSF). If the customer’s check does not clear and is returned because ofnon-sufficient funds in the customer’s account or because of a closed accountor a stop-payment order, additional collection efforts begin. These additionalcollection efforts are carried out by center employees and typically includecontacting the customer by telephone or in person to obtain payment or apromise to pay  and attempting toexchange the customer’s check for a cashier’s check, if funds become available.Wealso send out a series of collection letters centrally which are automaticallytriggered based on a set of pre-determined criteria.

***Selected Operating Data***

Thefollowing table presents key operating data for our business:

| ** **                                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of centers open  at end of period                                                            |       | 2,408                                      |       | 2,604 |   | 2,853 |   |
| Number of customers  served—all credit products (thousands)                                    |       | 1,412                                      |       | 1,534 |   | 1,494 |   |
| Number of payday cash  advances originated (thousands)                                              |       | 11,586                                     |       | 11,620 |   | 11,539 |   |
| Aggregate principal  amount of payday cash advances originated (thousands)                          |       | $                                          | 3,804,096  |   | $ | 3,943,815 |   | $ | 4,082,865 |   |
| Average amount of payday  cash advance originated                                                   |       | $                                          | 328        |   | $ | 339 |   | $ | 353 |   |
| Average charge to  customers for providing and processing a payday cash advance                     |       | $                                          | 52         |   | $ | 55 |   | $ | 55 |   |
| Average duration of a  payday cash advance (days)                                                   |       | 15.4                                       |       | 15.8 |   | 16.2 |   |
| Average number of lines  of credit outstanding during the period (thousands)                        |       | —                                     |       | — |   | 20 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period (thousands) |       | —                                     |       | — |   | $ | 8,963 |   |
| Average principal amount  on lines of credit outstanding during the period                          |       | —                                     |       | — |   | $ | 448 |   |
| Number of installment  loans originated (thousands)                                                 |       | —                                     |       | 68 |   | 29 |   |
| Aggregate principal  amount of installment loans originated (thousands)                             |       | —                                     |       | $ | 34,541 |   | $ | 13,905 |   |
| Average amount of  installment loan originated.                                                     |       | —                                     |       | $ | 508 |   | $ | 486 |   |
| Average charge to customers for providing and  processing an installment loan(1)                    |       | —                                     |       | $ | 337 |   | $ | 357 |   |

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(1)          Thiscalculation for 2006 excludes the Illinois installment loan product which wasrolled out in October 2006 because that product was not available long enoughfor an average charge in Illinois to be determined.

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***Revenues andExpenses***

Wehave historically derived our revenues from (1) fees and/or interest paidto us directly by our customers under the standard business model and(2) marketing, processing and servicing fees paid to us by the lendingbanks under the former agency business model. Ourtotal revenues for the years ended December 31, 2004, 2005 and 2006consisted of (dollars in millions):

| ** **                                | ** ** | **2004**    | ** ** | **2005** | ** ** | **2006**    | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|-------------|------------|
| ** **                                | ** ** | **Dollars** | ** ** | **%**    | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest  charged to customers   |       | $           | 430.9      |     | 75.6       |        | $          | 530.0 |   | 84.1 |   | $ | 659.9 |   | 98.2 |   |
| Marketing,  processing and servicing fees |       | 139.3       |       | 24.4     |       | 100.1       |       | 15.9 |   | 12.4 |   | 1.8 |   |
| Total revenues                            |       | $           | 570.2      |     | 100.0      |        | $          | 630.1 |   | 100.0 |   | $ | 672.3 |   | 100.0 |   |

 

Our expenses relate primarilyto the operation of our centers. These expenses include salaries and relatedpayroll costs, occupancy expense related to our leased centers, centerdepreciation expense, advertising expense and other center expenses thatconsist principally of costs related to center closings, communications,delivery, supplies, travel, bank charges, various compliance and collectioncosts and costs associated with theft.

***Former AgencyBusiness Model***

In March 2005, theFDIC issued revised guidance (the “Revised Guidance”) to FDIC supervisedinstitutions that offered payday cash advances, including the lending banks forwhich we then acted as a marketing, processing and servicing agent. The RevisedGuidance materially constrained payday lending under the agency business modeland, despite the introduction of installment loans by the lending banks,significantly reduced our marketing, processing and servicing fees during 2005.In response to the Revised Guidance, in June and July 2005, wemodified our MP&S Agreements in Arkansas, North Carolina and Pennsylvaniaand started operating in Texas and Michigan under existing state-basedlegislation. In response to an order from the North Carolina Commissioner ofBanks, we closed all of our centers in North Carolina in December 2005.

In February 2006, theFDIC instructed the lending banks, including those for which we still acted asa marketing, processing and servicing agent in Pennsylvania and Arkansas, todiscontinue offering payday cash advances and installment loans if they couldnot adequately address the FDIC’s continued concerns. In response, the lendingbanks in Pennsylvania and Arkansas stopped originating payday cash advances andinstallment loans and our marketing, processing and servicing fees completelyeroded during the second and third quarters of 2006. During June 2006, webegan operating in Pennsylvania and Arkansas pursuant to existing state-basedlegislation under the standard business model. As a result, we now operateunder the standard business model in all of our centers.

*Conversion of Operationsin Michigan and Texas.**  *EffectiveJune 26, 2005, we terminated our MP&S Agreement with the lending bankfor Michigan. Under the prior MP&S Agreement, the lending bank recordedadvances and fees receivable on its balance sheet and was contractuallyobligated for a portion of the losses on uncollectible accounts. Therefore, ourbalance sheet included, as an accrual for excess bank losses, the amount bywhich estimated losses exceeded the lending bank’s contractual obligation. Inconnection with terminating this MP&S Agreement, we purchased payday cashadvance accounts receivable for approximately $7.7 million. As a result, thelending bank no longer had any obligations for losses with respect to thoseaccounts.

After terminating ourprior MP&S Agreement for Michigan, we began offering check-cashing anddeferred-presentment services directly to customers in Michigan. Theprofitability of our check-cashing and deferred-presentment business andaverage fees, check amounts and duration for which we held checks was similarto what we historically experienced under the standard business model.****Because of the 

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adoptionof a new affirmative payday lending law in Michigan, we began offering paydaycash advances in Michigan in June 2006. Due to the limits on fees andcharges included in that law, we expect that our revenues in Michigan will belower, at least initially, than our historical experience under the standardbusiness model.

In the beginning ofJuly 2005, we terminated our prior MP&S Agreement with the lendingbank for Texas and began conducting business in that state through a whollyowned subsidiary that has registered as a Credit Services Organization (“CSO”)under Texas law. As a CSO, we offer a fee-based credit services package toassist customers in trying to improve their credit and in obtaining anextension of consumer credit through a third-party lender. A credit servicesorganization agreement (“CSO Agreement”) that we entered into with anunaffiliated third-party lender governs the terms by which we refer customersin Texas to that lender, on a non-exclusive basis, for a possible extension ofcredit, process loan applications and commit to reimburse the lender for anyloans or related fees that are not collected from such customers.

Under our former MP&SAgreement with the lending bank in Texas, the lending bank was contractuallyobligated for a portion of the losses on uncollectible accounts, whichhistorically had been sufficient to cover all losses incurred. Under the CSOAgreement, we are contractually obligated for all losses incurred by the lenderwith respect to loans it makes to customers referred by us.

*Conversion of Operationsin Pennsylvania and Arkansas.**  *Inresponse to instructions from the FDIC, the lending bank for Pennsylvaniaceased its payday cash advance and installment loan originations as of theclose of business on March 27, 2006. As a result, our revenues and centergross profits from Pennsylvania significantly decreased during the secondquarter. Through August 28, 2006, we continued to service all of thislending bank’s payday cash advances and installment loans that were outstandingas of March 27, 2006.****InJune 2006, we began offering the Advance America Choice-Line of Credit(“Choice-Line”) in Pennsylvania. The Choice-Line product allows customersaccess to up to $500 in credit for a monthly participation fee plus interest onoutstanding loan balances. We expect the profitability and cash flows ofoperating under state-based legislation to be similar to historic levels.

Thefollowing is a summary of financial information for our operations inPennsylvania for the years ended December 31, 2004, 2005 and 2006 (inthousands):

| ** **             | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net revenues           |       | $        | 39,421     |     | $          | 35,083   |       | $ | 24,531 |   |
| Total center  expenses |       | 15,481   |       | 16,038   |       | 14,502   |       |
| Center gross profit    |       | $        | 23,940     |     | $          | 19,045   |       | $ | 10,029 |   |

 

In addition, the lendingbank for Arkansas discontinued offering installment loans onApril 8, 2006 and discontinued offering payday cash advances onJune 24, 2006. As a result, our revenues and center gross profits inArkansas also deteriorated significantly during the second quarter. Wecontinued, through September 8, 2006, to service all of this lendingbank’s payday cash advances and installment loans that were outstanding as ofthese dates. In June 2006, we began operating in Arkansas under existingstate-based legislation and directly providing check-cashing services tocustomers in Arkansas. We expect the profitability and cash flows of operatingunder state-based legislation to be similar to historic levels.

The following is a summaryof financial information for our operations in Arkansas for the years ended December 31,2004, 2005 and 2006 (in thousands):

| ** **            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Net revenues          |       | $        | 6,638      |     | $          | 6,073    |       | $ | 4,427 |   |
| Total center expenses |       | 3,741    |       | 4,134    |       | 3,742    |       |
| Center gross profit   |       | $        | 2,897      |     | $          | 1,939    |       | $ | 685 |   |

 

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***Closings***

*Closing of Operations in North Carolina.**  *In August 2004, the North Carolina AttorneyGeneral’s office, in conjunction with the Commissioner of Banks for NorthCarolina, commanded an investigation of the agency business model operations ofour centers in North Carolina. In September 2005, the lending bank forNorth Carolina suspended its payday cash advance and installment loanoriginations. On December 22, 2005, the North Carolina Commissioner ofBanks issued an order directing us to cease operation of our centers in thestate. As a result, we ceased all of our business activities and closed ourcenters in North Carolina.

The following is a summaryof financial information for our operations in North Carolina for the yearsended December 31, 2004, 2005 and 2006 (in thousands):

| ** **                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net revenues               |       | $        | 26,450     |     | $          | 17,856   |       | $ | (35 | ) |
| Total center expenses      |       | 15,889   |       | 16,118   |       | 985      |       |
| Center gross profit/(loss) |       | $        | 10,561     |     | $          | 1,738    |       | $ | (1,020 | ) |

 

***New centers***

We opened 469, 361 and 302 new centers in the yearsended December 31, 2004, 2005 and 2006, respectively. The capital cost ofopening a new center varies depending on the size and type of center, buttypically averages approximately $40,000. This capital cost includes leaseholdimprovements, signage, fixtures, furniture, computer equipment and a securitysystem. In addition, the typical center that has been operating for at least24 months under the standard business model requires average workingcapital of approximately $87,000 to fund the center’s advance portfolio.

For the 1,160 centers opened in 2003, 2004 and 2005,1,083 centers remain open as of December 31, 2006. Of these, 909 havereached the point where, for at least one month, the center generatedsufficient revenues to cover the center’s expenses exclusive of corporateoverhead (the “Breakeven Point”). The amount of time that it takes for a centerto reach this Breakeven Point is affected by a number of factors including, butnot limited to, the time of the year the center opens, the seasonal nature ofthe business and the regulatory environment of the state in which the center isopened. It is not uncommon for a center that has reached the Breakeven Point totemporarily drop below that point and then again exceed the Breakeven Point.Given the relatively fixed nature of most center expenses, the main determinantof the Breakeven Point for a given center is the number of advancesoutstanding.

On average, the 909 centers reached the BreakevenPoint between their ninth and fourteenth month of operations and had, onaverage, approximately 115 advances outstanding at that time. Cumulativeoperating losses to breakeven for these centers averaged approximately $63,000.We have experienced a general trend of an increase in the time it takes acenter to reach the Breakeven Point and, consequently, an increase in thecumulative operating losses to breakeven.

The remaining 174 centers opened in 2003, 2004 and2005 have yet to reach the Breakeven Point. These 174 centers are, on average,approximately 20 months old at December 31, 2006. At December 31,2006, a seasonally high point in advances outstanding, these centers had, onaverage, approximately 87 advances outstanding. Cumulative operating losses todate for these centers averaged approximately $118,000.

Approximately 70% of the 302 centers we opened in 2006were opened in the last half of the year. As a result, we do not havesufficient data to determine average Breakeven Points for those centers.

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We will need to generateadequate capital internally or have adequate availability under our revolvingcredit facility to fund our growth, primarily the capital cost of the newcenters, the working capital required to fund the loan portfolio and the fundingof losses prior to the Breakeven Point. In addition, depending upon when andhow many new centers we open during any period, the losses incurred before anew center breaks even may significantly impact our results of operations.

***Closed centers***

We suspended operations inGeorgia during 2004 and in North Carolina during 2005. We closed 14 (including3 in Georgia), 251 (including 86 in Georgia and 118 in North Carolina) and 53centers in 2004, 2005 and 2006, respectively. The expenses related to closingcenters typically include the undepreciated costs of fixtures and signage thatcannot be moved and reused at another center, moving costs, severance paymentsand any lease cancellation costs. We recorded expenses related to center closuresof approximately $0.1 million, $5.1 million and $1.3 million in 2004,2005 and 2006, respectively.

***Principles of consolidation***

Our consolidated financialstatements include the accounts of Advance America, Cash AdvanceCenters, Inc., all of our wholly owned subsidiaries and, prior to itsacquisition on December 21, 2004, our one consolidated special purposeentity related to our corporate headquarters. At December 31, 2005 and2006, our consolidated financial statements also include the accounts of avariable interest entity (the third-party lender’s subsidiary related to ourCSO operations in Texas) for which we are the primary beneficiary. Allsignificant intercompany balances and transactions have been eliminated.

***Seasonality***

Our business is seasonaldue to the impact of fluctuating demand for advances and fluctuating collectionrates throughout the year. Demand has historically been highest in the thirdand fourth quarters of each year, corresponding to the back-to-school andholiday seasons, and lowest in the first quarter of each year, corresponding toour customers’ receipt of income tax refunds. Our provision for doubtfulaccounts and agency bank losses, allowance for doubtful accounts and accrualfor excess bank losses are historically lowest as a percentage of revenues inthe first quarter of each year, corresponding to customers’ receipt of incometax refunds, and increase as a percentage of revenues for the remainder of eachyear.

**Critical Accounting Policies and Use of Estimates**

In the ordinary course ofbusiness, we have made a number of estimates and assumptions relating to thereporting of our results of operations and financial condition in thepreparation of our financial statements in conformity with generally acceptedaccounting principles in the United States (“GAAP”). We evaluate theseestimates on an ongoing basis and we base these estimates on the informationcurrently available to us and on various other assumptions that we believe arereasonable under the circumstances. Actual results could vary from theseestimates under different assumptions or conditions.

We believe that thefollowing critical accounting policies affect the more significant estimatesand assumptions used in the preparation of our financial statements:

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

We believe the mostsignificant estimates made in the preparation of our accompanying consolidatedfinancial statements relate to the determination of an allowance for doubtfulaccounts for estimated probable losses under the standard business model (andthe amount we historically accrued for probable excess bank losses under theformer agency business model).

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The allowance for doubtfulaccounts is (and the accrual for excess bank losses was) primarily based uponmodels that analyze specific portfolio statistics and also reflect, to a lesserextent, management’s judgment regarding overall accuracy. The analytical modelstake into account several factors including the number of transactionscustomers complete and charge-off and recovery rates. Additional factorssuch as changes in state laws, center closings, length of time centers havebeen open in a state, relative mix of new centers within a state and otherrelevant factors are also evaluated to determine whether the results from theanalytical models should be revised. For those states where we operate underthe standard business model, we record this estimate of probable losses onreceivables as a reduction of advances and receivables, net on our balancesheet.

For those states where wepreviously operated as a marketing, processing and servicing agent for alending bank under the former agency business model, the estimate of probablelosses was reduced by the lending bank’s contractual obligation for such lossesto arrive at an estimate of excess loan losses. We recorded this as an accrualfor excess bank losses, a current liability on our balance sheet.

We have charged theportion of advances and fees deemed to be uncollectible against the allowancefor doubtful accounts (or the accrual for excess bank losses) and credited anysubsequent recoveries to the allowance for doubtful accounts (or the accrualfor excess bank losses).

Under the standardbusiness model, unpaid advances and the related fees and/or interest aregenerally charged off 60 days after the date the check was returned by thecustomer’s bank for non-sufficient funds or other reasons, unless the customerhas paid at least 15% of the total of his or her loan plus original fee. Underthe agency business model, unpaid payday cash advances and the related fees and/orinterest generally were charged off 60 days from the due date and unpaidinstallment loans and the related fees and/or interest generally were chargedoff 60 days from the deposit date if the check was returned by the customer’sbank for non-sufficient funds or other reasons. Under either model, unpaidadvances of customers who file for bankruptcy are charged off upon receipt ofthe bankruptcy notice. Although management uses the best information availableto make evaluations, future adjustments to the allowance for doubtful accountsmay be necessary if conditions differ substantially from our assumptions usedin assessing their adequacy.

Our business experiencescyclicality in receivable balances from both the time of year and the day ofthe week. Fluctuations in receivable balances result in a corresponding impacton the allowance for doubtful accounts (and the accrual for excess bank losses).

Our receivables aretraditionally lower at the end of the first quarter, corresponding to taxrefund season, and reach their highest level during the last week of December.

In addition to theseasonal fluctuations, the receivable balances can fluctuate throughout a week,generally being at their highest levels on a Wednesday or Thursday and at theirlowest levels on a Friday. In general, receivable balances decreaseapproximately 4% to 7% from a typical Thursday to a typical Friday. The year2005 began on a Saturday (a relative low point in weekly receivable balances)and ended on a Saturday (a relative low point in weekly receivable balances).The year 2006 began on a Sunday (a relative low point in weekly receivablebalances) and ended on a Sunday (a relative low point in weekly receivablebalances).

To the extent historicalcredit experience is not indicative of future performance or other assumptionsused by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts. As of December 31, 2006, if average default rates were5% higher or lower, the allowance for doubtful accounts would change byapproximately $2.9 million.

***Intangible Assets***

As a result of ouracquisition of the National Cash Advance group of affiliated companies inOctober 1999, we recorded approximately $143.0 million of goodwill.Due to the significance of goodwill 

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and thereduction of net income that would occur if goodwill were impaired, we assessthe impairment of our long-lived and intangible assets annually or whenever eventsor changes in circumstances indicate that the carrying value may not berecoverable. Factors considered important that could trigger an impairmentreview include significant underperformance relative to historical or projectedfuture cash flows, significant changes in the manner of use of the acquiredassets or the strategy of the overall business and significant negativeindustry trends. To identify potential impairment, we compare the fair value ofa reporting unit with its carrying amount, including goodwill. If the fairvalue of a reporting unit does not exceed its carrying amount, we measure theamount of impairment loss by comparing the implied fair value of the reportingunit’s goodwill with the carrying amount of that goodwill. The amount of anyimpairment would lower our net income.

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

Accrued liabilities in ourDecember 31, 2005 and 2006 financial statements include accruals ofapproximately $3.4 million and $3.5 million, respectively, for the self-insuredportion of our health and dental insurance and approximately $4.1 millionand $3.8 million, respectively, for workers’ compensation. We recognizeour obligations associated with those benefits in the period the claim isincurred. The costs of both reported claims and claims incurred but notreported, up to specified deductible limits, are estimated based on historicaldata, current enrollment, employee statistics and other information. We reviewestimates and periodically update our estimates and the resulting reserves andany necessary adjustments are reflected in earnings currently. To the extenthistorical claims are not indicative of future claims, there are changes inenrollment or employee history, workers’ compensation loss development factorschange or other assumptions used by management do not prevail, our expense andrelated accrued liabilities could increase or decrease.

***Consolidation ofVariable Interest Entity***

In connection with our CSOoperations in Texas, we entered into an agreement with an unaffiliatedthird-party lender. We have determined that the third-party lender is avariable interest entity (“VIE”) under Financial Accounting Standards BoardInterpretation No. 46 (Revised) (“FIN 46(R)”). We have neither an equityinterest nor voting rights in the lender and have no input into the managementof the lender. However, we determined that we are the primary beneficiary ofthe VIE because we have committed to reimburse the lender for the full amountsof the loans and all related fees that are not paid by the customers. As aresult, we have consolidated the lender as of December 31, 2005 and 2006.See “Item 8. Financial Statements and Supplementary Data—Note 16. Transactionswith Variable Interest Entity” for the impact of adopting FIN 46(R) on ourresults of operations and financial condition.

***Accounting forStock-Based Employee Compensation***

In 2004, we adoptedStatement of Financial Accounting Standards No. 123 (Revised), Share-BasedPayment (“SFAS 123(R)”). Accordingly, we measure the cost of our stock-basedemployee compensation at the grant date based on fair value and recognize suchcost in the financial statements over each award’s requisite service period. Asof December 31, 2006, the total compensation cost not yet recognized relatedto nonvested stock awards under our stock-based employee compensation plans isapproximately $10.3 million. The weighted average period over which thisexpense is expected to be recognized is approximately 5.7 years. See “Item 8.Financial Statements and Supplementary Data—Note 11. Stock-Based CompensationPlans” for a description of our restricted stock and stock option awards andthe assumptions used to calculate the fair value of such awards including theexpected volatility assumed in valuing our stock option grants.

