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**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****     QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

**o****      TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom              to            **

 

**COMMISSIONFILE NUMBER 001-32363**

 

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

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **58-2332639**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**135 North Church StreetSpartanburg, South Carolina 29306**(Address of principal executive offices) (Zip Code)

 

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

 

**None**(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer o                |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                              | ** ** | **Outstanding as of August 6, 2010** |
|----------------------------------------|------------|---------------------------------------------------------------|
| Common Stock, par value $.01 per share |       | 62,202,821 shares                                             |

 

 

 

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

**Form 10-Q**

**For thethree months and six months ended June 30, 2010**

 
| ** **                              | ** **                                                                                                         | **