48

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**Results ofOperations**

***Year EndedDecember 31, 2005 Compared to the Year Ended December 31, 2006***

Thefollowing tables set forth our results of operations for the year endedDecember 31, 2005 compared to the year ended December 31, 2006:

| ** **                                                     | ** ** | **Year Ended December 31,**                                     | ** ** | ** **               | ** ** | ** **   | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------|------------|--------------|------------|
| ** **                                                     | ** ** | **2005**                                                                       | ** ** | **2006**                 | ** ** | **Variance** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                                                    | ** ** | **% Net  Revenues** | ** ** | **Dollars**  | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Revenues:**                                                  |       |                                                                           |       |                     |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                                              | 529,953    |                     |       | 102.9        | %          |   | $ | 659,876 |   |   | 119.7 | % |   | $ | 129,923 |   | 24.5 | % |
| Marketing, processing  and servicing fees                      |       | 100,113                                                                        |       |                     | 19.4       | %            |       | 12,418 |   |   | 2.2 | % |   | (87,695 | ) | (87.6 | )% |
| Total revenues                                                 |       | 630,066                                                                        |       |                     | 122.3      | %            |       | 672,294 |   |   | 121.9 | % |   | 42,228 |   | 6.7 | % |
| Provision for doubtful  accounts and agency bank losses        |       | (115,060                                                                       | )          |                     | (22.3      | )%           |       | (120,855 | ) |   | (21.9 | )% |   | 5,795 |   | 5.0 | % |
| Net revenues                                                   |       | 515,006                                                                        |       |                     | 100.0      | %            |       | 551,439 |   |   | 100.0 | % |   | 36,433 |   | 7.1 | % |
| **Center Expenses:**                                           |       |                                                                           |       |                     |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                            |       | 171,092                                                                        |       |                     | 33.2       | %            |       | 185,938 |   |   | 33.7 | % |   | 14,846 |   | 8.7 | % |
| Occupancy costs                                                |       | 80,540                                                                         |       |                     | 15.6       | %            |       | 87,276 |   |   | 15.8 | % |   | 6,736 |   | 8.4 | % |
| Center depreciation  expense                                   |       | 14,902                                                                         |       |                     | 2.9        | %            |       | 16,233 |   |   | 3.0 | % |   | 1,331 |   | 8.9 | % |
| Advertising expense                                            |       | 24,137                                                                         |       |                     | 4.7        | %            |       | 20,375 |   |   | 3.7 | % |   | (3,762 | ) | (15.6 | )% |
| Other center expenses                                          |       | 52,712                                                                         |       |                     | 10.2       | %            |       | 54,986 |   |   | 10.0 | % |   | 2,274 |   | 4.3 | % |
| Total center expenses                                          |       | 343,383                                                                        |       |                     | 66.6       | %            |       | 364,808 |   |   | 66.2 | % |   | 21,425 |   | 6.2 | % |
| Center gross profit                                            |       | 171,623                                                                        |       |                     | 33.4       | %            |       | 186,631 |   |   | 33.8 | % |   | 15,008 |   | 8.7 | % |
| **Corporate and Other Expenses (Income):**                     |       |                                                                           |       |                     |       |         |       |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses                           |       | 51,758                                                                         |       |                     | 10.0       | %            |       | 53,363 |   |   | 9.7 | % |   | 1,605 |   | 3.1 | % |
| Corporate depreciation  expense                                |       | 4,483                                                                          |       |                     | 0.9        | %            |       | 3,661 |   |   | 0.6 | % |   | (822 | ) | (18.3 | )% |
| Interest expense                                               |       | 4,331                                                                          |       |                     | 0.9        | %            |       | 7,129 |   |   | 1.3 | % |   | 2,798 |   | 64.6 | % |
| Interest income                                                |       | (351                                                                           | )          |                     | —     |         |       | (538 | ) |   | (0.1 | )% |   | (187 | ) | (53.3 | )% |
| Loss on disposal of  property and equipment                    |       | 715                                                                            |       |                     | 0.1        | %            |       | 960 |   |   | 0.2 | % |   | 245 |   | 34.3 | % |
| Loss on impairment of  assets                                  |       | 2,918                                                                          |       |                     | 0.6        | %            |       | — |   |   | — |   |   | (2,918 | ) | (100.0 | )% |
| Total corporate and  other expenses                            |       | 63,854                                                                         |       |                     | 12.5       | %            |       | 64,575 |   |   | 11.7 | % |   | 721 |   | 1.1 | % |
| Income before income  taxes                                    |       | 107,769                                                                        |       |                     | 20.9       | %            |       | 122,056 |   |   | 22.1 | % |   | 14,287 |   | 13.3 | % |
| Income tax expense                                             |       | 43,776                                                                         |       |                     | 8.5        | %            |       | 48,858 |   |   | 8.9 | % |   | 5,082 |   | 11.6 | % |
| Income before income of  consolidated variable interest entity |       | 63,993                                                                         |       |                     | 12.4       | %            |       | 73,198 |   |   | 13.2 | % |   | 9,205 |   | 14.4 | % |
| Income of consolidated  variable interest entity               |       | (1,003                                                                         | )          |                     | (0.2       | )%           |       | (3,047 | ) |   | (0.5 | )% |   | 2,044 |   | 203.8 | % |
| Net income                                                     |       | $                                                                              | 62,990     |                     |       | 12.2         | %          |   | $ | 70,151 |   |   | 12.7 | % |   | $ | 7,161 |   | 11.4 | % |

 

49

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| ** **                                                                                           | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                               | ** ** | **2006** | ** ** |
| **Center Information:**                                                                              |       |                                   |       |   |   |
| Number of centers  open at beginning of period                                                       |       | 2,408                                  |       | 2,604 |   |
| Opened                                                                                               |       | 358                                    |       | 302 |   |
| Acquired                                                                                             |       | 3                                      |       | — |   |
| Closed (excluding Georgia)                                                                           |       | (165                                   | )          | (53 | ) |
| Number of centers  open at end of period                                                             |       | 2,604                                  |       | 2,853 |   |
| Weighted average  number of centers open during the period                                           |       | 2,487                                  |       | 2,663 |   |
| Number of  customers served—all credit products (thousands)                                     |       | 1,534                                  |       | 1,494 |   |
| Number of payday  cash advances originated (thousands)                                               |       | 11,620                                 |       | 11,539 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)                           |       | $                                      | 3,943,815  |   | $ | 4,082,865 |   |
| Average amount of  payday cash advance originated                                                    |       | $                                      | 339        |   | $ | 353 |   |
| Average charge to  customers for providing and processing a payday cash advance                      |       | $                                      | 55         |   | $ | 55 |   |
| Average duration  of a payday cash advance (days)                                                    |       | 15.8                                   |       | 16.2 |   |
| Average number of  lines of credit outstanding during the period (thousands)                         |       | —                                 |       | 20 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) |       | —                                 |       | $ | 8,963 |   |
| Average principal  amount on lines of credit outstanding during the period                           |       | —                                 |       | $ | 448 |   |
| Number of  installment loans originated (thousands)                                                  |       | 68                                     |       | 29 |   |
| Aggregate  principal amount of installment loans originated (thousands)                              |       | $                                      | 34,541     |   | $ | 13,905 |   |
| Average amount of  installment loan originated                                                       |       | $                                      | 508        |   | $ | 486 |   |
| Average charge to  customers for providing and processing an installment loan(1)                     |       | $                                      | 337        |   | $ | 357 |   |

----

(1)          Thiscalculation for 2006 excludes the Illinois installment loan product which wasrolled out in October 2006 because that product was not avaliable longenough for an average charge in Illinois to be determined.

| ** **                                                                            | ** ** | **Year Ended December 31,** | ** ** | ** **                     | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------|------------|--------------|------------|
| ** **                                                                            | ** ** | **2005**                                   | ** ** | **2006**                       | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                | ** ** | **% Net   Revenues** | ** ** | **Dollars**  | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**       | ** ** |
| **Per  Center (based on weighted average number of centers open during the period):** |       |                                       |       |                           |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       | $                                          | 207.1      |                           |       | 100.0        | %          |   | $ | 207.1 |   |   | 100.0 | % |   |   | $ | — |   |   | — |   |
| Center expenses:                                                                      |       |                                       |       |                           |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 68.8                                       |       |                           | 33.2       | %            |       | 69.8 |   |   | 33.7 | % |   |   | 1.0 |   |   | 1.5 | % |
| Occupancy costs                                                                       |       | 32.4                                       |       |                           | 15.6       | %            |       | 32.8 |   |   | 15.8 | % |   |   | 0.4 |   |   | 1.2 | % |
| Center depreciation expense                                                           |       | 6.0                                        |       |                           | 2.9        | %            |       | 6.1 |   |   | 3.0 | % |   |   | 0.1 |   |   | 1.7 | % |
| Advertising expense                                                                   |       | 9.7                                        |       |                           | 4.7        | %            |       | 7.7 |   |   | 3.7 | % |   |   | (2.0 | ) |   | (20.6 | )% |
| Other center expenses                                                                 |       | 21.2                                       |       |                           | 10.2       | %            |       | 20.6 |   |   | 10.0 | % |   |   | (0.6 | ) |   | (2.8 | )% |
| Total center expenses                                                                 |       | 138.1                                      |       |                           | 66.6       | %            |       | 137.0 |   |   | 66.2 | % |   |   | (1.1 | ) |   | (0.8 | )% |
| Center gross profit                                                                   |       | $                                          | 69.0       |                           |       | 33.4         | %          |   | $ | 70.1 |   |   | 33.8 | % |   |   | $ | 1.1 |   |   | 1.6 | % |

 

50

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***Revenue Analysis***

Total revenues increased approximately$42.2 million in 2006. The increase wasprimarily due to the opening of new centers and revenue growth in existingcenters. Total revenues for the 2,195 centers opened prior to January 1,2005 and still open as of December 31, 2006 increased $35.5 millionfrom $586.4 million in 2005 to $621.9 million in 2006. Total revenues forthe 658 centers opened after January 1, 2005 and still open as of December 31,2006 increased $39.7 million from $7.7 million in 2005 to $47.4 million in2006. Total revenues for the remaining 304 centers that closed represented adecrease of approximately $33.0 million for 2006 compared to 2005. Thisdecrease is primarily due to the suspension and subsequent closure ofoperations in North Carolina during the fourth quarter of 2005.

In addition to theclosed centers mentioned in the preceding paragraph, the increase in totalrevenues in 2006 was partially offset by:

·       theimplementation of the FDIC Revised Guidance in Pennsylvania and Arkansasbeginning during the third quarter of 2005 and the lending banks’ suspension oforiginations in the first half of 2006. Total revenues in 2006 in Pennsylvaniaand Arkansas were approximately $14.7 million less than 2005;

·       theimplementation of material changes in enabling legislation in Illinois andIndiana. Total revenues in 2006 in Illinois and Indiana were approximately$14.3 million less than 2005; and

·       thecontinued impact of Hurricanes Katrina and Rita in Louisiana and Mississippi.Total revenues in 2006 in Louisiana and Mississippi were approximately$2.1 million less than 2005.

As a percentage of totalrevenues, the provision for doubtful accounts and agency bank losses decreasedto 18.0% in 2006 from 18.3% in 2005. During 2006 and 2005, we sold certaincustomer accounts receivable to a collection agency, which generated proceedsof approximately $4.7 million and $3.7 million, respectively, which wererecorded as a reduction in the provision in both years.

***Center ExpenseAnalysis***

*Salariesand related payroll costs.**  *The increase in salaries and related payroll costs in2006 was due primarily to the new centers opened in 2005 and 2006. We averagedapproximately 2.14 and 2.18 full-time equivalent field employees, includingdistrict directors, per center during 2005 and 2006, respectively.

*Occupancycosts, center depreciation expense and other center expenses.**  *The increases in occupancy costs,center depreciation expense and other center expenses in 2006 were due primarilyto the new centers opened in 2005 and 2006.

*Advertising expense.**  *Advertising expense decreased in2006 compared to 2005 due primarily to a decision to conduct less advertisingduring the first three quarters of 2006.

***Corporate and OtherExpense (Income) Analysis***

*General and administrativeexpenses.**  *Theincrease in general and administrative expenses in 2006 was due primarily to:

·       approximately$2.5 million of additional expense related to personnel, consulting andother costs associated with new product development;

·       anincrease in stock-based compensation expense of approximately $1.2 million;

·       increasesin costs in our human resources department of approximately $0.6 millionrelated to additional department headcount and approximately $0.7 millionfor recruiting and employee relocation costs;

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·       anincrease of approximately $0.7 million related to additional headcount inour real estate and construction departments; partially offset by

·       adecrease in airplane operating expenses of approximately $1.6 million;

·       adecrease in legal fees of approximately $1.5 million; and

·       adecrease in accounting fees and other expenses of approximately $0.7 millionrelated to SEC reporting and compliance.

*Losson impairment of assets.**  *The loss on impairment of assets in 2005 represents awrite-down of approximately $1.5 million to market value of an aircraft wesold in October 2005, a write-down of approximately $0.4 million ofthe undepreciated costs of certain fixed assets in our centers identified forclosure, as well as the write-down of approximately $1.0 million of theundepreciated costs of our 117 centers in North Carolina, which we closed atthe end of 2005.

52

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***Year EndedDecember 31, 2004 Compared to the Year Ended December 31, 2005***

Thefollowing tables set forth our results of operations for the year endedDecember 31, 2004 compared to the year ended December 31, 2005:

| ** **                                                     | ** ** | **Year Ended December 31,**                                     | ** ** | ** **     | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                     | ** ** | **2004**                                                                       | ** ** | **2005**       | ** ** | **Variance** | ** ** |
| ** **                                                     | ** ** | ** **                                                                     | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                                                    | ** ** | **Revenues**   | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Revenues:**                                                  |       |                                                                           |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                                              | 430,859    |           |       | 89.6 | % |   | $ | 529,953 |   |   | 102.9 | % |   | $ | 99,094 |   | 23.0 | % |
| Marketing,  processing and servicing fees                      |       | 139,329                                                                        |       |           | 29.0       | % |   | 100,113 |   |   | 19.4 | % |   | (39,216 | ) | (28.1 | )% |
| Total revenues                                                 |       | 570,188                                                                        |       |           | 118.6      | % |   | 630,066 |   |   | 122.3 | % |   | 59,878 |   | 10.5 | % |
| Provision for  doubtful accounts and agency bank losses        |       | (89,236                                                                        | )          |           | (18.6      | )% |   | (115,060 | ) |   | (22.3 | )% |   | 25,824 |   | 28.9 | % |
| Net revenues                                                   |       | 480,952                                                                        |       |           | 100.0      | % |   | 515,006 |   |   | 100.0 | % |   | 34,054 |   | 7.1 | % |
| **Center Expenses:**                                           |       |                                                                           |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll   costs                           |       | 160,047                                                                        |       |           | 33.3       | % |   | 171,092 |   |   | 33.2 | % |   | 11,045 |   | 6.9 | % |
| Occupancy costs                                                |       | 67,305                                                                         |       |           | 14.0       | % |   | 80,540 |   |   | 15.6 | % |   | 13,235 |   | 19.7 | % |
| Center depreciation expense                                    |       | 13,719                                                                         |       |           | 2.9        | % |   | 14,902 |   |   | 2.9 | % |   | 1,183 |   | 8.6 | % |
| Advertising expense                                            |       | 26,082                                                                         |       |           | 5.4        | % |   | 24,137 |   |   | 4.7 | % |   | (1,945 | ) | (7.5 | )% |
| Other center expenses                                          |       | 47,087                                                                         |       |           | 9.8        | % |   | 52,712 |   |   | 10.2 | % |   | 5,625 |   | 11.9 | % |
| Total center expenses                                          |       | 314,240                                                                        |       |           | 65.4       | % |   | 343,383 |   |   | 66.6 | % |   | 29,143 |   | 9.3 | % |
| Center gross profit                                            |       | 166,712                                                                        |       |           | 34.6       | % |   | 171,623 |   |   | 33.4 | % |   | 4,911 |   | 2.9 | % |
| **Corporate and Other Expenses  (Income):**                    |       |                                                                           |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses                           |       | 44,102                                                                         |       |           | 9.2        | % |   | 51,758 |   |   | 10.0 | % |   | 7,656 |   | 17.4 | % |
| Corporate  depreciation expense                                |       | 3,942                                                                          |       |           | 0.8        | % |   | 4,483 |   |   | 0.9 | % |   | 541 |   | 13.7 | % |
| Interest expense                                               |       | 17,165                                                                         |       |           | 3.5        | % |   | 4,331 |   |   | 0.9 | % |   | (12,834 | ) | (74.8 | )% |
| Interest income                                                |       | (161                                                                           | )          |           | —     |   |   | (351 | ) |   | — |   |   | (190 | ) | (118.0 | )% |
| Loss on disposal  of property and equipment                    |       | 814                                                                            |       |           | 0.2        | % |   | 715 |   |   | 0.1 | % |   | (99 | ) | (12.2 | )% |
| Loss on  impairment of assets                                  |       | 1,288                                                                          |       |           | 0.2        | % |   | 2,918 |   |   | 0.6 | % |   | 1,630 |   | 126.6 | % |
| Transaction  related expense                                   |       | 2,466                                                                          |       |           | 0.5        | % |   | — |   |   | — |   |   | (2,466 | ) | (100.0 | )% |
| Total corporate and other expenses                             |       | 69,616                                                                         |       |           | 14.4       | % |   | 63,854 |   |   | 12.5 | % |   | (5,762 | ) | (8.3 | )% |
| Income before  income taxes                                    |       | 97,096                                                                         |       |           | 20.2       | % |   | 107,769 |   |   | 20.9 | % |   | 10,673 |   | 11.0 | % |
| Income tax  expense                                            |       | 14,041                                                                         |       |           | 2.9        | % |   | 43,776 |   |   | 8.5 | % |   | 29,735 |   | 211.8 | % |
| Income before  income of consolidated variable interest entity |       | 83,055                                                                         |       |           | 17.3       | % |   | 63,993 |   |   | 12.4 | % |   | (19,062 | ) | (23.0 | )% |
| Income of  consolidated variable interest entity               |       | —                                                                         |       |           | —     |   |   | (1,003 | ) |   | (0.2 | )% |   | (1,003 | ) | (100.0 | )% |
| Net income                                                     |       | $                                                                              | 83,055     |           |       | 17.3 | % |   | $ | 62,990 |   |   | 12.2 | % |   | $ | (20,065 | ) | (24.2 | )% |

 

53

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| ** **                                                                      | ** ** | **Year Ended**   | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **December 31,** | ** ** |
| ** **                                                                      | ** ** | **2004**              | ** ** | **2005** | ** ** |
| **Center  Information:**                                                        |       |                  |       |   |   |
| Number of centers  open at beginning of period                                  |       | 2,039                 |       | 2,408 |   |
| Opened                                                                          |       | 469                   |       | 358 |   |
| Acquired                                                                        |       | —                |       | 3 |   |
| Closed (excluding Georgia)                                                      |       | (11                   | )          | (165 | ) |
| Suspended (Georgia)                                                             |       | (89                   | )          | — |   |
| Number of centers  open at end of period                                        |       | 2,408                 |       | 2,604 |   |
| Weighted average  number of centers open during the period                      |       | 2,194                 |       | 2,487 |   |
| Number of  customers served—all credit products (thousands)                |       | 1,412                 |       | 1,534 |   |
| Number of payday  cash advances originated (thousands)                          |       | 11,586                |       | 11,620 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)      |       | $                     | 3,804,096  |   | $ | 3,943,815 |   |
| Average amount of  payday cash advance originated                               |       | $                     | 328        |   | $ | 339 |   |
| Average charge to  customers for providing and processing a payday cash advance |       | $                     | 52         |   | $ | 55 |   |
| Average duration  of a payday cash advance (days)                               |       | 15.4                  |       | 15.8 |   |
| Number of  installment loans originated (thousands)                             |       | —                |       | 68 |   |
| Aggregate  principal amount of installment loans originated (thousands)         |       | —                |       | $ | 34,541 |   |
| Average amount of  installment loan originated                                  |       | —                |       | $ | 508 |   |
| Average charge to  customers for providing and processing an installment loan   |       | —                |       | $ | 337 |   |

 

| ** **                                                                            | ** ** | **Year Ended December 31,** | ** ** | ** **     | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------|------------|
| ** **                                                                            | ** ** | **2004**                                   | ** ** | **2005**       | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | ** **                                 | ** ** | **% Net** | ** ** | ** ** | ** ** | **% Net** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                | ** ** | **Revenues**   | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**       | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                       |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       | $                                          | 219.2      |           |       | 100.0 | % |   | $ | 207.1 |   |   | 100.0 | % |   | $ | (12.1 | ) | (5.5 | )% |
| Center expenses:                                                                      |       |                                       |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 72.9                                       |       |           | 33.3       | % |   | 68.8 |   |   | 33.2 | % |   | (4.1 | ) | (5.6 | )% |
| Occupancy costs                                                                       |       | 30.7                                       |       |           | 14.0       | % |   | 32.4 |   |   | 15.6 | % |   | 1.7 |   | 5.5 | % |
| Center depreciation expense                                                           |       | 6.3                                        |       |           | 2.9        | % |   | 6.0 |   |   | 2.9 | % |   | (0.3 | ) | (4.8 | )% |
| Advertising expense                                                                   |       | 11.9                                       |       |           | 5.4        | % |   | 9.7 |   |   | 4.7 | % |   | (2.2 | ) | (18.5 | )% |
| Other center expenses                                                                 |       | 21.5                                       |       |           | 9.8        | % |   | 21.2 |   |   | 10.2 | % |   | (0.3 | ) | (1.4 | )% |
| Total center expenses                                                                 |       | 143.3                                      |       |           | 65.4       | % |   | 138.1 |   |   | 66.6 | % |   | (5.2 | ) | (3.6 | )% |
| Center gross profit                                                                   |       | $                                          | 75.9       |           |       | 34.6 | % |   | $ | 69.0 |   |   | 33.4 | % |   | $ | (6.9 | ) | (9.1 | )% |

 

***Revenue Analysis***

The increase in total revenues during 2005 wasprimarily due to the opening of new centers and the full year impact of the 469centers opened in 2004. Total revenues increased approximately $59.9 millionin 2005. Total revenues for the 1,801 centers opened prior to January 1,2004 and still open as of December 31, 2005 increased $29.1 millionfrom $512.7 million in 2004 to $541.8 million in 2005. Total revenuesfor the 803 centers opened after January 1, 2004 and still open as ofDecember 31, 2005 increased $49.2 million from $12.7 million in2004 to $61.9 million in 2005.

Total revenues for the 265 centers closed in 2004 and2005 represented a decrease of approximately $18.4 million for 2005compared to 2004. This decrease includes approximately $7.2 million fromour 89 

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Georgia centers for whichoperations were suspended in May 2004 and then subsequently permanentlyclosed.

In addition to theclosed centers mentioned in the preceding paragraph, the increase in totalrevenues in 2005 was partially offset by:

·       thesuspension and subsequent closure of operations in North Carolina during thefourth quarter of 2005. Total revenues in North Carolina were approximately$8.9 million less than 2004;

·       theimplementation of the FDIC’s Revised Guidance in Pennsylvania and Arkansas,beginning during the third quarter of 2005. The installment loan as offered bythe two lending banks generated approximately 50% of the revenue generated by apayday cash advance outstanding for the same period. During the fourth quarterof 2005, the ratio of installment loans to payday cash advances increased,impacting revenues even more significantly. Total revenues for the fourthquarter of 2005 in Pennsylvania and Arkansas were approximately $5.4 millionless than the fourth quarter of 2004; and

·       thetotal revenues lost during the fourth quarter of 2005 in the centers negativelyimpacted by Hurricanes Katrina and Rita were approximately $3.0 million.

As a percentage oftotal revenues, the provision for doubtful accounts and agency bank lossesincreased to 18.3% in 2005 from 15.7% in 2004. The increase in the provision isdue primarily to increased loss rates and was also impacted by the following:

·       acharge of approximately $4.2 million related to the contractual changes inTexas, Michigan, North Carolina and Arkansas;

·       anincrease in bankruptcy filings primarily during the fourth quarter of 2005 as aresult of the implementation of the amendments to the federal bankruptcy laws;

·       theconversion to the lending banks’ installment loan product resulting in higherthan normal denial rates on the lending banks’ customers who had exceeded their90-day limit of payday cash advances. This, coupled with the lowerrevenue generated by the lending banks’ installment loan product, resulted inan increase in losses as a percent of total revenues. During the fourth quarterof 2005, the losses as a percent of total revenues increased approximately 50%in Pennsylvania; and

·       theincrease in the provision was partially offset by the sale of certain customerdebt originated between September 2003 and September 2004. Theproceeds from the sale of debt were approximately $3.7 million and wererecorded as a reduction in the provision.

As a result of Hurricanes Katrina and Rita during thelast half of 2005, we incurred property and equipment losses and theinterruption of our business at certain centers. Accordingly, we recorded areceivable for insurance recoveries as of December 31, 2005 of $1.0 million,which is included as an other receivable in advances and receivables, net. Ofthis amount, approximately $0.8 million was recorded as a reduction of theprovision for doubtful accounts and agency bank losses.

The provision in 2004included an expense of approximately $1.3 million related to the expectedlosses in connection with the suspension of operations at our 89 Georgiacenters.

***Center ExpenseAnalysis***

*Salariesand related payroll costs.**  *Theincrease in salaries and related payroll costs in 2005 was due primarily to theaddition of 361 new centers in 2005 and the full year impact in 2005 of the 469centers opened in 2004. Salaries and related payroll costs per center decreasedin 2005 due primarily to lower bonus and health insurance expenses. We averagedapproximately 2.14 and 2.24 full-time equivalent field employees, includingdistrict directors, per center during 2005 and 2004, respectively.

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*Occupancycosts, center depreciation expense and other center expenses.**  *The increases in occupancy costs, center depreciationexpense and other center expenses in 2005 were due primarily to the addition ofnew centers in 2005 and the full year impact in 2005 of centers opened in 2004.

*Advertising expense.**  *Advertising expense decreased in 2005 due primarilyto a decision to conduct less advertising in Texas and the agency businessmodel states during the fourth quarter of 2005.

***Corporate and OtherExpense (Income) Analysis***

*General and administrativeexpenses.**  *Theincrease in general and administrative expenses in 2005 was due primarily to:

·       higherlegal fees of approximately $3.0 million primarily related to ongoinglegal issues in North Carolina and various other cases as well as costs todevelop the new installment loan and CSO products;

·       higherexpenses of approximately $2.2 million related to SEC reporting andcompliance as a result of becoming a public company;

·       anincrease in stock-based compensation expense of approximately $1.2 million;

·       higherinsurance expense of approximately $1.0 million, primarily directors andofficers insurance as a result of becoming a public company; and

·       expensesincurred to support the growth in the number of centers, offset by a decreasein airplane operating expenses.

*Interestexpense.**  *Thedecrease in interest expense is due to the repayment in the fourth quarter of2004 of all long-term debt with related parties and the reduction of advancesunder our revolving credit facility.

*Incometax expense.**  *Theincrease in 2005 income tax expense compared to 2004 is primarily due to ourconversion to a C corporation for tax purposes.

*Losson impairment of assets.**  *Losson impairment of assets in 2004 represents the write-down of the undepreciatedcosts of our Georgia centers for which we suspended operations in May 2004and subsequently permanently closed in the third quarter 2005. The loss onimpairment of assets in 2005 represents a write-down of approximately $1.5 millionto market value of an aircraft we sold in October 2005, a write-down ofapproximately $0.4 million of the undepreciated costs of certain fixedassets in our centers identified for closure, as well as the write-down ofapproximately $1.0 million of the undepreciated costs of our 117 centersin North Carolina, which we closed at the end of 2005.

*Transaction relatedexpense.**  *Transactionrelated expense in 2004 represents the cost associated with our initial publicoffering.

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**Liquidity andCapital Resources**

Thefollowing table presents a summary of cash flows for the years ended December 31,2004, 2005 and 2006:

| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005 vs 2004** | ** ** | **2006 vs 2005** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance**               | ** ** | **Variance**               | ** ** |
| ** **                                      | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **Dollars**                | ** ** | **%**                      | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Cash flows provided by  (used in):              |       |       |       |       |       |       |       |                       |       |                       |       |   |   |   |   |
| Operating activities                            |       | $          | 163,910    |       | $          | 189,382    |       | $                          | 186,125    |                       | $          | 25,472 |   | 15.5 | % | $ | (3,257 | ) | (1.7 | )% |
| Investing activities                            |       | (97,055    | )          | (139,880   | )          | (156,216   | )          | (42,825                    | )          | (44.1                      | )%         | (16,336 | ) | (11.7 | )% |
| Financing activities                            |       | (59,115    | )          | (40,467    | )          | 10,077     |       | 18,648                     |       | 31.5                       | %          | 50,544 |   | 124.9 | % |
| Net increase in  cash and cash equivalents      |       | 7,740      |       | 9,035      |       | 39,986     |       | 1,295                      |       | 16.7                       | %          | 30,951 |   | 342.6 | % |
| Cash and cash  equivalents, beginning of period |       | 10,484     |       | 18,224     |       | 27,259     |       | 7,740                      |       | 73.8                       | %          | 9,035 |   | 49.6 | % |
| Cash and cash  equivalents, end of period       |       | $          | 18,224     |       | $          | 27,259     |       | $                          | 67,245     |                       | $          | 9,035 |   | 49.6 | % | $ | 39,986 |   | 146.7 | % |

 

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

We borrow under our $265.0 million revolvingcredit facility to fund our advances and our other liquidity needs. Ourday-to-day balances under our revolving credit facility, as well as our cashbalances, vary because of seasonal and day-to-day requirements resulting frommaking and collecting advances. For example, if a month ends on a Friday (atypical payday), our borrowings and our cash balances will be high compared toa month that does not end on a Friday. This is because a substantial portion ofthe advances will be repaid in cash on that day but sufficient time will notyet have passed for the cash to reduce the outstanding borrowings under ourrevolving credit facility. Our borrowings under our revolving credit facilitywill also increase as the demand for advances increases during our peak periodssuch as the back-to-school and holiday seasons. Conversely, our borrowingstypically decrease during the tax refund season when cash receipts fromcustomers peak or the customer demand for new advances decreases.

On May 4, 2005, we announced that our Board ofDirectors had approved a program authorizing the repurchase of up to $50.0 millionof our outstanding common stock. Additionally, on August 16, 2006, weannounced that our Board of Directors had approved an extension of our stockrepurchase program authorizing us to repurchase up to $100.0 million ofour outstanding common stock on and after that date. Our Board of Directorsdetermined that the continuation and increase of the stock repurchase programserves the best interest of us and our stockholders by returning capital to ourstockholders.

Share repurchases will continue to be made from timeto time and will be effected on the open market, in block trades, or inprivately negotiated transactions, and in compliance with applicable laws,including Securities and Exchange Commission Rule 10b-18 andRegulation M. The program does not generally require us to purchase anyspecific number of shares, and any purchases under the program depend on marketand other conditions. Our Board of Directors may suspend or cancel the stockrepurchase program at any time.

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During the years ended December 31, 2005 and2006, we repurchased 1,963,033 and 2,820,782 shares, respectively, of ourcommon stock at a cost of approximately $25.7 million and $40.1 million,respectively.

Although our revolvingcredit facility places restrictions on our capital expenditures andacquisitions, we believe that these restrictions do not prohibit us frompursuing our growth strategy as currently planned. Cash that is restricted dueto certain states’ regulatory liquidity requirements is not included in cashand cash equivalents. Instead, the restricted cash is shown on our consolidatedbalance sheet as a non-current asset under the line item “Restricted cash.”

***Cash Flows fromOperating Activities***

The decrease in net cash provided by operatingactivities in 2006 compared to 2005 was due primarily to a net decrease inchanges in operating assets and liabilities of $24.8 million, partiallyoffset by an increase in net income of $7.2 million and a net increase innon-cash adjustments of $14.3 million. The $24.8 million net decreasein changes in operating assets and liabilities is due primarily to a decreasein the change in fees receivable, net, of $9.1 million, a decrease in thechange in income taxes payable of $5.5 million and a decrease in thechange in other current assets of $11.5 million (due primarily to thetiming of insurance and center rent payments as well as the refund in 2005 offunds deposited with the IRS relating to the period we were an S Corporation).

The increase in net cashprovided by operating activities in 2005 compared to 2004 was due primarily toa $25.8 million increase in the provision for doubtful accounts and agencybank losses. The net increase from all other non-cash adjustments and changesin operating assets and liabilities was approximately $19.7 million, andwas offset by a $20.1 million decrease in net income.

***Cash Flows fromInvesting Activities***

The increase in net cash used in investing activitiesin 2006 compared to 2005 was primarily due to a $16.8 million increase inthe change in cash invested in advances receivable and a $6.6 millionreduction in proceeds from the sale of property and equipment (relatedprincipally to the sale of one of our aircraft in 2005), partially offset by a$5.5 million decrease in restricted cash and a $1.2 million decreasein purchases of property and equipment.

The increase in net cashused in investing activities in 2005 compared to 2004 was primarily due to a$56.8 million increase in the change in cash invested in advancesreceivable, a $9.5 million decrease in purchases of property and equipmentand a $6.8 million increase in proceeds from the sale of property andequipment, related principally to the sale of one of our aircraft in the fourthquarter 2005.

***Cash Flows fromFinancing Activities***

The increase in net cash from financing activities in2006 compared to 2005 was primarily due to a $68.5 million increase inborrowings under our revolving credit facility and an $11.8 millionincrease in the change in book overdrafts. These changes are partially offsetby a $14.4 million increase in repurchases of our common stock, an $11.5 milliondecrease in the change in the non-controlling interest of the variable interestentity and a $4.0 million increase in dividends paid to stockholders.

The decrease in net cashused in financing activities in 2005 compared to 2004 was primarily due to a$48.2 million decrease in dividends paid to stockholders, a $171.4 millionreduction in payments on our revolving credit facility and debt with relatedparties and a $20.0 million increase in the non-controlling interest ofthe variable interest entity. These changes are partially offset by a $195.1 millionreduction in net proceeds from issuance of our common stock and a $25.7 millionincrease in the purchase of treasury stock.

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**CapitalExpenditures**

For the years ended December 31,2004, 2005 and 2006, we spent $28.4 million, $18.9 million and $17.7 million,respectively, on capital expenditures. Capital expenditures includedexpenditures for (1) new centers opened, (2) center remodels and (3) computerequipment replacements in our centers and at our corporate headquarters.

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

We previously operated as an agent for lending banksin Arkansas, Michigan, North Carolina, Pennsylvania and Texas pursuant toMP&S Agreements. Each lending bank was responsible for evaluating each ofits customers’ applications and determining whether the payday cash advance orinstallment loan was approved. The lending banks utilized an automatedthird-party credit scoring system to evaluate and approve each customerapplication. We were not involved in the lending banks’ approval process or indetermining their approval procedures or criteria and, in the normal course ofbusiness, we generally did not fund or acquire any payday cash advances orinstallment loans from the lending banks. The payday cash advances andinstallment loans were repayable solely to the lending banks and were assets ofthe lending banks. Consequently, the lending banks’ payday cash advances andinstallment loans have never been included in our balance sheet within ouradvances and fees receivable, net.

Under the MP&S Agreements, the lending banks werecontractually obligated for all or a specified percentage of the losses ontheir advances and loans. Therefore, our MP&S fee increased by the lendingbanks’ contractual obligation for losses. If actual losses by a lending bankexceeded the percentage specified in its MP&S Agreement, we werepotentially obligated to pay the lending bank the outstanding amount of theadvances and loans plus the lending bank’s fees and/or interest receivable onthe advances and loans, less the lending bank’s contractually obligated portionof the losses.

Because of our economic exposure for excess banklosses related to the lending banks’ payday cash advances and installmentloans, we accrued for excess bank losses to reflect our probable losses relatedto uncollected lending bank advances and loans. The accrual for excess banklosses was established on a basis similar to the allowance for doubtfulaccounts under the standard business model.

As a result of the FDICRevised Guidance, and the conversion of our Texas and Michigan operations toour standard business model in July 2005, the discontinuation of our NorthCarolina operations in September 2005 and the conversion of ourPennsylvania and Arkansas operations to our standard business model in June 2006,the accrual for excess bank losses and gross profit derived from the agencybusiness model has declined. The accrual for excess bank losses that wasreported in our balance sheet was $1.4 million as of December 31,2005. We had no accrual for excess bank losses as of December 31, 2006.Approximately 15.8% and 0.4% of our total center gross profit, in the yearsended December 31, 2005 and 2006, respectively, was derived from theagency business model.

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**Certain ContractualCash Commitments**

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

| ** **                                 | ** ** | ** ** | ** ** | **Payment due by period** | ** ** |
|--------------------------------------------|------------|------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** **                               | ** ** | **2008 and** | ** ** | **2010 and** | ** ** | **2012 and** | ** ** |
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**                                | ** ** | **2007** | ** ** | **2009** | ** ** | **2011** | ** ** | **thereafter** | ** ** |
| Long-term debt  obligations:               |       |       |       |                                     |       |   |   |   |   |   |   |   |   |
| Revolving credit facility                  |       | $          | 104,835    |                                     | $          | — |   | $ | 104,835 |   | $ | — |   |   | $ | — |   |   |
| Mortgage payable                           |       | 8,365      |       | 797                                      |       | 1,593 |   | 1,593 |   |   | 4,382 |   |   |
| Note payable                               |       | 415        |       | 173                                      |       | 242 |   | — |   |   | — |   |   |
| Operating lease  obligations (1)           |       | 140,580    |       | 58,847                                   |       | 65,949 |   | 14,694 |   |   | 1,090 |   |   |
| Purchase  obligations                      |       | 1,937      |       | 1,937                                    |       | — |   | — |   |   | — |   |   |
| Total                                      |       | $          | 256,132    |                                     | $          | 61,754 |   | $ | 172,619 |   | $ | 16,287 |   |   | $ | 5,472 |   |   |
|                                            |            |            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includesleases for centers, aircraft hangar space, security equipment and fax/copierequipment.

***Long-Term DebtObligations***

*RevolvingCredit Facility.**  *On July 16,2004, we entered into an amendment and restatement of our prior credit facilitywith a syndicate of banks. As amended and restated, our revolving creditfacility provides us with a $265.0 million revolving line of credit, whichamount includes the ability to issue up to $20.0 million in letters ofcredit. Our revolving credit facility matures on July 16, 2009. We havethe option to (i) increase our revolving credit facility by an additional$10.0 million and (ii) extend its maturity date to July 16,2010, in each case upon our satisfaction of certain covenants and conditions.Any portion of our revolving credit facility that is repaid may be borrowedagain. In May 2005, we amended our revolving credit facility to allow therepurchase of up to $50.0 million of our outstanding common stock. In June 2005,we further amended our revolving credit facility to permit us to operate as aCSO in Texas. In August 2006, we amended our revolving credit facility toallow the repurchase of up to $100.0 million of our outstanding commonstock on and after the date of this amendment. In January 2007, we furtheramended our credit facility to permit foreign subsidiaries.

As of December 31, 2006, we had $104.8 millionoutstanding on the revolving portion of our credit facility and approximately$3.9 million of letters of credit outstanding, leaving approximately$156.3 million available for future borrowings under our credit facility.

In general, our borrowings under our revolving creditfacility bear interest, at our option, at either a base rate plus an applicablemargin or a LIBOR-based rate plus an applicable margin. The base rateequals the greater of (i) the prime rate announced by Bank of America, theadministrative agent under the revolving credit facility, and (ii) the sumof the federal funds rate plus 0.50%. The applicable margin is determined eachquarter by a pricing grid based on our senior leverage ratio of ourconsolidated senior debt to consolidated EBITDA. The base rate applicablemargin ranges from 0.75% to 1.50% based upon our senior leverage ratio. TheLIBOR-based applicable margin ranges from 2.50% to 3.25% based upon oursenior leverage ratio. As of December 31, 2006, the applicable margin forthe prime-based rate was 0.75% and the applicable margin for the LIBOR-basedrate was 2.5%.

The applicable rate is chosen when we request a drawdown under the revolving credit facility and is based on the forecasted workingcapital requirements and the required notice period for each type of borrowing.LIBOR-based rates can be selected for one-, two-, three- or six-monthterms. In the case of a base rate loan, we must notify the bank on the businessday prior to the date of the required borrowing and in the case of a LIBOR-basedloan we must notify the bank on the third business day prior to the date of therequested borrowing. Base rate loans are variable, and the rates on those loansare changed whenever 

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the underlying ratechanges. LIBOR-based loans bear interest for the term of the loan at therate set at the time of borrowing for that loan.

Our obligations under the revolving credit facilityare guaranteed by each of our subsidiaries. Our borrowings under the revolvingcredit facility are secured by substantially all of our assets and the assetsof our subsidiaries. In addition, our borrowings under the revolving creditfacility are secured by a pledge of all of the capital stock, or similar equityinterests, of our subsidiaries. Our revolving credit facility contains variousfinancial covenants that require, among other things, the maintenance of aminimum net worth and leverage and fixed charge coverage ratios. The revolvingcredit facility contains customary covenants and events of default, includingcovenants that restrict our ability to encumber assets, to create indebtednessand to declare and pay dividends. The revolving credit facility also includescross default provisions where an event of default with respect to any otherindebtedness in excess of $1.0 million in the aggregate could cause allamounts outstanding under the revolving credit facility to become due andpayable. We were in compliance with all covenants at December 31, 2006.

We borrow under our $265.0 million revolvingcredit facility to fund our advances and our other liquidity needs. Ourday-to-day balances under our revolving credit facility, as well as our cashbalances, vary because of seasonal and day-to-day requirements resulting frommaking and collecting advances. For example, if a month ends on a Friday (atypical payday), our borrowings and our cash balances will be high compared toa month that does not end on a Friday. This is because a substantial portion ofthe advances will be repaid in cash on that day but sufficient time will notyet have passed for the cash to reduce the outstanding borrowings under ourrevolving credit facility. Our borrowings under our revolving credit facilitywill also increase as the demand for advances increases during our peak periodssuch as the back-to-school and holiday seasons. Conversely, our borrowingstypically decrease during the tax refund season when cash receipts fromcustomers peak or the customer demand for new advances decreases.

*Mortgage Payable.**  *Our corporate headquarters building and related landare subject to a mortgage, the principal amount of which was approximately $6.2 millionand $5.8 million at December 31, 2005 and 2006, respectively. Themortgage is payable to an insurance company and is collateralized by ourcorporate headquarters building and related land. The mortgage is payable in180 monthly installments of approximately $66,400, including principal andinterest, and bears interest at a fixed rate of 7.30% over its term. The mortgagematures on June 10, 2017. The carrying amount of our corporateheadquarters (land, land improvements and building) was approximately $5.4 millionand $5.2 million at December 31, 2005 and 2006, respectively.

***Operating LeaseObligations***

We lease all but three of our centers from third-partylessors under operating leases. These leases typically have initial terms ofthree to five years and may contain provisions for renewal options, additionalrental charges based on revenue and payment of real estate taxes and commonarea charges. In addition, we lease aircraft hangar space and certain securityand office equipment.

The lessor under three center leases, the aircrafthanger space lease and other office and warehouse space leases are companiescontrolled by our Chairman. See “Item 8. Financial Statements and SupplementaryData—Note 13. Related Party Transactions.”

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***PurchaseObligations***

We enter into agreementswith vendors to purchase furniture, fixtures and other items used to open newcenters. These purchase commitments typically extend for a period of two tothree months after the opening of a new center. As of December 31, 2006,our purchase obligations totaled approximately $1.9 million.

**Critical Estimates,Uncertainties or Assessments in the Financial Statements**

The preparation of our financial statements inconformity with GAAP requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. In applying theaccounting principles, we must often make individual estimates and assumptionsregarding expected outcomes or uncertainties. As might be expected, the actualresults or outcomes are generally different than the estimated or assumedamounts. These differences are usually minor and are included in ourconsolidated financial statements as soon as they are known. Estimates,judgments and assumptions are continually evaluated based on availableinformation and experience. Because of the use of estimates inherent in thefinancial reporting process, actual results could differ from those estimates.

Actual results related to the estimates andassumptions made in preparing our consolidated financial statements will emergeover periods of time, such as estimates and assumptions underlying thedetermination of allowance for doubtful accounts. These estimates andassumptions are monitored and periodically adjusted as circumstances warrant.These amounts may be adjusted based on higher or lower actual loss experience. Althoughthere is greater risk with respect to the accuracy of these estimates andassumptions because of the period over which actual results may emerge, suchrisk is mitigated by the ability to make changes to these estimates andassumptions over the same period.

We periodically review thecarrying value of goodwill and other intangible assets when events andcircumstances warrant such a review. One of the methods used for this review isperformed using estimates of future cash flows. If the carrying value ofgoodwill or other intangible assets is considered impaired, an impairmentcharge is recorded for the amount by which the carrying value of the goodwillor intangible assets exceeds its fair value. We believe that the estimates offuture cash flows and fair value are reasonable. Changes in estimates of thosecash flows and fair value, however, could affect the evaluation.

**Impact of Inflation**

We believe our results ofoperations are not dependent upon the levels of inflation.

**Impact of NewAccounting Pronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued Financial Interpretation No. 48, Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. We are in the process of adopting FIN 48 and anticipateno material impact on our financial condition or results of operations as aresult of its adoption.

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In September 2006,the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”) whichexpresses the view of the SEC staff (the “Staff”) regarding the process ofquantifying financial statement misstatements. SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. The Staffbelieves registrants must quantify the impact of correcting all misstatements,including both the carryover and reversing effects of prior year misstatements,on its current year financial statements. Registrants electing not to restateprior periods should reflect the effects of initially applying the guidance inSAB 108 in their annual financial statements covering the first fiscal yearending after November 15, 2006. The application of the guidance in SAB 108in fiscal year 2006 did not have a material impact on our financial conditionor results of operations.

**FORWARD-LOOKINGSTATEMENTS**

This Annual Report on Form 10-K includesforward-looking statements. All statements other than historical information orstatements of current condition contained in this Annual Report, includingstatements regarding our future financial performance, our business strategyand expected developments in our industry, are forward-looking statements. The words“expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “may,” “will,”“should,” “would,” “could,” “estimate,” “continue” and similar expressions areintended to identify forward-looking statements.

We have based theseforward-looking statements on management’s current views and expectations.Although we believe that the current views and expectations reflected in theseforward-looking statements are reasonable, those views and expectations, andthe related statements, are inherently subject to risks, uncertainties andother factors, many of which are not under our control and may not even bepredictable. These risks, uncertainties and other factors could cause theactual results, performance or achievements to differ materially from any futureresults, performance or achievements expressed or implied by theforward-looking statements. These risks, uncertainties and factors include, butare not limited to:

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

·       currentand future litigation and regulatory proceedings against us, including but notlimited to those against us in Pennsylvania;

·       ourability to identify and enter new markets and to successfully manage ourgrowth;

·       ourability to identify and successfully implement new product and serviceofferings;

·  the accuracy of our estimates of losses;

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

·       ourrelationships with the banks party to our revolving credit facility;

·       thefragmentation of our industry and competition from various other sources, suchas other payday cash advance providers, small loan providers, short-termconsumer lenders, banks, savings and loans and other similar financial servicesentities, as well as retail businesses that offer consumer loans or otherproducts or services similar to those offered by us and, most recently,governmental agencies offering alternative sources of credit;

·       theftand employee errors; and

·       theother matters set forth under “Item 1A. Risk Factors” above.

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We expressly disclaim any obligation to update orrevise any of these forward-looking statements, whether because of futureevents, new information, a change in our views or expectations, or otherwise.We make no prediction or statement about the performance of our shares ofcommon stock.

You are cautioned not torely unduly on any forward-looking statements. These risks and uncertaintiesare discussed in more detail elsewhere in this Annual Report, including under“Item 1A. Risk Factors,” “Item 1. Business” and this Item 7.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

***Interest Rate Risk***

We are exposed to interest rate risk on our revolvingcredit facility. Our variable interest expense is sensitive to changes in thegeneral level of interest rates. We may from time to time enter into interestrate swaps, collars or similar instruments with the objective of reducing our volatilityin borrowing costs. We do not use derivative financial instruments forspeculative or trading purposes. We had no derivative financial instrumentsoutstanding as of December 31, 2005 and 2006. Our variable interestexpense is sensitive to changes in the general level of interest rates. Theweighted average interest rate on our $37.9 million of variable interestdebt as of December 31, 2005 was approximately 7.38%. The weighted averageinterest rate on our $104.8 million of variable interest debt as ofDecember 31, 2006 was approximately 8.15%.

We had totalinterest expense of $17.2 million, $4.3 million and $7.1 million for the yearsended December 31, 2004, 2005 and 2006, respectively. The estimated changein interest expense from a hypothetical 200 basis-point change inapplicable variable interest rates would have been approximately $2.4 millionin 2004, $0.4 million in 2005 and $0.8 million in 2006.

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**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

**Indexto Consolidated Financial Statements**

| Report  of Independent Registered Public Accounting Firm                                                        |   | 66 |   |
|-----------------------------------------------------------------------------------------------------------------|--------|----|--------|
| Consolidated  Balance Sheets as of December 31, 2005 and 2006                                              |   | 68 |   |
| Consolidated Statements of Income for the Years Ended  December 31, 2004, 2005 and 2006                    |   | 69 |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2004, 2005 and 2006 |   | 70 |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2004, 2005 and 2006                |   | 71 |   |
| Notes to Consolidated Financial Statements                                                                      |   | 73 |   |

 

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors and Stockholders ofAdvance America, Cash Advance Centers, Inc.:

We have completedintegrated audits of Advance America, Cash Advance Centers, Inc.’s 2006and 2005 consolidated financial statements and of its internal control overfinancial reporting as of December 31, 2006, and an audit of its 2004consolidated financial statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Our opinions, based on ouraudits, are presented below.

*Consolidatedfinancial statements*

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of Advance America,Cash Advance Centers, Inc. and its subsidiaries at December 31, 2006and 2005, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2006 in conformity withaccounting principles generally accepted in the United States of America. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment, includedin Management’s Report on Internal Control Over Financial Reporting appearingunder Item 9A, that the Company maintained effective internal control overfinancial reporting as of December 31, 2006 based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material repects, based on those criteria.Furthermore, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on criteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financial reportingbased on our audit. We conducted our audit of internal control over financialreporting in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal 

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control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company;(ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the Company’s assets that could have a material effect on thefinancial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies and procedures may deteriorate.

/s/ PricewaterhouseCoopers LLPSpartanburg, South CarolinaFebruary 28, 2007

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

| ** **                                                                                                                                                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                                                                      |       |     |       |     |       |
| Current assets                                                                                                                                                                  |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                                                                      |       | $        | 27,259     |     | $          | 67,245 |   |
| Advances and fees  receivable, net                                                                                                                                              |       | 193,468  |       | 237,725  |       |
| Deferred income taxes                                                                                                                                                           |       | 6,367    |       | 11,798   |       |
| Other current assets                                                                                                                                                            |       | 5,033    |       | 11,664   |       |
| Total current assets                                                                                                                                                            |       | 232,127  |       | 328,432  |       |
| Restricted cash                                                                                                                                                                 |       | 10,034   |       | 5,446    |       |
| Property and equipment,  net                                                                                                                                                    |       | 64,990   |       | 63,198   |       |
| Goodwill                                                                                                                                                                        |       | 122,586  |       | 122,627  |       |
| Other assets                                                                                                                                                                    |       | 6,651    |       | 5,389    |       |
| Total assets                                                                                                                                                                    |       | $        | 436,388    |     | $          | 525,092 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                   |       |     |       |     |       |
| Current liabilities                                                                                                                                                             |       |     |       |     |       |
| Accounts payable                                                                                                                                                                |       | $        | 9,306      |     | $          | 21,164 |   |
| Accrued liabilities                                                                                                                                                             |       | 29,895   |       | 31,737   |       |
| Income taxes payable                                                                                                                                                            |       | 11,349   |       | 14,983   |       |
| Accrual for excess bank  losses                                                                                                                                                 |       | 1,373    |       | —   |       |
| Current portion of  long-term debt                                                                                                                                              |       | 503      |       | 537      |       |
| Total current  liabilities                                                                                                                                                      |       | 52,426   |       | 68,421   |       |
| Revolving credit  facility                                                                                                                                                      |       | 37,933   |       | 104,835  |       |
| Long-term debt                                                                                                                                                                  |       | 6,185    |       | 5,678    |       |
| Deferred income taxes                                                                                                                                                           |       | 15,706   |       | 13,564   |       |
| Other liabilities                                                                                                                                                               |       | 44       |       | 157      |       |
| Total liabilities                                                                                                                                                               |       | 112,294  |       | 192,655  |       |
| Non-controlling interest  in variable interest entity                                                                                                                           |       | 21,069   |       | 32,540   |       |
| Commitments and contingencies (Note 12)                                                                                                                                         |       |     |       |     |       |
| Stockholders’ equity                                                                                                                                                       |       |     |       |     |       |
| Preferred stock, par value  $.01 per share, 25,000 shares authorized; no shares issued and outstanding                                                                          |       | —   |       | —   |       |
| Common stock, par value  $.01 per share, 250,000 shares authorized; 96,821 shares issued and 82,219  and 79,534 outstanding as of December 31, 2005 and 2006, respectively |       | 968      |       | 968      |       |
| Paid in capital                                                                                                                                                                 |       | 282,840  |       | 285,382  |       |
| Retained earnings                                                                                                                                                               |       | 83,842   |       | 118,258  |       |
| Common stock in treasury  (14,602 and 17,287 shares at cost at December 31, 2005 and 2006,  respectively)                                                                  |       | (64,625  | )          | (104,711 | )          |
| Total stockholders’  equity                                                                                                                                                |       | 303,025  |       | 299,897  |       |
| Total liabilities and stockholders’ equity                                                                                                                                 |       | $        | 436,388    |     | $          | 525,092 |   |

 

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

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**Advance America,Cash Advance Centers, Inc.Consolidated Statements of IncomeYears Ended December 31, 2004, 2005 and 2006(in thousands, except per share data)**

| ** **                                                                        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Revenues:**                                                                     |       |     |       |     |       |     |       |
| Fees and interest  charged to customers                                           |       | $        | 430,859    |     | $          | 529,953  |       | $ | 659,876 |   |
| Marketing,  processing and servicing fees                                         |       | 139,329  |       | 100,113  |       | 12,418   |       |
| Total revenues                                                                    |       | 570,188  |       | 630,066  |       | 672,294  |       |
| Provision for  doubtful accounts and agency bank losses                           |       | (89,236  | )          | (115,060 | )          | (120,855 | )          |
| Net revenues                                                                      |       | 480,952  |       | 515,006  |       | 551,439  |       |
| **Center Expenses:**                                                              |       |     |       |     |       |     |       |
| Salaries and  related payroll costs                                               |       | 160,047  |       | 171,092  |       | 185,938  |       |
| Occupancy costs                                                                   |       | 67,305   |       | 80,540   |       | 87,276   |       |
| Center  depreciation expense                                                      |       | 13,719   |       | 14,902   |       | 16,233   |       |
| Advertising  expense                                                              |       | 26,082   |       | 24,137   |       | 20,375   |       |
| Other center  expenses                                                            |       | 47,087   |       | 52,712   |       | 54,986   |       |
| Total center  expenses                                                            |       | 314,240  |       | 343,383  |       | 364,808  |       |
| Center gross  profit                                                              |       | 166,712  |       | 171,623  |       | 186,631  |       |
| **Corporate and Other Expenses  (Income):**                                       |       |     |       |     |       |     |       |
| General and  administrative expenses                                              |       | 42,081   |       | 51,151   |       | 52,816   |       |
| General and  administrative expenses with related parties                         |       | 2,021    |       | 607      |       | 547      |       |
| Corporate  depreciation expense                                                   |       | 3,942    |       | 4,483    |       | 3,661    |       |
| Interest expense                                                                  |       | 7,303    |       | 4,331    |       | 7,129    |       |
| Interest expense  with related parties                                            |       | 9,862    |       | —   |       | —   |       |
| Interest income                                                                   |       | (161     | )          | (351     | )          | (538     | )          |
| Loss on disposal  of property and equipment                                       |       | 814      |       | 715      |       | 960      |       |
| Loss on impairment  of assets                                                     |       | 1,288    |       | 2,918    |       | —   |       |
| Transaction  related expense                                                      |       | 2,466    |       | —   |       | —   |       |
| Income before  income taxes                                                       |       | 97,096   |       | 107,769  |       | 122,056  |       |
| Income tax expense                                                                |       | 14,041   |       | 43,776   |       | 48,858   |       |
| Income before  income of consolidated variable interest entity                    |       | 83,055   |       | 63,993   |       | 73,198   |       |
| Income of  consolidated variable interest entity                                  |       | —   |       | (1,003   | )          | (3,047   | )          |
| Net income                                                                        |       | $        | 83,055     |     | $          | 62,990   |       | $ | 70,151 |   |
| Net income per common  share:                                                     |       |     |       |     |       |     |       |
| Basic                                                                             |       | $        | 1.20       |     | $          | 0.76     |       | $ | 0.87 |   |
| Diluted                                                                           |       | $        | 1.20       |     | $          | 0.76     |       | $ | 0.87 |   |
| Dividends declared  per common share                                              |       | $        | 1.15       |     | $          | 0.38     |       | $ | 0.44 |   |
| Weighted average number  of shares outstanding:                                   |       |     |       |     |       |     |       |
| Basic                                                                             |       | 69,126   |       | 83,124   |       | 80,889   |       |
| Diluted                                                                           |       | 69,126   |       | 83,124   |       | 80,917   |       |
| **Pro  Forma Data (unaudited):**                                                  |       |     |       |     |       |     |       |
| Historical income  before taxes                                                   |       | $        | 97,096     |     |       |     |       |   |
| Pro forma income  tax expense                                                     |       | 39,247   |       |     |       |     |       |
| Net income  adjusted for pro forma income tax expense                             |       | $        | 57,849     |     |       |     |       |   |
| Pro forma net  income per common share—basic and diluted                     |       | $        | 0.84       |     |       |     |       |   |
| Weighted average  pro forma number of shares outstanding—basic   and diluted |       | 69,126   |       |     |       |     |       |

 

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

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**Advance America,Cash Advance Centers, Inc.Consolidated Statements of Stockholders’ EquityYears Ended December 31, 2004, 2005 and 2006(in thousands, except per share data)**

| ** **                                                              | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **  | ** ** | **Common Stock** | ** ** | ** **           | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                              | ** ** | ** **            | ** ** | **Par**    | ** ** | **Paid-In** | ** ** | **Retained**          | ** ** | **In Treasury** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Shares**            | ** ** | **Value**  | ** ** | **Capital** | ** ** | **Earnings**          | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Total** | ** ** |
| **Balances, January 1, 2004**                                      |       | 81,530                |       |       | $          | 815         |       |                  | $          | 78,719               |       | $ | 49,228 |   | (12,863 | ) | $ | (37,723 | ) | $ | 91,039 |   |
| Net income                                                              |       | —                |       |       | —     |        |       | —                |       | 83,055               |       | — |   | — |   | 83,055 |   |
| Dividends paid  ($1.15 per share)                                       |       | —                |       |       | —     |        |       | —                |       | (79,791              | )          | — |   | — |   | (79,791 | ) |
| Issuance of  restricted stock                                           |       | 233                   |       |       | 3          |        |       | (3                    | )          | —               |       | — |   | — |   | — |   |
| Amortization of  restricted stock                                       |       | —                |       |       | —     |        |       | 49                    |       | —               |       | — |   | — |   | 49 |   |
| Issuance of common  stock                                               |       | 14,333                |       |       | 143        |        |       | 214,857               |       | —               |       | — |   | — |   | 215,000 |   |
| Common stock  issuance costs                                            |       | —                |       |       | —     |        |       | (20,099               | )          | —               |       | — |   | — |   | (20,099 | ) |
| Issuance of common  stock for purchase of aircraft                      |       | 686                   |       |       | 7          |        |       | 7,030                 |       | —               |       | — |   | — |   | 7,037 |   |
| Issuance of common  stock for acquisition of Church & Commerce |       | 39                    |       |       | —     |        |       | —                |       | —               |       | — |   | — |   | — |   |
| **Balances, December 31, 2004**                                    |       | 96,821                |       |       | 968        |        |       | 280,553               |       | 52,492               |       | (12,863 | ) | (37,723 | ) | 296,290 |   |
| Net income                                                              |       | —                |       |       | —     |        |       | —                |       | 62,990               |       | — |   | — |   | 62,990 |   |
| Dividends paid  ($0.38 per share)                                       |       | —                |       |       | —     |        |       | —                |       | (31,575              | )          | — |   | — |   | (31,575 | ) |
| Dividends payable                                                       |       | —                |       |       | —     |        |       | —                |       | (65                  | )          | — |   | — |   | (65 | ) |
| Purchases of  treasury stock                                            |       | —                |       |       | —     |        |       | —                |       | —               |       | (1,963 | ) | (25,685 | ) | (25,685 | ) |
| Issuance of  restricted stock                                           |       | —                |       |       | —     |        |       | —                |       | —               |       | 305 |   | — |   | — |   |
| Forfeitures of  restricted stock                                        |       | —                |       |       | —     |        |       | 1,217                 |       | —               |       | (81 | ) | (1,217 | ) | — |   |
| Amortization of  restricted stock                                       |       | —                |       |       | —     |        |       | 1,053                 |       | —               |       | — |   | — |   | 1,053 |   |
| Stock option  expense                                                   |       | —                |       |       | —     |        |       | 186                   |       | —               |       | — |   | — |   | 186 |   |
| Common stock  issuance costs                                            |       | —                |       |       | —     |        |       | (169                  | )          | —               |       | — |   | — |   | (169 | ) |
| **Balances, December 31, 2005**                                    |       | 96,821                |       |       | 968        |        |       | 282,840               |       | 83,842               |       | (14,602 | ) | (64,625 | ) | 303,025 |   |
| Net income                                                              |       | —                |       |       | —     |        |       | —                |       | 70,151               |       | — |   | — |   | 70,151 |   |
| Dividends paid  ($0.44 per share)                                       |       | —                |       |       | —     |        |       | —                |       | (35,573              | )          | — |   | — |   | (35,573 | ) |
| Dividends payable                                                       |       | —                |       |       | —     |        |       | —                |       | (162                 | )          | — |   | — |   | (162 | ) |
| Purchases of  treasury stock                                            |       | —                |       |       | —     |        |       | —                |       | —               |       | (2,821 | ) | (40,087 | ) | (40,087 | ) |
| Issuance of  restricted stock                                           |       | —                |       |       | —     |        |       | —                |       | —               |       | 143 |   | — |   | — |   |
| Amortization of  restricted stock                                       |       | —                |       |       | —     |        |       | 1,529                 |       | —               |       | — |   | — |   | 1,529 |   |
| Forfeitures of  restricted stock                                        |       | —                |       |       | —     |        |       | 20                    |       | —               |       | (11 | ) | (20 | ) | — |   |
| Stock option  expense                                                   |       | —                |       |       | —     |        |       | 951                   |       | —               |       | — |   | — |   | 951 |   |
| Issuance of common  stock to director in lieu of cash                   |       | —                |       |       | —     |        |       | 42                    |       | —               |       | 4 |   | 21 |   | 63 |   |
| **Balances,  December 31, 2006**                                   |       | 96,821                |       |       | $          | 968         |       |                  | $          | 285,382              |       | $ | 118,258 |   | (17,287 | ) | $ | (104,711 | ) | $ | 299,897 |   |

 

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

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**Advance America, Cash Advance Centers, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2004, 2005 and 2006 (in thousands)**

| ** **                                                                                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Cash flows from operating activities**                                                              |       |     |       |     |       |     |       |
| Net income                                                                                            |       | $        | 83,055     |     | $          | 62,990   |       | $ | 70,151 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisition |       |     |       |     |       |     |       |
| Income of consolidated  variable interest entity                                                      |       | —   |       | 1,003    |       | 3,047    |       |
| Depreciation                                                                                          |       | 17,661   |       | 19,385   |       | 19,894   |       |
| Non-cash interest  expense                                                                            |       | 906      |       | 981      |       | 987      |       |
| Provisions for doubtful  accounts and agency bank losses                                              |       | 89,236   |       | 115,060  |       | 120,855  |       |
| Agency bank charge-offs,  net of recoveries                                                           |       | (22,471  | )          | (17,445  | )          | (2,803   | )          |
| Deferred income taxes                                                                                 |       | 8,843    |       | 194      |       | (7,573   | )          |
| Loss on disposal of  property and equipment                                                           |       | 814      |       | 715      |       | 960      |       |
| Loss on impairment of  assets                                                                         |       | 1,288    |       | 2,437    |       | —   |       |
| Amortization of  restricted stock                                                                     |       | 49       |       | 1,053    |       | 1,529    |       |
| Stock option expense                                                                                  |       | —   |       | 186      |       | 951      |       |
| Common stock issued to  director in lieu of cash                                                      |       | —   |       | —   |       | 63       |       |
| Changes in operating assets and liabilities                                                           |       |     |       |     |       |     |       |
| Fees receivable, net                                                                                  |       | (14,313  | )          | (11,361  | )          | (20,418  | )          |
| Other current assets                                                                                  |       | (6,768   | )          | 4,881    |       | (6,632   | )          |
| Other assets                                                                                          |       | 3,908    |       | (13      | )          | 284      |       |
| Accounts payable                                                                                      |       | 5,507    |       | (3,633   | )          | 995      |       |
| Accrued liabilities                                                                                   |       | (5,939   | )          | 3,768    |       | 201      |       |
| Income taxes payable                                                                                  |       | 2,134    |       | 9,181    |       | 3,634    |       |
| Net cash provided by operating activities                                                             |       | 163,910  |       | 189,382  |       | 186,125  |       |
| **Cash flows from investing activities**                                                              |       |     |       |     |       |     |       |
| Changes in advances  receivable                                                                       |       | (69,661  | )          | (126,447 | )          | (143,264 | )          |
| Changes in restricted  cash                                                                           |       | 1,031    |       | (925     | )          | 4,588    |       |
| Acquisition of business,  net of cash acquired                                                        |       | —   |       | (352     | )          | (41      | )          |
| Proceeds from sale of  property and equipment                                                         |       | 23       |       | 6,774    |       | 190      |       |
| Purchases of property  and equipment                                                                  |       | (28,448  | )          | (18,930  | )          | (17,689  | )          |
| Net cash used in investing activities                                                                 |       | (97,055  | )          | (139,880 | )          | (156,216 | )          |
|                                                                                                       |            |          |            |          |            |          |            |  |  |  |

 

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

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**Advance America, Cash Advance Centers, Inc. Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2004, 2005 and 2006 (in thousands)**

 

| ** **                                                                                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** |   |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|--------|
| **Cash flows from financing activities**                                                      |       |     |       |     |       |     |   |
| Proceeds from issuance   of common stock                                                      |       | $        | 215,000    |     | $          | —   |   | $ | — |   |
| Increase in   non-controlling interest of variable interest entity                            |       | —   |       | 19,973   |       | 8,453    |   |
| (Payments on) proceeds   from revolving credit facility, net                                  |       | (89,136  | )          | (1,572   | )          | 66,902   |   |
| Common stock issuance   costs                                                                 |       | (20,099  | )          | (169     | )          | —   |   |
| Payments on mortgage   payable                                                                |       | (307     | )          | (334     | )          | (357     | )      |
| Proceeds from note   payable                                                                  |       | 610      |       | —   |       | —   |   |
| Payments on note   payable                                                                    |       | —   |       | (110     | )          | (116     | )      |
| Payments of   financing costs                                                                 |       | (3,068   | )          | (23      | )          | (8       | )      |
| Purchases of   treasury stock                                                                 |       | —   |       | (25,685  | )          | (40,087  | )      |
| Payments of   dividends                                                                       |       | (79,791  | )          | (31,575  | )          | (35,573  | )      |
| Changes in book   overdrafts                                                                  |       | 1,465    |       | (972     | )          | 10,863   |   |
| Payments on debt   with related parties                                                       |       | (83,789  | )          | —   |       | —   |   |
| Net cash (used in) provided by financing activities                                           |       | (59,115  | )          | (40,467  | )          | 10,077   |   |
| Net increase in cash and cash equivalents                                                     |       | 7,740    |       | 9,035    |       | 39,986   |   |
| Cash and cash   equivalents, beginning of period                                              |       | 10,484   |       | 18,224   |       | 27,259   |   |
| Cash and cash   equivalents, end of period                                                    |       | $        | 18,224     |     | $          | 27,259   |   | $ | 67,245 |   |
| Supplemental   disclosures of cash flow information:                                          |       |     |       |     |       |     |   |
| Cash paid during   the period for:                                                            |       |     |       |     |       |     |   |
| Interest, net of amounts capitalized                                                          |       | $        | 19,236     |     | $          | 3,179    |   | $ | 5,884 |   |
| Income taxes                                                                                  |       | 2,271    |       | 34,402   |       | 52,796   |   |
| Supplemental schedule   of non-cash investing and financing activity:                         |       |     |       |     |       |     |   |
| Property and equipment purchases included in accounts   payable and accrued expenses          |       | 1,818    |       | 3,071    |       | 1,563    |   |
| Issuance of note payable related to purchase of   software                                    |       | 610      |       | —   |       | —   |   |
| Issuance of common stock for purchase of aircraft                                             |       | 7,037    |       | —   |       | —   |   |
| Deferred tax liability resulting from difference in   book and tax basis of aircraft acquired |       | 3,257    |       | —   |       | —   |   |
| Restricted stock dividends payable                                                            |       | —   |       | 65       |       | 162      |   |
| Issuance of restricted common stock                                                           |       | 3,500    |       | 3,669    |       | 2,060    |   |
| Net assets   acquired through acquisition of business                                         |       | —   |       | 168      |       | —   |   |

 

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

72

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**Advance America, Cash Advance Centers, Inc.Notes to Consolidated Financial Statements December 31, 2004, 2005 and 2006**

**1. Description of Businessand Significant Accounting Policies**

**Basis ofPresentation, Principles of Consolidation and Description of Business**

The accompanying consolidated financial statementsinclude the accounts of Advance America, Cash Advance Centers, Inc.(“AACACI”), its wholly owned subsidiaries (collectively, the “Company”) and,prior to its acquisition on December 21, 2004, the one consolidatedspecial purpose entity related to its corporate headquarters. AtDecember 31, 2005 and 2006, the Company’s consolidated financialstatements also include the accounts of a variable interest entity for whichthe Company is the primary beneficiary. All significant intercompany balancesand transactions have been eliminated.

At December 31, 2006,the Company operated 2,853 centers throughout the United States under the brandnames Advance America (“Advance America”) and National Cash Advance (“NationalCash”). In each state, separate wholly owned subsidiaries own the centersoperating as Advance America and as National Cash. Historically, the Companyhas conducted business in most states under the authority of a variety ofenabling state statutes including payday advance, deferred presentment,check-cashing, small loan, credit service organization and other state lawswhereby advances are made directly to customers (which is referred to as thestandard business model). In certain states, the Company previously conductedbusiness as a marketing, processing and servicing agent for Federal DepositInsurance Corporation (“FDIC”) supervised, state-chartered banks that madepayday cash advances and installment loans to their customers pursuant to theauthority of the laws of the states in which they were located and theauthority of federal interstate banking laws, regulations and guidelines (whichis referred to as the agency business model). The banks for which the Companyhas acted as an agent are referred to as lending banks. The Company no longeroperates under the agency business model.

**Cash and CashEquivalents**

Cash and cash equivalentsinclude cash on hand and short-term investments with original maturities ofthree months or less. The carrying amount of cash and cash equivalents is theestimated fair value at December 31, 2005 and 2006. The Company invests excessfunds in certificates of deposit and in overnight sweep accounts withcommercial banks, which in turn invest these funds in short-term, interest-bearingreverse repurchase agreements or overnight Eurodollar deposits. Due to theshort-term nature of these investments, the Company does not take possession ofthe securities, which are instead held by the financial institution. The marketvalue of the securities held pursuant to these arrangements approximates thecarrying amount. Deposits in excess of $100,000 are not insured by the FDIC.

**Restricted Cash**

Restricted cash includescash in certain money market accounts and certificates of deposit. Restrictedcash is restricted due to certain states’ liquidity requirements.

**Revenue Recognition**

Revenues can be characterizedas fees and/or interest depending upon various state laws. Revenue isrecognized under the standard business model on a constant-yield basisratably over the term of each advance. Under the agency business model, theCompany’s revenues consisted of the marketing, processing and servicing feespayable to the Company by the lending banks. Prior to July 2005, thesefees 

73

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**Advance America, Cash Advance Centers, Inc.Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**1.Description of Business and Significant Accounting Policies (Continued)**

includedthe losses for which the lending banks were contractually obligated in each ofthe states where the Company operated under the agency business model. AfterJuly 2005, these fees included only the losses for which the lending bankoperating in Pennsylvania was contractually obligated. The Company recognizedrevenue under the agency business model on a constant-yield basis ratablyover the term of each advance and installment loan.

**Advances and FeesReceivable, Net**

The Company segregates itsaccounts receivable into advances receivable, fees and interest receivable,returned item receivables, loans and fees receivable of consolidated variableinterest entity, lending bank receivables and other receivables. Advancesreceivable and fees and interest receivable include advances that have not beenrepaid. Returned item receivables include advances for which the customer’spersonal check has been deposited and the check has been returned due tonon-sufficient funds in the customers’ accounts, closed accounts or otherreasons. Lending bank receivables included amounts due from the lending banks.Other receivables include other miscellaneous receivables. Advances and feesand interest receivable are carried at cost less unearned revenues and theallowance for doubtful accounts. The advances and loans made and funded by thelending banks under the former agency business model were never reflected onthe Company’s balance sheet within the advances and fees receivable, netbecause these advances and loans were repayable solely to the lending banks andwere assets of the lending banks.

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

The allowance for doubtful accounts representsmanagement’s estimated probable losses in advances and fees receivable underthe standard business model. The accrual for excess bank losses represents theamount the Company historically accrued for probable excess bank losses for theCompany’s share of losses on advances and loans the Company marketed, processedand serviced for the lending banks under the former agency business model.

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

Under the standard business model, the Company recordsthis estimate of probable losses on receivables as a reduction of advances andreceivables, net on the Company’s balance sheet. Under the former agencybusiness model, the lending banks’ contractual obligation for a portion of thepayday cash advance and installment loan losses reduced the Company’s estimateof probable losses to arrive at an estimate of excess loan losses. The Companyrecorded this amount as an accrual for excess bank losses, a current liabilityon the Company’s balance sheet.

The Company has charged the portion of advances, installmentloans and fees deemed to be uncollectible against the allowance for doubtfulaccounts or the accrual for excess bank losses, as 

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**Advance America, Cash Advance Centers, Inc.Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**1.Description of Business and Significant Accounting Policies (Continued)**

appropriate, and creditedany subsequent recoveries to the allowance for doubtful accounts or the accrualfor excess bank losses, as appropriate.

Under the standard business model, unpaid advances andthe related fees and/or interest are generally charged off 60 days after thedate the check was returned by the customer’s bank for non-sufficient funds orother reasons, unless the customer has paid at least 15% of the total of his orher loan plus original fee. Under the agency business model, unpaid payday cashadvances and the related fees and/or interest generally were charged off 60days from the due date. Under the agency business model, unpaid installmentloans and the related fees and/or interest generally were charged off 60 daysfrom the deposit date if the check is returned by the customer’s bank fornon-sufficient funds or other reasons. Under either model, unpaid advances ofcustomers who file for bankruptcy are charged off upon receipt of thebankruptcy notice.

Management believes thatthe allowance for doubtful accounts is adequate. Management’s ongoingevaluation of the adequacy of the allowance for doubtful accounts is based onits evaluation of the advances and installment loans outstanding, historicalexperience and such other factors that, in management’s judgment, deserveconsideration in estimating probable losses.

**Property andEquipment**

Property and equipment, including improvements thatsignificantly extend useful lives, are recorded at cost. Cost includes majorexpenditures for improvements and replacements that extend useful lives andinterest costs associated with significant capital expenditures. Maintenanceand repairs are expensed when incurred. Depreciation is calculated forfinancial reporting purposes using the straight-line method over the estimateduseful lives of the assets as follows: building, 40 years; aircraft, 20years; land improvements, 7 years; leasehold improvements, office equipment andfurniture, 3 to 5 years; and software, 3 to 5 years. When property and equipment aresold or otherwise disposed of, the cost and related accumulated depreciationare removed from the accounts, and the resulting gains or losses are includedin income.

The carrying value of property and equipment isreviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of assets may not be recoverable. The Company assessesrecoverability by determining whether the net book value of assets will berecovered through projected undiscounted future cash flows. If the Companydetermines that the carrying value of assets may not be recoverable, itmeasures any impairment based on the projected discounted future cash flows orestimated sale proceeds to be provided from the assets as compared to thecarrying value. The Company records impairment losses in the period in which itidentifies such impairment. The Company recorded in the fourth quarter 2004 animpairment of assets expense of approximately $1.3 million to write-offthe undepreciated costs of the remaining 86 centers located in Georgia. TheCompany recorded in the third quarter 2005 an impairment of assets expense ofapproximately $0.4 million to write-off the undepreciated costs ofunderperforming centers identified for future closure and approximately $1.5 millionin connection with the sale of one of its aircraft. The Company recorded in thefourth quarter 2005 an impairment of assets expense of approximately $1.0 millionto write-off the undepreciated costs of the 117 centers located in NorthCarolina. See Note 12 for further discussion of the Company’s North Carolinaoperations. The Company had no impairment losses in 2006.

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**Advance America, Cash Advance Centers, Inc.Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**1.Description of Business and Significant Accounting Policies (Continued)**

The Company accounts for internally developed softwarecosts in accordance with SOP 98-1, Accounting for the Costs of ComputerSoftware Developed for or Obtained for Internal Use, which requires thecapitalization of certain costs incurred in connection with developing orobtaining software for internal use. The Company capitalizes internal usesoftware if that software meets the following criteria:

·       Thesoftware is acquired, internally developed or modified solely to meet theCompany’s internal needs, and

·       Nosubstantive plan exists or is being developed to market the softwareexternally.

If these two criteria are met, the Company willcapitalize labor costs of full-time and temporary employees workingdirectly on the development or modification of internal use software andhardware and software purchased specifically for the internal use software.Capitalized costs are depreciated over the estimated useful lives of 3 to5 years when the software is complete and ready for its intended use.

**Cash Overdrafts**

The Company has includedin accounts payable book overdrafts of $3.8 million and $14.6 millionat December 31, 2005 and 2006, respectively.

**Operating Leases**

The Company’s centerleases typically have a lease term of three years and contain lessee renewaloptions and cancellation clauses in the event of regulatory changes. Because ofthe economic penalties associated with relocating its centers, combined withthe loss of customers and additional capital requirements, the Companytypically renews its leases for one or more options periods. Accordingly, theCompany amortizes its leasehold improvements over the shorter of their economiclives, which are generally five years, or the lease term that considers renewalperiods that are reasonably assured.

**Concentration ofRisk**

During the year endedDecember 31, 2006, the Company operated in 36 states in the UnitedStates. For the years ended December 31, 2004, 2005 and 2006, totalrevenues within the Company’s five largest states (measured by total revenues)accounted for approximately 42%, 41% and 47%, respectively, of the Company’stotal revenues.

**Advertising Costs**

Advertising costs areexpensed when incurred.

**Pre-opening Costs**

New center pre-opening costs are expensed whenincurred.

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**1. Description of Businessand Significant Accounting Policies (Continued)**

**Center ClosingCosts**

Center closing costsrepresent management’s estimate of severance payments, costs to clean andvacate the premises, losses related to the write-off of leasehold improvementsand signage, and lease cancellation expense related to closing a center. Aliability for severance payments, which are paid in accordance with theCompany’s severance policy, is recognized when management (i) decides toclose a center and this plan is unlikely to change, (ii) determines thatan employee cannot be relocated to another center and (iii) informs theemployee of the termination and the benefits that will be paid. The severancepayment is recognized at the time the termination is communicated to theemployee or, if the employee is required to continue service in order toreceive the benefit, ratably until the center closes. Costs to terminate thelease are recorded at the earlier of the date the lease is terminated or thelease’s cease-use date. All other expenses are recorded when incurred.

**Income Taxes**

Effective October 1, 2001, AACACI filed anelection to convert to Subchapter S status. Certain subsidiaries also convertedto Subchapter S status as part of this election. The Company terminated theseelections on December 21, 2004. For theyear ended December 31, 2004, approximately 91% of total revenues wereattributable to companies that had elected Subchapter S status.

Income taxes are accountedfor under the asset and liability method for those subsidiaries that remainedC corporations for 2004 and for the period December 21, 2004 throughDecember 31, 2004 for the Company. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying value of existing assets and liabilities andtheir respective tax bases and for operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which the related temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date.

**Derivative andHedging Activities**

The Company hasoccasionally used derivative financial instruments for the purpose of managingexposure to adverse fluctuations in interest rates. While these instruments aresubject to fluctuations in value, such fluctuations are generally offset by thechange in value of the underlying exposures being hedged. The Company does notenter into any derivative financial instruments for speculative or tradingpurposes. The Company had no derivative financial instruments outstanding as ofDecember 31, 2005 and 2006.

**Earnings per Share**

Basic earnings per share is computed by dividing netincome by the weighted average number of common shares outstanding for theperiod excluding unvested restricted stock. Diluted earnings per share iscomputed by dividing net income by the weighted average number of common sharesoutstanding for the period, after adjusting for the dilutive effect of unvestedrestricted stock and stock options. Unvested shares of restricted stock of233,329 and 391,488 at December 31, 2004 and 2005, respectively, andoptions 

77

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**1.Description of Business and Significant Accounting Policies (Continued)**

to purchase 1,200,000 and1,280,000 shares of common stock that were outstanding at December 31,2005 and 2006, respectively, were not included in the computation of dilutedearnings per share since the effect of including them would be anti-dilutive.

Thefollowing table presents the reconciliation of the denominator used in thecalculation of basic and diluted earnings per share for the years endedDecember 31, 2004, 2005 and 2006 (in thousands):

| ** **                                                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Reconciliation of  denominator:                                    |       |     |       |     |       |     |       |
| Weighted average number of common shares  outstanding—basic   |       | 69,126   |       | 83,124   |       | 80,889   |       |
| Effect of dilutive unvested restricted stock                       |       | —   |       | —   |       | 28       |       |
| Weighted average  number of common shares outstanding—diluted |       | 69,126   |       | 83,124   |       | 80,917   |       |

 

**Stock-BasedCompensation Plans**

The Company’s stock-based compensation plansinclude the 2004 Omnibus Stock Plan which was approved by the Company’s Boardof Directors in 2004 and a Nonqualified Stock Option Agreement and a RestrictedStock Agreement, both of which are between the Company and the Company’sPresident and Chief Executive Officer and were approved by the Company’s Boardof Directors in 2005.

Under the Company’sstock-based compensation plans, the Company has granted shares of restrictedstock (in 2004, 2005 and 2006) and options to purchase the Company’s commonstock (in 2005 and 2006). For the year ended December 31, 2004, theCompany adopted Statement of Financial Accounting Standards No. 123(Revised), Share-Based Payment (“SFAS No. 123(R)”). As required by SFASNo. 123(R), the Company uses the fair value method of accounting forcompensation cost for its restricted stock and stock options. Accordingly,compensation cost was measured at the grant date based on the fair value of theawards and is being recognized over each award’s respective service period. SeeNote 11 for the impact of these stock-based compensation plans on the Company’sresults of operations and financial condition as well as other disclosuresrequired by SFAS No. 123(R).

**Use of Estimates**

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andrelated notes to financial statements. Actual results could differ from theseestimates. Significant estimates include the determination of the allowance fordoubtful accounts, accounting for income taxes, self-insurance accrualsfor workers’ compensation and medical insurance and fair value of goodwillunder required impairment analysis.

**Risks andUncertainties**

The Company’s futureoperations involve a number of risks and uncertainties. Factors that couldaffect the Company’s future operating results and cause actual results todiffer materially from expectations include, but are not limited to:application of laws and regulations to the Company’s business, as more fullydisclosed in Note 2; the Company’s ability to manage credit risk;continued access to 

78

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**1.Description of Business and Significant Accounting Policies (Continued)**

revolvingcredit facilities; and interest rate fluctuation on variable rate debt. TheCompany manages these risks through political and legal efforts, continualevaluation of advance loss experience and, occasionally, entering into interestrate hedging instruments, respectively.

**Fair Value ofFinancial Instruments**

For certain of theCompany’s financial instruments, including cash and cash equivalents, advancesand fees receivable, accounts payable and accrued liabilities, the carryingamounts approximate fair value due to their short maturities.

**Treasury Stock**

The Company’s Board ofDirectors periodically authorizes the repurchase of common stock. The Company’srepurchases of shares of common stock are recorded as “Common stock intreasury” and result in a reduction of stockholders’ equity. When treasuryshares are reissued, the Company uses an average cost method. Gains on sales oftreasury stock not previously accounted for as constructively retired arecredited to additional paid-in-capital. Losses on sales of treasury stock arecharged to additional paid in capital to the extent that previous net “gains”from sales or retirements are included therein, otherwise to retained earnings.

**Business Segment**

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, (“SFASNo. 131”), established standards for reporting information about operatingsegments. Operating segments are defined as components of an enterprise aboutwhich separate financial information is available that is evaluated regularlyby the chief operating decision maker, or group, in deciding how to allocateresources and in assessing performance. For purposes of disclosure required bySFAS No. 131, the Company operates in one segment, retail financialservices.

**InsuranceRecoveries**

As a result of HurricanesKatrina and Rita during the last half of 2005, the Company incurred propertyand equipment losses and the interruption of its business at certain centers.Accordingly, at December 31, 2005, the Company recorded an estimated $1.0million receivable for insurance recoveries, which was included as an otherreceivable in advances and fees receivable, net. Of this amount, approximately$0.8 million was recorded in 2005 as a reduction of the provision for doubtfulaccounts and agency bank losses in the accompanying consolidated statements ofincome. During the year ended December 31, 2006, actual insurance recoveryproceeds totaled approximately $1.3 million and an additional $0.2 million wasrecorded as a recovery in the allowance for doubtful accounts.

**Recently IssuedAccounting Pronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued Financial Interpretation No. 48, Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin a company’s 

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**1.Description of Business and Significant Accounting Policies (Continued)**

financial statements inaccordance with FASB Statement No. 109, Accounting for Income Taxes. FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company is in the process ofadopting FIN 48 and anticipates no material impact on its financial conditionor results of operations as a result of its adoption.

In September 2006,the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”) whichexpresses the view of the SEC staff (the “Staff”) regarding the process ofquantifying financial statement misstatements. SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. The Staffbelieves registrants must quantify the impact of correcting all misstatements,including both the carryover and reversing effects of prior year misstatements,on its current year financial statements. Registrants electing not to restateprior periods should reflect the effects of initially applying the guidance inSAB 108 in their annual financial statements covering the first fiscal yearending after November 15, 2006. The application of the guidance in SAB 108in fiscal year 2006 did not have a material impact on the Company’s financialcondition or results of operations.

**Revisions to theConsolidated Statements of Cash Flows**

The Company has revisedthe consolidated statements of cash flows for the years ended December 31,2004 and 2005 to properly present the changes in fees receivable, net as anoperating activity. The effect of the revision is to decrease 2004 and 2005 netcash provided by operating activities by $14.3 million and $11.4 million,respectively, and to decrease 2004 and 2005 net cash used in investingactivities by the same amounts. The revision does not affect the net change incash and cash equivalents for any of the periods presented and has no effect onthe Company’s consolidated statements of income or any related earnings pershare amounts for any of the periods presented.

**Reclassifications**

Certain previouslyreported amounts have been reclassified to conform to the current presentation.

**2. Regulatory Requirements**

The Company’s business is regulated under numerousstate laws and regulations, which are subject to change and which may imposesignificant costs or limitations on the way the Company conducts or expands itsbusiness. As of December 31, 2006, 39 states and the District of Columbiahad specific laws that permitted payday cash advances or a similar form ofshort-term consumer loans. As of December 31, 2006, the Company operatedin 35 of these 39 states.

The Company does not conduct business in the remainingfour of these 39 states or in the District of Columbia because the Company doesnot believe it is currently economically attractive to operate in thesejurisdictions due to specific legislative restrictions such as interest rateceilings, an unattractive population density or unattractive locationcharacteristics. The remaining 11 states do not have laws specifically 

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**2.Regulatory Requirements (Continued)**

authorizing the paydaycash advance or short-term consumer finance business. Despite the lack ofspecific laws, other laws may permit the Company to do business in thesestates. As of December 31, 2006, the Company operated in one of these 11states.

The Company’s centers are individually licensed underthese state laws. Certain states have minimum net worth or minimum asset levelrequirements for each company conducting business in the state as a provider ofpayday cash advances or similar short-term consumer credit.

Although states provide the primary regulatoryframework under which the Company offers advance services, certain federal lawsalso impact the business. The Company’s advance services are subject to federallaws and regulations, including the Truth-in-Lending Act (“TILA”), the EqualCredit Opportunity Act (“ECOA”), the Fair Credit Reporting Act (“FCRA”), theFair Debt Collection Practices Act (“FDCPA”), the Gramm-Leach-BlileyAct (“GLBA”) and the regulations promulgated for each. Among other things,these laws require disclosure of the principal terms of each transaction toevery customer, prohibit misleading advertising, protect against discriminatorylending practices, proscribe unfair credit practices and prohibit creditorsfrom discriminating against credit applicants on the basis of race, sex, age ormarital status. The GLBA and its implementing regulations generally require theCompany to protect the confidentiality of its customers’ nonpublic personalinformation and to disclose to the Company’s customers its privacy policy andpractices.

The Company’s marketing efforts and therepresentations it makes about advance services also are subject to federal andstate unfair and deceptive practices statutes. The Federal Trade Commission(“FTC”) enforces the Federal Trade Commission Act and the state attorneysgeneral and private plaintiffs enforce the analogous state statutes. Thesestatutes generally prohibit unfair or deceptive conduct. The FTC has notinitiated any formal actions against the Company.

Violations of the statutesand regulations described above may result in actions for damages, claims forrefund of payments made, certain fines and penalties, injunctions againstcertain practices and the potential forfeiture of rights to repayment of loans.

**3. Marketing, Processingand Servicing Arrangements**

In connection with the Company’s former agencybusiness model, the Company entered into marketing, processing and servicingagreements (“MP&S Agreements”) with lending banks that offered payday cashadvances and, beginning in July 2005, installment loans.

During 2005, the Company was compensated underMP&S Agreements with the lending banks for Arkansas, Michigan, NorthCarolina, Pennsylvania and Texas. Operations in Michigan and Texas wereconverted to state-based legislation during June and July 2005,respectively, and operations in Pennsylvania and Arkansas were converted tostate-based legislation during June 2006. During 2006, the Company wascompensated under MP&S Agreements relating to only Pennsylvania andArkansas. As of December 31, 2006, the Company only operates pursuant toenabling state statutes under its standard business model.

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**3. Marketing, Processingand Servicing Arrangements (Continued)**

Although the Company marketed, processed and servicedpayday cash advances and installment loans made by the lending banks, eachlending bank was responsible for evaluating each of its customers’ applicationsand determining whether to approve the payday cash advance or installment loan.The Company was not involved in the lending banks’ payday cash advance orinstallment loan approval process or the determination of their approvalprocedures or criteria. The payday cash advances and installment loans wererepayable solely to the lending banks and were assets of the lending banks;accordingly, they were never included in the Company’s balance sheet.

Prior to July 2005,under each MP&S Agreement, the Company’s fees included each lending bank’scontractual obligation for its portion of the losses on payday cash advances.If actual losses exceeded the lending bank’s contractual obligations, theCompany was potentially obligated to pay the lending bank the outstandingamount of the advances plus the lending bank’s fees and/or interest receivableon the advances, less the lending bank’s contractually obligated portion of thelosses. Beginning in July 2005, the lending bank in North Carolina andArkansas became responsible for all losses associated with its payday cashadvances and installment loans, while the lending bank in Pennsylvaniacontinued to be contractually obligated only for only a portion of its losses.The outstanding balances of the lending banks’ advances, installment loans andfees receivable serviced by the Company were approximately $21.9 million atDecember 31, 2005. There were no such outstanding balances atDecember 31, 2006.

**4. Advances and FeesReceivable, Net**

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

| ** **                                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Advances  receivable                                                |       | $        | 165,212    |     | $          | 195,011 |   |
| Fees and interest  receivable                                       |       | 25,945   |       | 35,300   |       |
| Returned items  receivable                                          |       | 35,244   |       | 43,793   |       |
| Loans and fees  receivable of consolidated variable interest entity |       | 24,905   |       | 37,701   |       |
| Lending bank  receivable                                            |       | 2,342    |       | —   |       |
| Other                                                               |       | 3,350    |       | 2,975    |       |
| Allowance for  doubtful accounts                                    |       | (45,585  | )          | (57,396  | )          |
| Unearned revenues                                                   |       | (17,945  | )          | (19,659  | )          |
| Advances and fees  receivable, net                                  |       | $        | 193,468    |     | $          | 237,725 |   |

 

82

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**5. Allowance for DoubtfulAccounts and Accrual for Excess Bank Losses**

Changesin the allowance for doubtful accounts were as follows (in thousands):

| ** **                       | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance                |       | $        | 23,021     |     | $          | 29,221   |       | $ | 45,585 |   |
| Provision for  doubtful accounts |       | 67,169   |       | 99,460   |       | 119,425  |       |
| Charge-offs                      |       | (73,839  | )          | (105,411 | )          | (137,714 | )          |
| Recoveries                       |       | 12,870   |       | 22,315   |       | 30,100   |       |
| Ending balance                   |       | $        | 29,221     |     | $          | 45,585   |       | $ | 57,396 |   |

 

Changesin the accrual for excess bank losses were as follows (in thousands):

| ** **                        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance                 |       | $        | 3,623      |     | $          | 3,219    |       | $ | 1,373 |   |
| Provision for  agency bank losses |       | 22,067   |       | 15,600   |       | 1,430    |       |
| Charge-offs                       |       | (29,323  | )          | (23,761  | )          | (4,752   | )          |
| Recoveries                        |       | 6,852    |       | 6,315    |       | 1,949    |       |
| Ending balance                    |       | $        | 3,219      |     | $          | 1,373    |       | $ | — |   |

 

The provision for agency bank losses consisted ofthose losses for which the lending banks were contractually obligated and anestimate by which actual losses differed from the lending banks’ contractualobligations.

Thetotal changes in the allowance for doubtful accounts and the accrual for excessbank losses were as follows (in thousands):

| ** **                                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance                                       |       | $        | 26,644     |     | $          | 32,440   |       | $ | 46,958 |   |
| Provision for  doubtful accounts and agency bank losses |       | 89,236   |       | 115,060  |       | 120,855  |       |
| Charge-offs                                             |       | (103,162 | )          | (129,172 | )          | (142,466 | )          |
| Recoveries                                              |       | 19,722   |       | 28,630   |       | 32,049   |       |
| Ending balance                                          |       | $        | 32,440     |     | $          | 46,958   |       | $ | 57,396 |   |

 

83

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**6. Property and Equipment,Net**

Propertyand equipment, net, consisted of the following (in thousands):

| ** **                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Land and land  improvements     |       | $        | 1,479      |     | $          | 1,479 |   |
| Leasehold  improvements         |       | 39,145   |       | 46,235   |       |
| Office furniture  and equipment |       | 67,206   |       | 75,962   |       |
| Software                        |       | 17,260   |       | 11,631   |       |
| Building                        |       | 5,293    |       | 5,293    |       |
| Aircraft                        |       | 2,790    |       | 2,790    |       |
| Construction in  progress       |       | 3,486    |       | 2,356    |       |
| Property and equipment          |       | 136,659  |       | 145,746  |       |
| Less accumulated  depreciation  |       | (71,669  | )          | (82,548  | )          |
| Property and  equipment, net    |       | $        | 64,990     |     | $          | 63,198 |   |

 

**7. Goodwill**

Goodwill represents theexcess cost over the fair value of assets acquired. The Company tests itsgoodwill for impairment annually or if there is a significant change in thebusiness environment. The results of the 2004, 2005 and 2006 tests indicatedthere was no impairment.

**8. Accrued Liabilities**

Accruedliabilities consisted of the following (in thousands):

| ** **                           | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Employee  compensation               |       | $        | 8,819      |     | $          | 12,038 |   |
| Workers’  compensation          |       | 4,120    |       | 3,754    |       |
| Health and dental  insurance         |       | 3,352    |       | 3,495    |       |
| Lease smoothing                      |       | 2,357    |       | 2,924    |       |
| Advertising                          |       | 271      |       | 2,001    |       |
| Construction in  progress            |       | 3,071    |       | 1,563    |       |
| Center closing  costs                |       | 2,235    |       | 618      |       |
| Accounting and  tax                  |       | 1,362    |       | 661      |       |
| Property, sales  and franchise taxes |       | 676      |       | 622      |       |
| Legal                                |       | 583      |       | 885      |       |
| Other                                |       | 3,049    |       | 3,176    |       |
| Total                                |       | $        | 29,895     |     | $          | 31,737 |   |

 

**9. Revolving CreditFacility and Long-Term Debt**

**Revolving CreditFacility**

On July 16, 2004, the Company amended andrestated its prior credit facility. This facility, as subsequently amended (the“2004 Facility”) provides the Company with a $265 million revolving lineof credit, including the ability to issue up to $20 million in letters ofcredit and to repurchase the Company’s 

84

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**9.Revolving Credit Facility and Long-Term Debt (Continued)**

outstanding common stock(see Note 14). The maturity date of the 2004 Facility is July 16, 2009.The Company has the option to (i) increase the 2004 Facility by anadditional $10 million and (ii) extend the maturity date toJuly 16, 2010, in each case upon satisfaction of certain covenants andconditions. In connection with this amendment, the Company incurred $3.1million in loan origination costs in 2004 that were capitalized in other assetsand are being amortized over the remaining term of the 2004 Facility.

The 2004 Facility is collateralized by substantiallyall of the Company’s assets and contains various financial covenants thatrequire, among other things, the maintenance of a minimum net worth and certainleverage and fixed charge coverage ratios and also restricts the encumbrance ofassets and the creation of indebtedness. The 2004 Facility also includes crossdefault provisions where an event of default with respect to any otherindebtedness in excess of $1 million in the aggregate could cause all amountsoutstanding under the 2004 Facility to become due and payable. The Company wasin compliance with all covenants at December 31, 2005 and 2006.

Borrowings under the Facility consisted of Base RateLoans or Eurodollar Loans, or a combination thereof. Base Rate Loans boreinterest at the greater of the Federal Funds Rate plus 1¤2  of1% or the Prime Rate in effect on such day plus an amount that varied basedupon the Company’s Consolidated Senior Leverage Ratio (the Margin). EurodollarLoans bore interest at the 1-Month, 2-Month, 3-Month or 6-MonthLIBOR rate plus the Margin.

The weighted average interest rate was 7.38% and 8.15%for the 2004 Facility at December 31, 2005 and 2006, respectively.

Total commitment fees paid were $0.5 million, $1.5million, and $1.0 million for the years ended December 31, 2004, 2005, and2006, respectively.

The carrying value of the revolving credit facilityapproximated its fair value at December 31, 2005 and 2006.

The Company hadapproximately $3.9 million in letters of credit outstanding atDecember 31, 2006.

**Long-Term Debt**

Long-termdebt consists of the following (in thousands):

| ** **            | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Mortgage payable      |       | $        | 6,188      |     | $          | 5,831 |   |
| Note payable          |       | 500      |       | 384      |       |
| Total long-term debt  |       | 6,688    |       | 6,215    |       |
| Less current  portion |       | (503     | )          | (537     | )          |
| Long-term  debt       |       | $        | 6,185      |     | $          | 5,678 |   |

 

85

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**9. Revolving CreditFacility and Long-Term Debt (Continued)**

The Company owns its headquarters building and relatedland subject to a mortgage. The mortgage is payable to an insurance company andis secured by the Company’s corporate headquarters building and related land.The mortgage is payable in 180 monthly installments of approximately $66,400,including principal and interest, and bears interest at a fixed rate of 7.30%over its term. The mortgage matures on June 10, 2017. The carrying amountof the corporate headquarters (land, land improvements and building) was $5.4million and $5.2 million at December 31, 2005 and 2006, respectively.

The fair value of the long-term debt is estimatedusing a discounted cash flow analysis and was approximately $6.6 million and$6.0 million at December 31, 2005 and 2006, respectively.

Interestexpense consists of the following (in thousands):

| ** **                                                  | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Interest expense:**                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| National Cash Advance subordinated debt                     |       | $          | 4,791      |       | $          | —     |       | $ | — |   |
| Stock repurchase subordinated debt                          |       | 2,725      |       | —     |       | —     |       |
| Notes payable to stockholders                               |       | 2,346      |       | —     |       | —     |       |
| Mortgage payable                                            |       | 498        |       | 488        |       | 438        |       |
| Credit facility                                             |       | 6,113      |       | 2,731      |       | 4,484      |       |
| Amortization of deferred financing costs                    |       | 906        |       | 981        |       | 987        |       |
| Capitalized interest on internally developed software       |       | (259       | )          | (91        | )          | —     |       |
| Interest expense of consolidated variable interest   entity |       | —     |       | —     |       | 1,036      |       |
| Other                                                       |       | 45         |       | 222        |       | 184        |       |
| Total interest  expense                                     |       | $          | 17,165     |       | $          | 4,331      |       | $ | 7,129 |   |

 

The National Cash Advance subordinated debt, which wasunsecured and subordinate to the credit facility, was issued in connection withthe Company’s acquisition of National Cash and was amended onSeptember 30, 2002. The maturity date and interest rate for $30.7 millionof this debt was extended from October 15, 2004 to October 15, 2007and increased from 10% to 13% effective October 1, 2002, respectively.This debt was repaid on December 21, 2004. The remaining $11.5 million ofthe National Cash Advance subordinated debt was not amended, bore interest at arate of 10% and was repaid upon its maturity on October 15, 2004.

The stock repurchase subordinated debt, which wasunsecured and subordinate to the credit facility, was issued in connection withpurchases of common stock that is now included in Treasury Stock, and wasamended on September 30, 2002. The maturity date and interest rate for$16.4 million of this debt was extended from October 15, 2004 toOctober 15, 2007 and increased from 10% to 13% effective October 1,2002, respectively. Approximately $3.8 million of the remaining stockrepurchase subordinated debt was not amended, bore interest at a rate of 10%and was repaid upon its maturity date on October 15, 2004. The remaining$2.8 million of the stock repurchase subordinated debt was amended to increasethe interest rate from 10% to 13% and was repaid on December 21, 2004.

The notes payable to stockholders, which wereunsecured and subordinate to the credit facility and the National Cash Advancesubordinated debt, were amended on September 30, 2002. The maturity date 

86

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**9. RevolvingCredit Facility and Long-Term Debt (Continued)**

was extended fromDecember 31, 2004 to October 15, 2007 and the interest rate wasincreased from 8.25% to 13% effective October 1, 2002, respectively. Thisdebt was repaid on December 21, 2004.

Revolvingcredit facility and long-term debt maturities for the next five years andthereafter are (in thousands):

| 2007       |   | $       | 537     |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 542     |    |
| 2009       |   | 105,380 |    |
| 2010       |   | 477     |    |
| 2011       |   | 514     |    |
| Thereafter |   | 3,600   |    |
| Total      |   | $       | 111,050 |   |

 

**10. Income Taxes**

Incometax expense consisted of the following (in thousands):

| ** ** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current    |       |     |       |     |       |     |       |
| Federal    |       | $        | 1,101      |     | $          | 36,359   |       | $ | 47,078 |   |
| State      |       | 4,098    |       | 7,223    |       | 9,352    |       |
|       |       | 5,199    |       | 43,582   |       | 56,430   |       |
| Deferred   |       | 8,842    |       | 194      |       | (7,572   | )          |
| Total      |       | $        | 14,041     |     | $          | 43,776   |       | $ | 48,858 |   |

 

A reconciliationof the statutory federal income tax rate and the Company’s effective income taxrate follows:

| ** **                               | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory income  tax rate               |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| S corporation  income not subject to tax |       | (29.9    | )          | —   |       | —   |       |
| Conversion to C  corporation status      |       | 6.4      |       | —   |       | —   |       |
| State income  taxes, net                 |       | 2.8      |       | 4.4      |       | 4.3      |       |
| Other                                    |       | 0.2      |       | 1.2      |       | 0.7      |       |
| Effective income tax  rate               |       | 14.5     | %          | 40.6     | %          | 40.0     | %          |

 

87

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**10.Income Taxes (Continued)**

The tax effects oftemporary differences that give rise to significant portions of deferred taxassets and deferred tax liabilities are (in thousands):

| ** **                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets                           |       |     |       |     |       |
| Accrued expenses                              |       | $        | 4,113      |     | $          | 4,764 |   |
| Bad debts                                     |       | 2,491    |       | 7,684    |       |
| Net operating loss carryforwards              |       | 356      |       | 260      |       |
| State credit carryforwards                    |       | 275      |       | 1,012    |       |
| Depreciation                                  |       | —   |       | 224      |       |
| Other                                         |       | 46       |       | 646      |       |
| Valuation allowance                           |       | —   |       | (260     | )          |
| Total deferred tax assets                     |       | 7,281    |       | 14,330   |       |
| Deferred tax liabilities                      |       |     |       |     |       |
| Goodwill                                      |       | (10,743  | )          | (13,609  | )          |
| Depreciation                                  |       | (3,731   | )          | —   |       |
| Prepaid expenses                              |       | (1,477   | )          | (1,822   | )          |
| Book versus tax basis difference for aircraft |       | (669     | )          | (665     | )          |
| Total deferred tax liabilities                |       | (16,620  | )          | (16,096  | )          |
| Net deferred tax  liability                   |       | $        | (9,339     | )        | $          | (1,766 | ) |

 

Prior to the Company’s initial public offering inDecember 2004, the Company and substantially all of its subsidiaries (the“Subchapter S Companies”) were taxed as an S corporation for federal and moststate income tax purposes. On December 21, 2004, the Subchapter SCompanies terminated their status as an S corporation and are now taxed asSubchapter C corporations. As a result of the termination of the Subchapter SCompanies’ S corporation status, AACACI recorded a net deferred tax liabilityand corresponding income tax expense on the revocation date of $8.4 million.

Following the filing of the Company’s final Scorporation tax returns, the Company recorded an additional $0.6 million ofdeferred tax liability that resulted in a $0.6 million increase in tax expensefor the third quarter of 2006.

As of December 31,2005 and 2006, the Company had net operating loss carryforwards for stateincome tax purposes totaling approximately $0.8 million and $0.3 million,respectively, which will begin to expire in 2014. A valuation allowance of $0.3million has been recorded because management believes it is more likely thannot that the entire deferred tax asset related to state net operating losscarryforwards will not be realized. As of December 31, 2005 and 2006, theCompany had credit carryforwards for federal and state income tax purposes totalingapproximately $0.4 million and $1.0 million, respectively, which will begin toexpire in 2010.

**11. Stock-BasedCompensation Plans**

In 2004, the Companyadopted SFAS No. 123(R). Accordingly, the Company measures the cost of itsstock-based employee compensation at fair value on the grant date andrecognizes such cost in the 

88

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**11.Stock-Based Compensation Plans (Continued)**

financial statements on astraight-line basis over the requisite service period of the awards, which isgenerally the vesting period.

The Company’s 2004 Omnibus Stock Plan provides for thegranting of restricted stock, stock options and other stock awards to certaindirectors, officers and other key employees of the Company. Additionally,during 2005, the Company granted to its President and Chief Executive Officer,stock options and shares of restricted stock under a Nonqualified Stock OptionAgreement and a Restricted Stock Agreement, respectively. Both of theseagreements are outside the terms of the Company’s 2004 Omnibus Stock Plan.

Restricted stock grants under the Company’sstock-based compensation plans generally vest in equal annual installments overthree, five or eight years from the date of grant. Stock option grants underthe Company’s stock-based compensation plans are generally exercisable in equalannual installments over three, five or eight years from the date of grant andgenerally expire ten years after the date of grant.

The grant date fair value of all shares of restrictedstock was based on the market value of the Company’s common stock on the datesof grant. These amounts are being expensed ratably over each award’s respectivevesting period.

All stock optionswere granted with an exercise price equal to the market value of the Company’scommon stock on the dates of grant. The Company estimated the fair value ofstock options on the date of grant using the Black-Scholes option pricing modelusing the following assumptions:

·       *Expected term*—The expected term represents the period duringwhich the Company’s stock options are expected to be outstanding. The Companybased its determination of the expected term by giving consideration to thecontractual terms of the stock options awards, vesting schedules, expectationsof future employee behavior and published academic research regarding exercisebehavior.

·       *Expected volatility*—The expected volatility represents theamount by which the price of the underlying shares has fluctuated or isexpected to fluctuate during the expected term. As of the stock option grantdates, the Company was still a relatively new public company with limitedhistorical data regarding the volatility of the price of its publicly-tradedshares and has no other publicly-traded financial instruments from which toderive implied volatility. As such, the Company based its estimated volatilityon the historical stock price volatility of other public companies in itsindustry, which the Company believes is representative of its expected futurevolatility over the expected term of its options.

·       *Expected dividends*—The Company used its expected dividendyield as of each stock option grant date as its expected dividends over theexpected term of the options.

·       *Risk-free rate*—The Company used risk-free interest rates forperiods within the expected terms of the options based on the U.S. Treasuryyield curve in effect at each option grant date.

89

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**11. Stock-BasedCompensation Plans (Continued)**

Toestimate each stock option’s weighted-average fair value on the grant dates,the following weighted-average assumptions were used in the Black-Scholesoption pricing model for all stock options granted during the years ended December 31,2005 and 2006 (there were no stock options granted during the year ended December 31,2004):

| ** **                  | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Expected term  (years)      |       | 6.56     |       | 4.41     |       |
| Expected  volatility        |       | 50       | %          | 47       | %          |
| Expected  dividends (yield) |       | 3.4      | %          | 3.6      | %          |
| Risk-free rate              |       | 4.37     | %          | 4.63     | %          |

 

The weighted-averagegrant-date fair values of options granted during the years ended December 31,2005 and 2006 were $4.90 per option and $4.85 per option, respectively, and arebeing expensed ratably over each award’s respective vesting period.

Thefollowing table provides certain information with respect to stock optionsoutstanding and exercisable at December 31, 2006 under the Company’sstock-based compensation plans:

| ** **                                           | ** ** | **Outstanding** | ** **     | **Exercisable** | ** ** |
|------------------------------------------------------|------------|-----------------|----------------|-----------------|------------|
| Number of stock  options                             |       | 1,280,000       |           | 168,750         |       |
| Range of exercise  prices                            |       | $               | 12.11 - $14.70 |            | $          | 12.11 - $13.83 |   |
| Weighted-average  exercise price                     |       | $               | 12.61          |            | $          | 12.62 |   |
| Aggregate  intrinsic value (in thousands)            |       | $               | 2,614          |            | $          | 343 |   |
| Weighted-average  remaining contractual term (years) |       | 8.8             |           | 8.8             |       |

 

90

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**11.Stock-Based Compensation Plans (Continued)**

A summary of the Company’sauthorized and available shares, activity and the weighted average stock optionexercise prices under its stock-based compensation plans follows:

| ** **                             | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------|------------|-------------|------------|--------------------|------------|--------------|------------|
| ** **                             | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Average**  | ** ** |
| ** **                             | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Stock**    | ** ** |
| ** **                             | ** ** | ** **     | ** ** | **Outstanding** | ** ** | ** **  | ** ** | **Option**         | ** ** |
| ** **                             | ** ** | ** **     | ** ** | **Restricted**  | ** ** | **Stock**   | ** ** | **Available**      | ** ** | **Exercise** | ** ** |
| ** **                             | ** ** | **Authorized** | ** ** | **Stock**       | ** ** | **Options** | ** ** | **For Grant** | ** ** | **Price**    | ** ** |
| Outstanding at  December 31, 2003 |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Authorized                             |       | 4,250,000      |       |            | —     |        |       | —             |       | 4,250,000    |       |   | — |   |   |
| Granted                                |       | —         |       |            | 233,329    |        |       | —             |       | (233,329     | )          |   | — |   |   |
| Exercised                              |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Canceled                               |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Outstanding at  December 31, 2004 |       | 4,250,000      |       |            | 233,329    |        |       | —             |       | 4,016,671    |       |   | — |   |   |
| Authorized                             |       | 950,000        |       |            | —     |        |       | —             |       | 950,000      |       |   | — |   |   |
| Granted                                |       | —         |       |            | 304,823    |        |       | 1,200,000          |       | (1,504,823   | )          |   | $ | 12.47 |   |   |
| Exercised                              |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Canceled                               |       | —         |       |            | (81,109    | )           |       | —             |       | 81,109       |       |   | — |   |   |
| Outstanding at  December 31, 2005 |       | 5,200,000      |       |            | 457,043    |        |       | 1,200,000          |       | 3,542,957    |       |   | 12.47 |   |   |
| Authorized                             |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Granted                                |       | —         |       |            | 143,334    |        |       | 80,000             |       | (223,334     | )          |   | 14.70 |   |   |
| Exercised                              |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Canceled                               |       | —         |       |            | (11,333    | )           |       | —             |       | 11,333       |       |   | — |   |   |
| Outstanding at  December 31, 2006 |       | 5,200,000      |       |            | 589,044    |        |       | 1,280,000          |       | 3,330,956    |       |   | $ | 12.61 |   |   |

 

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

| ** **                           | ** ** | **Shares** | ** ** | **Weighted Average  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Nonvested at  December 31, 2003 |       | —     |       |                                       | —     |   |   |
| Granted                              |       | 233,329    |       |                                       | $          | 15.00 |   |   |
| Vested                               |       | —     |       |                                       | —     |   |   |
| Forfeited                            |       | —     |       |                                       | —     |   |   |
| Nonvested at  December 31, 2004 |       | 233,329    |       |                                       | 15.00      |   |   |
| Granted                              |       | 304,823    |       |                                       | 12.04      |   |   |
| Vested                               |       | (65,555    | )          |                                       | 15.00      |   |   |
| Forfeited                            |       | (81,109    | )          |                                       | 15.00      |   |   |
| Nonvested at  December 31, 2005 |       | 391,488    |       |                                       | 12.69      |   |   |
| Granted                              |       | 143,334    |       |                                       | 14.37      |   |   |
| Vested                               |       | (102,689   | )          |                                       | 13.58      |   |   |
| Forfeited                            |       | (11,333    | )          |                                       | 14.81      |   |   |
| Nonvested at December 31, 2006  |       | 420,800    |       |                                       | $          | 12.99 |   |   |

 

91

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**11.Stock-Based Compensation Plans (Continued)**

The total grant date fair value of restricted sharesvested during the years ended December 31, 2005 and 2006 was approximately$1.0 million and $1.4 million, respectively, and the total market value ofthese shares on the dates vested was approximately $0.8 million and $1.5million, respectively.

Asummary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the years ended December 31, 2004, 2005 and 2006 follows (inthousands):

| ** **                             | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Restricted stock                       |       |     | $          | 49       |       |     | $          | 1,053 |   | $ | 1,529 |   |
| Stock options                          |       |     | —     |     |       | 186      |       | 951 |   |
| Total stock-based compensation expense |       |     | $          | 49       |       |     | $          | 1,239 |   | $ | 2,480 |   |

 

As of December 31,2006, the total compensation cost not yet recognized related to nonvested stockawards under the Company’s plans is approximately $10.3 million. The weightedaverage period over which this expense is expected to be recognized is approximately5.7 years.

**12. Commitments andContingencies**

**Legal Proceedings**

The Company is involved inseveral active lawsuits, including lawsuits arising out of actions taken bystate regulatory authorities, and is involved in various other legalproceedings with state and federal regulators. 

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

The Company, the Company’ssubsidiary, McKenzie Check Advance of Florida, LLC (“McKenzie”), and certainofficers, directors and employees are defendants in a putative class-actionlawsuit commenced by former customers, Wendy Betts and Donna Reuter, inFlorida. This putative class action was filed by Ms. Betts and Ms. Reuterin February 2001 in the Circuit Court of Palm Beach County and allegesthat McKenzie, by and through the actions of certain officers, directors andemployees, engaged in unfair and deceptive trade practices and violated Florida’scriminal usury statute, the Florida Consumer Finance Act and the FloridaRacketeer Influenced and Corrupt Organizations Act. The suit seeks unspecifieddamages, and McKenzie or the other defendants could be required to refund feesand/or interest collected, refund the principal amount of payday cash advances,pay multiple damages and pay other monetary penalties.

Defendants’ motion for summary judgment was originallygranted as to Ms. Betts’ claims but later reversed by a Florida appellatecourt. On appeal, the Florida Supreme Court issued an opinion in April 2006,holding that the deferred presentment transactions between Betts and theCompany were governed by Florida’s usury laws and not governed by the FloridaMoney Transmitters’ Code as the Company asserted. The case has been remanded tothe Circuit Court by the Fourth District Court of Appeals where discovery isnow ongoing. Although this ruling by the Florida Supreme Court was adverse tothe Company, it is too early in this proceeding to identify the amount ofpotential losses to the Company, if any, since the case is still in its earlystages and several material issues have yet to be addressed by the courts.

92

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**12.Commitments and Contingencies (Continued)**

Ms.  Reuter’s claims were subject to an arbitration agreement containedin the contract; defendants’ motion to compel arbitration was granted by thestate trial court, upheld by the state appeals court and affirmed by theFlorida Supreme Court declining to accept certiorari. Thus, the order to compelarbitration is final as to Ms. Reuter. The arbitration and litigation willlikely proceed in parallel.

*Reuter and Betts v. Advance America, Cash AdvanceCenters of Florida, Inc. et al.*

A second Florida lawsuitwas filed in August 2004 in the Circuit Court of Palm Beach County byformer customers Gerald Betts and Ms. Reuter against the Company, theCompany’s subsidiary, Advance America, Cash Advance Centers of Florida, Inc.,and certain officers and directors. The allegations are nearly identical tothose alleged in the first Betts and Reuter lawsuit. The Company filed motionsto dismiss, to stay the proceedings pending determination of dispositiveactions by the Florida Supreme Court in the original Betts and Reuter case andto compel arbitration. Proceedings in this case were stayed pending thedisposition of the appeals in the original Betts and Reuter case. Now that thoseappeals have been resolved, the stay of proceedings has been lifted and theCompany will proceed with defending this second lawsuit. Discovery is nowongoing.

*Pennsylvania Department of Banking v. NCAS ofDelaware, LLC*

In September 2006, the PennsylvaniaDepartment of Banking filed a lawsuit in the Commonwealth Court of Pennsylvaniaalleging that the Company’s Delaware subsidiary is providing lines of credit toborrowers in Pennsylvania without a license required under Pennsylvania law andwith interest and fees in excess of the amounts permitted by Pennsylvania law.The Pennsylvania Department of Banking has filed a Motion for Judgment on thePleadings for Declaratory Relief and Permanent Injunction, seeking: (1) adeclaration as a matter of law that the Company’s Delaware subsidiary isviolating Pennsylvania lending laws and (2) a permanent injunctionenjoining the Delaware subsidiary from issuing new lines of credit and fromcollecting on or enforcing currently outstanding lines of credit or other loanproducts in Pennsylvania. The Company filed a brief in opposition and a crossmotion for judgment on the pleadings. Further briefing has been scheduled andoral argument for both parties’ motions is scheduled for April 2007.

*Raymond King v. Advance America, Cash Advance Centersof Pennsylvania, Inc.*

In April 2006, RaymondKing, who was a customer of the lending bank in Pennsylvania, filed adeclaratory judgment action in the Court of Common Pleas in Philadelphia Countyagainst the Company’s Pennsylvania subsidiary. The parties have mutually agreedto end this lawsuit because the plaintiff (and another party) filed anotherseparate putative class action lawsuit in the United States District Court forthe Eastern District of Pennsylvania. The parties notified the court of theirmutual agreement and the Court of Commons Pleas discontinued this action in February 2007.

*Raymond King and Sandra Coates v. Advance America,Cash Advance Centers of Pennsylvania, LLC*

In January 2007, RaymondKing and Sandra Coates, who were customers of BankWest, the lending bank forwhich the Company marketed, processed and serviced payday cash advances inPennsylvania, filed a putative class action lawsuit in the United StatesDistrict Court, Eastern District of 

93

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**12.Commitments and Contingencies (Continued)**

Pennsylvaniaagainst the Company alleging various causes of action, including that thePennsylvania subsidiary made illegal payday loans in Pennsylvania in violationof Pennsylvania’s usury law, the Pennsylvania Consumer Discount Company Act,the Pennsylvania Unfair Trade Practices and Consumer Protection Law, thePennsylvania Fair Credit Extension Uniformity Act and the Pennsylvania CreditServices Act. The complaint alleges that BankWest was not the “true lender” onthe advances that the Company marketed, processed and serviced for BankWest inPennsylvania and that the Company was the “lender in fact.” The complaint seekscompensatory damages, attorneys’ fees, punitive damages and the trebling of anycompensatory damages. The Company intends to file its response to the Complaintin March 2007.

*Kingand Strong v. Advance America, Cash Advance Centers of Georgia, Inc. etal.*

In August 2004, TahishaKing and James E. Strong, who were customers of BankWest, the lending bank forwhich the Company marketed, processed and serviced payday cash advances inGeorgia, filed a putative class action lawsuit in the State Court of CobbCounty, Georgia against the Company, William M. Webster IV, the Company’s ViceChairman, and other unnamed officers, directors, owners and “stakeholders,”alleging various causes of action including that the Georgia subsidiary madeillegal payday loans in Georgia in violation of Georgia’s usury law, theGeorgia Industrial Loan Act and Georgia’s Racketeer Influenced and CorruptOrganizations Act. The complaint alleges that BankWest was not the “true lender”on the advances that the Company marketed, processed and serviced for BankWestin Georgia and that the Company was the “de facto” lender. The complaint seekscompensatory damages, attorneys’ fees, punitive damages and the trebling of anycompensatory damages. The Company and the other defendants denied theplaintiffs’ claims and asserted that all of the claims are subject to mandatoryand binding individual arbitration pursuant to arbitration agreements signed byeach plaintiff. In April 2006, the State Court of Cobb County entered aconsent order, which was jointly submitted by the parties, whereby the partiesagreed and consented to arbitration of all claims raised by plaintiffs in thisaction and to stay all proceedings pending the outcome of arbitration onplaintiffs’ claims. The plaintiffs filed a demand for arbitration seeking toarbitrate their claims in a class action or representative status. Anarbitrator was appointed, initial briefs were filed, and oral arguments wereheld regarding the enforceability of the arbitration provision and the classaction waiver contained in the bank’s consumer loan agreement. The Companyintends to continue to deny plaintiffs’ claims and resist plaintiffs’ effortsto conduct class arbitration.

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

The Company’s Georgiasubsidiary is involved in another case in Georgia that, although not a classaction lawsuit, contains essentially the same allegations as the King andStrong case. In March 2003, Angela Glasscock, a customer of BankWest, filed anadversary proceeding in the U.S. Bankruptcy Court for the Southern District ofGeorgia alleging that the Georgia subsidiary was making payday cash advances inGeorgia in violation of the Georgia Industrial Loan Act. BankWest intervenedinto the case and subsequently both the subsidiary and BankWest filed a motionfor summary judgment, which was granted in September 2005. In its holding,the court ruled that BankWest was the “true lender.” Plaintiffs have appealedthis ruling to the United States District Court where it is now pending.Although the amount in controversy in the case is only $350, the underlyingclaims of Ms. Glasscock, if validated by the appellate court, could serveas a basis for future claims against the Company.

94

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**12.Commitments and Contingencies (Continued)**

*Kucan et al. v. Advance America, Cash Advance Centersof North Carolina, Inc. et al.*

In July 2004, John Kucan,Welsie Torrence and Terry Coates, each of whom was a customer of Republic Bank &Trust Company (“Republic”), the lending bank for whom the Company marketed,processed and serviced payday cash advances in North Carolina, filed a putativeclass action lawsuit in the General Court of Justice for the Superior CourtDivision for New Hanover County, North Carolina against the Company and Mr. Webster,alleging, among other things, that the relationship between the Company’s NorthCarolina subsidiary and Republic was a “rent a charter” relationship andtherefore Republic was not the “true lender” on the payday cash advances itoffered. The lawsuit also claims that the payday cash advances were made,administered and collected in violation of numerous North Carolina consumerprotection laws. The lawsuit seeks an injunction barring the subsidiary fromcontinuing to do business in North Carolina, the return of the principal amountof the payday cash advances made to the plaintiff class since August 2001,the return of any interest or fees associated with those advances, trebledamages, attorneys’ fees and other unspecified costs. In December 2005, thecourt issued an Order granting defendants’ motion for arbitration, staying theproceedings and denying class certification. The plaintiffs have appealed thisOrder to the North Carolina Court of Appeals. The plaintiffs in this case andtwo other North Carolina cases currently before the Court of Appeals filed apetition, which the Company has opposed, for discretionary review andconsolidation of the cases. The Court of Appeals heard oral argument on theconsolidated cases in January 2007. The Company is awaiting a ruling fromthe Court of Appeals.

*North Carolina Commissioner of Banks Order*

In August 2004, theNorth Carolina Attorney General’s Office, in conjunction with the Commissionerof Banks for North Carolina, issued a subpoena to the Company to producedocuments, respond to written questions and have a corporate representativeappear for a deposition regarding the relationship between the Company’s NorthCarolina subsidiary and the lending bank in North Carolina, Republic, todetermine whether the Company’s operations in North Carolina were in compliancewith North Carolina law. In February 2005, the Commissioner of Banksinitiated a contested case against the Company’s North Carolina subsidiary foralleged violations of the North Carolina Consumer Finance Act. In December 2005,at the conclusion of the contested case, the Commissioner of Banks ordered thatthe Company’s North Carolina subsidiary immediately cease and desist operating.In accordance with the Commissioner of Banks’ Order, the Company’s NorthCarolina subsidiary ceased all business operations on December 22, 2005.The full North Carolina State Banking Commission has since affirmed theCommissioner of Banks’ Order and the Company filed an appeal with the NorthCarolina Superior Court. The appeal was dismissed and the Company is currentlyappealing the dismissal to the North Carolina Court of Appeals.

*New Mexico Proposed Rules and RegulationsGoverning the Extension of Credit For Small Loans*

In February 2006, the Company joined four other paydaylenders in a lawsuit against the New Mexico Attorney General requestingimmediate injunctive relief from the enforcement of the Attorney General’sProposed Rules and Regulations Governing the Extension of Credit for SmallLoans, which would have severely limited the payday loan industry in New Mexico.The parties mutually agreed to stay 

95

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**12.Commitments and Contingencies (Continued)**

anyfurther proceedings pending the adoption of new proposed regulations publishedby the Financial Institutions Division of the New Mexico Regulation andLicensing Department (“FID”) in June 2006. In August 2006, in alawsuit filed by several other payday loan companies, the second judicialdistrict court of New Mexico issued a preliminary injunction enjoining theenforcement of the FID proposed regulations. As a result of the Court’s order,the Company has not made any changes in its New Mexico operations and ismonitoring the litigation to determine what, if any, changes may be required toits New Mexico operations in the future.

*Department of Labor Investigations*

The United StatesDepartment of Labor has periodically initiated investigations of the Company’spractices regarding the payment of overtime wages to certain employees. TheDepartment of Labor recently concluded some of these investigations and theCompany is cooperating with the ongoing investigations, any of which couldresult in the payment of back wages, civil monetary penalties and otherenforcement action.

*OtherMatters*

The Company is alsoinvolved in other litigation and administrative proceedings. This litigationincludes contractual disputes, employee claims for workers’ compensation,wrongful termination, harassment, discrimination, payment of wages due andcustomer claims relating to collection practices and violations of state and/orfederal consumer protections laws.

The amount of lossesand/or the probability of an unfavorable outcome, if any, cannot be reasonablyestimated for the above legal proceedings. Accordingly, no accrual has beenrecorded for any of the above matters as of December 31, 2006.

**Other Commitments and Contingencies**

The Company is self-insured for certain elements ofits employee benefits, including workers’ compensation, but limits itsliability through stop-loss insurance. Self-insurance liabilities are based onclaims filed and estimates of claims incurred but not reported.

96

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**12. Commitments andContingencies (Continued)**

Substantiallyall center locations and certain office equipment are leased from third partylessors under operating leases. Total rent expense in 2004, 2005 and 2006 was$48.8 million, $58.2 million and $61.0 million, respectively. As ofDecember 31, 2006, minimum future lease commitments under the operatingleases having non-cancelable lease terms in excess of one year are (inthousands): 

| ** **                   | ** ** | **Operating  Lease** | ** ** |
|------------------------------|------------|----------------------|------------|
| 2007                         |       | $                    | 58,847     |   |
| 2008                         |       | 42,013               |       |
| 2009                         |       | 23,936               |       |
| 2010                         |       | 9,889                |       |
| 2011                         |       | 4,805                |       |
| Thereafter                   |       | 1,090                |       |
| Operating lease  obligations |       | $                    | 140,580    |   |

 

The Company enters intoagreements with vendors to purchase furniture, fixtures and other items used toopen new centers. These purchase commitments typically extend for a period oftwo to three months after the opening of a new center. As of December 31,2006, the Company’s purchase obligations totaled approximately $1.9 million.

**13. Related PartyTransactions**

The Company’s corporateheadquarters building was constructed and financed through a special purposeentity (“SPE”) in 2001, which was controlled and owned by the Company’sChairman and certain of the Company’s stockholders. The SPE was determined tobe a variable interest entity (“VIE”) and had been consolidated in accordancewith Financial Accounting Standards Board Interpretation No. 46,Consolidation of Variable Interest Entities (“FIN 46”). The Company acquiredthe SPE on December 21, 2004 through the issuance of 38,730 shares ofcommon stock and assumption of the mortgage payable.

Prior to December 21,2004, the Company leased two jet aircraft from Wyoming Associates, Inc.(“Wyoming”), an enterprise owned by the Company’s Chairman. Wyoming wasdetermined to be a VIE. The Company’s leasehold interest in aircraft owned byWyoming was deemed to be a variable interest in aircraft owned by Wyoming;however, the Company was not deemed to be the primary beneficiary. The Companyleased, on a month-to-month basis, certain aircraft of Wyoming butdid not provide guarantees related to the aircraft; therefore, the Company wasnot exposed to the losses of Wyoming. The Company acquired these two jetaircraft on December 21, 2004 through the issuance of 686,217 shares ofcommon stock, which the Board of Directors determined to be the fair value ofthe two aircraft.

Beginning inDecember 2003, the Company also leased a plane from a stockholder andformer director. The Company terminated the lease as of September 1, 2004.

The Company has enteredinto operating leases for centers, aircraft hangar space and other office andwarehouse space with companies controlled by or affiliated with the Company’sChairman and members of his family.

97

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**13.Related Party Transactions (Continued)**

During 2005 and 2006, theCompany periodically leased, on an hourly basis, airplanes owned by companies controlledby the Company’s Chairman and/or Vice Chairman or in which they had ownershipinterests.

Additionally, companiescontrolled by the Company’s Chairman and/or Vice Chairman or in which they hadownership interests, provided pilots, fuel and other operating services for theCompany’s aircraft.

The Company’s Chairman hasa brother who is a partner of a law firm that provided the Company certain routinelegal services during 2005 and 2006.

Finally, under atime-share arrangement, the Company’s Chairman and Vice Chairman have used theCompany’s aircraft for private purposes in exchange for the Company’s use of anidentical aircraft owned by the Company’s Chairman and Vice Chairman. For theyear ended December 31, 2006, the value of the Company’s use of theaircraft owned by the Company’s Chairman and Vice Chairman exceeded the valueof the Company’s Chairman’s and Vice Chairman’s use of the Company’s aircraftby approximately $31,000. This liability is included in accrued liabilities in theaccompanying consolidated balance sheet at December 31, 2006.

Expensesrelated to all transactions with related parties consisted of the following (inthousands):

| ** **                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Aircraft                           |       | $        | 2,021      |     | $          | 579      |       | $ | 390 |   |
| Center leases                      |       | 206      |       | 53       |       | 51       |       |
| Office and  warehouse space leases |       | 32       |       | 59       |       | 93       |       |
| Legal and other                    |       | —   |       | 2        |       | 64       |       |
| Total                              |       | $        | 2,259      |     | $          | 693      |       | $ | 598 |   |

 

On October 31, 2005,the Company completed the sale of one of the aircraft to a non-related party.As a result of this transaction, the Company recorded a loss of approximately$1.5 million in 2005. For tax purposes, the Company recognized a gain ofapproximately $5.4 million in the fourth quarter 2005.

**14. Capital Stock**

At December 31, 2003, authorized capital stock ofthe Company consisted of 10,000 shares of common stock without par value.Effective August 11, 2004, the Company filed an Amended and RestatedCertificate of Incorporation, which increased the authorized common stock to250 million shares and also authorized 25 million shares of par value $.01 pershare preferred stock. In addition, the Board of Directors declared a 500,000-to-1stock split of the common stock affected in the form of a stock dividend. TheCompany also converted its no par common stock into par value $.01 per sharecommon stock. Effective November 23, 2004, the Board of Directors declareda 0.908439145-to-1 reverse stock split of the common stock. Eachshare of common stock is entitled to one vote.

On December 21, 2004, the Company completed thesale of 14.3 million shares of its common stock at an initial public offeringprice of $15 per share. The net proceeds of $194.9 million were used to repayborrowings under the Company’s revolving credit facility and debt with relatedparties.

98

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**14.Capital Stock (Continued)**

On May 4, 2005, theCompany announced that its Board of Directors had approved a programauthorizing the repurchase by the Company of up to $50.0 million of itsoutstanding common stock. On August 16, 2006, the Company announced thatits Board of Directors had approved an extension of the Company’s stockrepurchase program authorizing the Company to repurchase up to $100.0 millionof its outstanding common stock on and after this date. During the years endedDecember 31, 2005 and 2006, the Company repurchased, pursuant to its stockrepurchase program, 1,963,033 and 2,820,782 shares of its common stock,respectively, at a cost of approximately $25.7 million and $40.1 million, respectively.

**15. Quarterly FinancialInformation (unaudited)**

Quarterlyfinancial information for the years ended December 31, 2006 and 2005 ispresented below ($ in thousands, except per share data):

| ** **                                                     | ** ** | **2006**                          | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **Three months ended,** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **March 31**                 | ** ** | **June 30** | ** ** | **Sept 30** | ** ** | **Dec 31** | ** ** | **Total Year** | ** ** |
| Fees and interest  charged to customers                        |       | $                                 | 143,092    |   | $ | 152,611 |   | $ | 178,521 |   | $ | 185,652 |   | $ | 659,876 |   |
| Marketing,  processing and servicing fees                      |       | 9,077                             |       | 3,310 |   | 31 |   | — |   | 12,418 |   |
| Total revenues                                                 |       | 152,169                           |       | 155,921 |   | 178,552 |   | 185,652 |   | 672,294 |   |
| Provision for  doubtful accounts and agency bank losses        |       | (11,876                           | )          | (27,435 | ) | (40,514 | ) | (41,030 | ) | (120,855 | ) |
| Net revenues.                                                  |       | 140,293                           |       | 128,486 |   | 138,038 |   | 144,622 |   | 551,439 |   |
| Total center  expenses                                         |       | 90,157                            |       | 89,998 |   | 89,590 |   | 95,063 |   | 364,808 |   |
| Center gross  profit                                           |       | 50,136                            |       | 38,488 |   | 48,448 |   | 49,559 |   | 186,631 |   |
| Total corporate  and other expenses                            |       | 14,911                            |       | 15,780 |   | 16,264 |   | 17,620 |   | 64,575 |   |
| Income before  income taxes                                    |       | 35,225                            |       | 22,708 |   | 32,184 |   | 31,939 |   | 122,056 |   |
| Income tax  expense                                            |       | 14,313                            |       | 8,924 |   | 13,322 |   | 12,299 |   | 48,858 |   |
| Income before income of consolidated variable  interest entity |       | 20,912                            |       | 13,784 |   | 18,862 |   | 19,640 |   | 73,198 |   |
| Income of consolidated  variable interest entity               |       | (485                              | )          | (888 | ) | (894 | ) | (780 | ) | (3,047 | ) |
| Net income                                                     |       | $                                 | 20,427     |   | $ | 12,896 |   | $ | 17,968 |   | $ | 18,860 |   | $ | 70,151 |   |
| Net income per  common share                                   |       |                              |       |   |   |   |   |   |   |   |   |
| —basic                                                    |       | $                                 | 0.25       |   | $ | 0.16 |   | $ | 0.22 |   | $ | 0.24 |   | $ | 0.87 |   |
| —diluted                                                  |       | $                                 | 0.25       |   | $ | 0.16 |   | $ | 0.22 |   | $ | 0.24 |   | $ | 0.87 |   |

 

99

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**15.Quarterly Financial Information (unaudited) (Continued)**

| ** **                                                     | ** ** | **2005**                          | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **Three months ended,** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **March 31**                 | ** ** | **June 30** | ** ** | **Sept 30** | ** ** | **Dec 31** | ** ** | **Total Year** | ** ** |
| Fees and interest  charged to customers                        |       | $                                 | 105,156    |   | $ | 114,693 |   | $ | 153,161 |   | $ | 156,943 |   | $ | 529,953 |   |
| Marketing,  processing and servicing fees                      |       | 33,227                            |       | 35,624 |   | 19,476 |   | 11,786 |   | 100,113 |   |
| Total revenues                                                 |       | 138,383                           |       | 150,317 |   | 172,637 |   | 168,729 |   | 630,066 |   |
| Provision for  doubtful accounts and agency bank losses        |       | (10,091                           | )          | (30,567 | ) | (36,340 | ) | (38,062 | ) | (115,060 | ) |
| Net revenues                                                   |       | 128,292                           |       | 119,750 |   | 136,297 |   | 130,667 |   | 515,006 |   |
| Total center  expenses                                         |       | 82,394                            |       | 85,512 |   | 90,598 |   | 84,879 |   | 343,383 |   |
| Center gross  profit                                           |       | 45,898                            |       | 34,238 |   | 45,699 |   | 45,788 |   | 171,623 |   |
| Total corporate  and other expenses                            |       | 13,709                            |       | 15,109 |   | 18,018 |   | 17,018 |   | 63,854 |   |
| Income before  income taxes                                    |       | 32,189                            |       | 19,129 |   | 27,681 |   | 28,770 |   | 107,769 |   |
| Income tax  expense                                            |       | 12,451                            |       | 8,384 |   | 11,352 |   | 11,589 |   | 43,776 |   |
| Income before income of consolidated variable  interest entity |       | 19,738                            |       | 10,745 |   | 16,329 |   | 17,181 |   | 63,993 |   |
| Income of consolidated  variable interest entity               |       | —                            |       | — |   | (476 | ) | (527 | ) | (1,003 | ) |
| Net income                                                     |       | $                                 | 19,738     |   | $ | 10,745 |   | $ | 15,853 |   | $ | 16,654 |   | $ | 62,990 |   |
| Net income per  common share                                   |       |                              |       |   |   |   |   |   |   |   |   |
| —basic                                                    |       | $                                 | 0.24       |   | $ | 0.13 |   | $ | 0.19 |   | $ | 0.20 |   | $ | 0.76 |   |
| —diluted                                                  |       | $                                 | 0.24       |   | $ | 0.13 |   | $ | 0.19 |   | $ | 0.20 |   | $ | 0.76 |   |

 

**16.**Transactionswith Variable Interest Entity

Beginning in July 2005, the Company ceasedconducting business under the agency business model in Texas, and beganconducting business through a wholly owned subsidiary registered as a CreditServices Organization (“CSO”) under Texas law. In connection with operating asa CSO, the Company entered into a credit services organization agreement (“CSOAgreement”) with an unaffiliated third-party lender. The CSO Agreement governsthe terms by which the Company refers customers in Texas to that lender, on anon-exclusive basis, for a possible extension of credit, processes loanapplications and commits to reimburse the lender for any loans or related feesthat are not collected from such customers.

The Company has determined that the lender is a VIEunder FIN 46(R) (a revised version of FIN 46). The Company has neither anequity interest nor voting rights in the lender and has no input into themanagement of the lender. However, the Company has determined that it is theprimary beneficiary of the VIE because the Company has committed to reimbursethe lender for the full amount of the loans and all related fees that are notpaid by the customers for all loans that are processed under the CSO Agreement.As a result, the Company has consolidated the lender into the Company’sfinancial statements.

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**Advance America, Cash Advance Centers, Inc. Notes to Consolidated Financial Statements (Continued) December 31, 2004, 2005 and 2006**

**16.Transactions with Variable Interest Entity (Continued)**

The impact of theconsolidation of this VIE on the Company’s December 31, 2005 and 2006consolidated balance sheets was to increase the following balance sheetaccounts as follows (in thousands):

| ** **                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash and cash  equivalents                            |       | $        | 3,332      |     | $          | 5,000 |   |
| Advances and fees  receivable, net                    |       | 17,777   |       | 33,713   |       |
| Accounts payable                                      |       | —   |       | 5,815    |       |
| Accrued  liabilities                                  |       | 40       |       | 358      |       |
| Non-controlling interest  in variable interest entity |       | 21,069   |       | 32,540   |       |
|                                                       |            |          |            |          |            |  |  |

 

Theimpact of the consolidation of this VIE on the Company’s consolidatedstatements of income for the years ended December 31, 2005 and 2006 was toincrease the following income statement accounts as follows (in thousands):

| ** **                                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Net revenues                                     |       | $        | 1,375      |     | $          | 5,150 |   |
| Other center expenses                            |       | 372      |       | 1,067    |       |
| Interest expense                                 |       | —   |       | 1,036    |       |
| Income of consolidated  variable interest entity |       | 1,003    |       | 3,047    |       |
|                                                  |            |          |            |          |            |  |  |

 

**17.Subsequent Events**

On January 24, 2007, the Company’s Board ofDirectors declared a cash dividend of $0.125 per share of common stock, payableon March 9, 2007 to stockholders of record on February 28, 2007.

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**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES.

**Evaluation of Disclosure, Controls and Procedures**

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”)) as of December 31, 2006. Based uponthis evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of December 31, 2006, our disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission rules and forms and such information isaccumulated and communicated to management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  

**Management’s Report on Internal Control over FinancialReporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under the Securities ExchangeAct of 1934). Internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles in the United States of America.Our internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect our transactions anddispositions of our assets; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of our financialstatements in accordance with generally accepted accounting principles in theUnited States of America, and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and directors of theCompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of our assetsthat could have a material effect on our financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.  

Our management assessedthe effectiveness of our internal control over financial reporting based on theframework in *Internal Control—Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on this assessment, management concluded that our internal control overfinancial reporting was effective as of December 31, 2006. 

Management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting asof December 31, 2006, has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report whichappears in “Item 8. Financial Statements and Supplementary Data.” 

Additionally, as requiredby Section 303A.12(a) of the New York Stock Exchange (“NYSE”) Listed CompanyManual, the Registrant’s Chief Executive Officer filed a certificate with the NYSEon June 16, 2006 reporting that he was not aware of any violation by us ofthe NYSE’s Corporate Governance listing standards. The certifications of thePresident and Chief Executive Officer and the Executive Vice President andChief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002,regarding the 

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qualityof the Company’s disclosure in this 2006 Annual Report on Form 10-K, have beenfiled as exhibits 31.1 and 31.2 hereto.

**ITEM 9B.   OTHER INFORMATION.**

None. 

**PARTIII**

**ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT.**

**Executive Officers **

Ourexecutive officers, their ages at March 1, 2007, and their positions with usare set forth below. Our executive officers are elected by and serve at thediscretion of our Board of Directors. 

| **Name**            | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                          | ** ** |
|---------------------|------------|------------|------------|---------|------------|-------------------------------------------------------|------------|
| Kenneth E.  Compton |       |       | 54         |    |       | President  and Chief Executive Officer                |       |
| John I. Hill        |       |       | 53         |    |       | Executive Vice President  and Chief Financial Officer |       |

 

***Kenneth E. Compton*** hasserved as our President and Chief Executive Officer since August 26, 2005. FromFebruary 1992 to February 2005, Mr. Compton was President of the GlobalAutomotive Group for Milliken & Company, an international textile andchemical manufacturer headquartered in Spartanburg, South Carolina. FromJune 1974 to February 1992 Mr. Compton served Milliken & Company invarious management positions.

***John I. Hill*** has servedas our Executive Vice President and Chief Financial Officer sinceJanuary 2002. From July 1999 to December 2001, Mr. Hill wasExecutive Vice President and Chief Financial Officer of DHI, Inc., aconsolidation of four companies providing staffing, security and contractservices in sixteen states. Mr. Hill's other positions have includedserving from April 1998 to April 1999 as Senior Vice President andChief Financial Officer of Enterprise Computer Systems, a vertically integratedsoftware and business-to-business e-commerce provider to the shelter industry,from May 1996 to April 1998 as Executive Vice President and ChiefFinancial Officer of Phoenix Wireless Group, a switching software and wirelesslocal loop service provider in international markets and fromDecember 1992 to May 1996 as Vice President and Chief FinancialOfficer of Dial Call Communications, Inc., a cellular provider. From 1979through 1991, Mr. Hill worked with KPMG Peat Marwick. 

**Other Information**

The information set forth underthe captions “Election of our Board of Directors,” “Principal Stockholders—Section16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance—Meetingand Committees of the Board of Directors-Audit Committee” in the proxystatement for our 2007 annual meeting is incorporated herein by reference.

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Wehave a Code of Business Conduct and Ethics that applies to all of ourDirectors, officers and employees, including our principal executive officer,principal financial officer and principal accounting officer. You can find ourCode of Business Conduct and Ethics by going to the following website address: http://investors.advanceamerica.netand clicking “Code of Conduct.”  We willpost on our website (http://www.advanceamerica.net) any amendments to the Codeof Business Conduct and Ethics, as well as any waivers that are required to bedisclosed by the rules of either the U.S. Securities and Exchange Commission(“SEC”) or the New York Stock Exchange. You can also obtain a printed copy ofany of the materials referred to above without charge by contacting us at thefollowing address and requesting a copy:

Advance America, Cash Advance Centers, Inc.Attention:  Corporate Secretary135 North Church StreetSpartanburg, South Carolina  29306Telephone:  864-342-5600

**ITEM11.**   EXECUTIVE COMPENSATION.

Information containedunder the captions “Executive and Director Compensation,” “CompensationCommittee Report” and “Corporate Governance-Meetings and Committees of theBoard of Directors-Compensation Committee Interlocks and Insider Participation”in the proxy statement for our 2007 annual meeting is incorporated herein byreference.

**ITEM12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information set forthunder the captions “Principal Stockholders” and “Executive and DirectorCompensation—Equity Compensation Plans” in the proxy statement for our 2007 annualmeeting is incorporated herein by reference.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information set forthunder the captions “Certain Transactions” and “Corporate Governance—IndependentDirectors” in the proxy statement for our 2007 annual meeting is incorporatedherein by reference.

**ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

Information containedunder the caption “Appointment of Our Independent Auditors” in the proxy statementfor our 2007 annual meeting is incorporated herein by reference.

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**PART IV**

**ITEM 15.   EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.**

**(a)(1) FinancialStatements**

Theinformation required by this Item is included in “Item 8. Financial Statementsand Supplementary Data.”

**(a)(2) FinancialStatement Schedules**

Allschedules for which provision is made in the applicable accounting regulationsof the SEC have been omitted because they are not required under the relatedinstructions, are not applicable, or the information has been provided in theconsolidated financial statements or the notes thereto, included in “Item 8. FinancialStatements and Supplementary Data.”

**(a)(3) Exhibits:**

Theexhibits to this report are listed in the Exhibit Index included elsewhereherein.  Included in the exhibits listedare the following exhibits that constitute management contracts or compensatoryplans or arrangements of the Company:
| 10.2  | (a)    | 2004 Omnibus Stock Plan.                                                                                                                                         |   |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.2  | (b)    | Form of Restricted Stock Agreement.                                                                                                                              |   |
| 10.2  | (c)    | Form of Nonqualified Stock Option Agreement.                                                                                                                     |   |
| 10.3  |   | Form of Registration Rights Agreement.                                                                                                                           |   |
| 10.4  |   | Nonqualified Stock Option Agreement between Advance  America, Cash Advance Centers, Inc. and Kenneth E. Compton, dated  as of October 27, 2005.   |   |
| 10.5  |   | Restricted Stock Agreement between Advance America,  Cash Advance Centers, Inc. and Kenneth E. Compton, dated as of  October 27, 2005.            |   |
| 10.7  |   | Separation Agreement and General Release between  Advance America, Cash Advance Centers, Inc. and John T. Egeland,  dated as of January 25, 2006. |   |
| 10.8  |   | Advance America, Cash Advance Centers, Inc.  Policy Regarding Receipt of Company Stock in Lieu of Cash Director’s Fees.                                |   |
| 10.9  |   | Description of 2006 Cash Bonus Arrangement for Named  Executive Officers.                                                                                        |   |
| 10.10 |   | Description of  Compensation Arrangement for Non-executive Directors.                                                                                            |   |
| 10.15 |   | Description of  2007 Cash Bonus Arrangement for Named Executive Officers.                                                                                        |   |

 

**(b) Exhibits**
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                                                     | ** ** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                | ** ** |
| 3.1        |       | Amended and  Restated Certificate of Incorporation of the registrant (incorporated herein  by reference to Exhibit 3.1 to Advance America, Cash Advance Centers, Inc.’s  Registration Statement, on Form S-1, Registration No. 333-118227 (the “IPO  Registration Statement”)). |       |
| 3.2        |       | Amended and  Restated Bylaws of the registrant (incorporated herein by reference to  Exhibit 3.1 to Advance America, Cash Advance Centers, Inc.’s Current  Report on Form 8-K filed on December 21, 2005).                                                                           |       |

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| 4.1  |   | Specimen common  stock certificate (incorporated herein by reference to Exhibit 4.1 to the IPO  Registration Statement).                                                                                                                                                                                                |   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.1 | (a)    | Amended and  Restated Credit Agreement, dated as of July 16, 2004 (incorporated herein by  reference to Exhibit 10.1 to the IPO Registration Statement).                                                                                                                                                                |   |
| 10.1 | (b)    | First Amendment,  dated as of November 29, 2004, to the Amended and Restated Credit Agreement,  dated as of July 16, 2004 (incorporated herein by reference to Exhibit  10.1(b) to Advance America, Cash Advance Centers, Inc.’s Annual Report on  Form 10-K filed on March 16, 2006 (the “2005 10-K”)). |   |
| 10.1 | (c)    | Second Amendment,  dated as of December 31, 2004, to the Amended and Restated Credit Agreement,  dated as of July 16, 2004 (incorporated herein by reference to Exhibit  10.1(c) to the 2005 10-K).                                                                                                                     |   |
| 10.1 | (d)    | Third Amendment,  dated as of May 11, 2005, to the Amended and Restated Credit Agreement, dated  as of July 16, 2004 (incorporated herein by reference to Exhibit 10.1(d) to  the 2005 10-K).                                                                                                                           |   |
| 10.1 | (e)    | Fourth Amendment,  dated as of June 23, 2005, to the Amended and Restated Credit Agreement,  dated as of July 16, 2004 (incorporated herein by reference to Exhibit  10.1(e) to the 2005 10-K).                                                                                                                         |   |
| 10.1 | (f)    | Fifth Amendment,  dated as of August 16, 2006, to the Amended and Restated Credit Agreement,  dated as of July 16, 2004 (incorporated herein by reference to Exhibit 10.1  to Advance America, Cash Advance Centers, Inc.’s Current Report on Form 8-K  filed on August 16, 2006).                                 |   |
| 10.1 | (g)    | Sixth Amendment,  dated as of January 12, 2007, to the Amended and Restated Credit Agreement,  dated as of July 16, 2004.                                                                                                                                                                                               |   |
| 10.2 | (a)    | 2004 Omnibus  Stock Plan (incorporated herein by reference to Exhibit 10.5(a) to the IPO  Registration Statement).                                                                                                                                                                                                      |   |
| 10.2 | (b)    | Form of  Restricted Stock Agreement (incorporated herein by reference to Exhibit  10.5(b) to the IPO Registration Statement).                                                                                                                                                                                           |   |
| 10.2 | (c)    | Form of  Nonqualified Stock Option Agreement (incorporated herein by reference to  Exhibit 10.3 to Advance America, Cash Advance Centers, Inc.’s Current  Report on Form 8-K filed on November 3, 2005 (the “November 2005  8-K”)).                                                            |   |
| 10.3 |   | Form of  Registration Rights Agreement (incorporated herein by reference to Exhibit  10.6 to the IPO Registration Statement).                                                                                                                                                                                           |   |
| 10.4 |   | Nonqualified  Stock Option Agreement between Advance America, Cash Advance Centers, Inc.  and Kenneth E. Compton, dated as of October 27, 2005 (incorporated herein by  reference to Exhibit 10.1 to the November 2005 8-K).                                                                                            |   |
| 10.5 |   | Restricted Stock  Agreement between Advance America, Cash Advance Centers, Inc. and Kenneth E.  Compton, dated as of October 27, 2005 (incorporated herein by reference to  Exhibit 10.2 to the November 2005 8-K).                                                                                                     |   |
| 10.6 |   | Form of  Indemnification Agreement (incorporated herein by reference to Exhibit 10.11  to the IPO Registration Statement).                                                                                                                                                                                              |   |

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| 10.7  |   | Separation  Agreement and General Release between Advance America, Cash Advance Centers,  Inc. and John T. Egeland, dated as of January 25, 2006 (incorporated herein  by reference to Exhibit 10.1 to Advance America, Cash Advance Centers, Inc.’s  Current Report on Form 8-K filed on January 31, 2006).               |   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.8  |   | Advance America,  Cash Advance Centers, Inc. Policy Regarding Receipt of Company Stock in Lieu  of Cash Director’s Fees (incorporated herein by reference to Exhibit 99.1 to  Advance America, Cash Advance Centers, Inc.’s Current Report on Form 8-K  filed on February 23, 2006).                                  |   |
| 10.9  |   | Description of 2006  Cash Bonus Arrangement for Named Executive Officers (incorporated herein by  reference to Exhibit 10.2 to Advance America, Cash Advance Centers, Inc.’s  Current Report on Form 8-K filed on July 26, 2006 (the “July 2006 8-K”)).                                                          |   |
| 10.10 |   | Description of  Compensation Arrangement for Non-executive Directors (incorporated herein by  reference to Exhibit 10.3 to the July 2006 8-K).                                                                                                                                                                                  |   |
| 10.11 |   | Aircraft Dry  Lease by and between Advance America, Cash Advance Centers, Inc. and Arizona,  LLC, dated as of May 9, 2006 (incorporated herein by reference to Exhibit  10.2 to Advance America, Cash Advance Centers, Inc.’s Current Report on Form  8-K filed on November 22, 2006 (the “November 2006 8-K”)). |   |
| 10.12 |   | Aircraft Dry  Lease by and between Advance America, Cash Advance Centers, Inc. and Arizona,  LLC, dated as of June 15, 2005 (incorporated herein by reference to Exhibit  10.3 to the November 2006 8-K).                                                                                                                       |   |
| 10.13 |   | Summary of Terms  of Reciprocal Use Agreement by and between Advance America, Cash Advance  Centers, Inc. and Arizona, LLC (incorporated herein by reference to Exhibit  10.1 to the November 2006 8-K).                                                                                                                        |   |
| 10.14 |   | Summary of Terms  of Arrangement for Personal Use of Aircraft by Kenneth E. Compton  (incorporated herein by reference to Exhibit 10.4 to the November 2006 8-K).                                                                                                                                                               |   |
| 10.15 |   | Description of  2007 Cash Bonus Arrangement for Named Executive Officers (incorporated herein  by reference to Exhibit 10.1 to Advance America, Cash Advance Centers, Inc.’s  Current Report on Form 8-K filed on February 26, 2007).                                                                  |   |
| 21.1  |   | Subsidiaries of  the registrant.                                                                                                                                                                                                                                                                                                |   |
| 23.1  |   | Consent of PricewaterhouseCoopers  LLP.                                                                                                                                                                                                                                                                                         |   |
| 31.1  |   | Certification of  Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities and Exchange Act of 1934, as amended.                                                                                                                                                                             |   |
| 31.2  |   | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities and Exchange Act of 1934, as amended.                                                                                                                                                                             |   |
| 32.1  |   | Certification of  Chief Executive Officer of Advance America, Cash Advance Centers, Inc.  pursuant to 18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002).                                                                                                                              |   |
| 32.2  |   | Certification of Chief Financial Officer of Advance  America, Cash Advance Centers, Inc. pursuant to 18 U.S.C. Section 1350  (Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).                                                                                                                               |   |

 

**(c) FinancialStatement Schedules**

None.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on the 1st day of March, 2007.

|          | **ADVANCE  AMERICA, CASH ADVANCE CENTERS, INC.** |
|----------|--------------------------------------------------|
|     | By:                                              | /s/ KENNETH E. COMPTON |
|     |                                             | Kenneth E. Compton |
| * * | * *                                         | *President and Chief Executive  Officer* |

 

Pursuant to therequirement of the Securities Exchange Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| Signature                         | ** ** | ** **                        | ** ** | **Title**           | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|---------------------|------------|------------|------------|----------|------------|------------|
| /s/ GEORGE D. JOHNSON, JR.   |       | Chairman of the  Board            |       | March 1,  2007 |
| George D.  Johnson, Jr.      |       | and Director                      |       |                |
| /s/ WILLIAM M. WEBSTER, IV        |       | Vice Chairman of  the Board       |       | March 1,  2007 |
| William M. Webster, IV            |       | and Director                      |       |                |
| /s/ KENNETH E. COMPTON            |       | President and  Chief Executive    |       | March 1,  2007 |
| Kenneth E. Compton                |       | Officer (Principal  Executive     |       |                |
|                              |       | Officer) and Director             |       |                |
| /s/ JOHN I. HILL                  |       | Executive Vice  President         |       | March 1,  2007 |
| John I. Hill                      |       | and Chief Financial  Officer      |       |                |
|                              |       | (Principal Financial  Officer and |       |                |
|                              |       | Principal Accounting  Officer)    |       |                |
| /s/ STEPHEN K. BENJAMIN           |       | Director                          |       | March 1,  2007 |
| Stephen K. Benjamin               |       |                              |       |                |
| /s/ ROBERT H. CHAPMAN, III   |       | Director                          |       | March 1,  2007 |
| Robert H.  Chapman, III      |       |                              |       |                |
| /s/ THOMAS E. HANNAH              |       | Director                          |       | March 1,  2007 |
| Thomas E. Hannah                  |       |                              |       |                |
| /s/ DONOVAN A. LANGFORD, III |       | Director                          |       | March 1,  2007 |
| Donovan A. Langford, III     |       |                              |       |                |
| /s/ W. OLIN NISBET                |       | Director                          |       | March 1,  2007 |
| W. Olin Nisbet                    |       |                              |       |                |

 

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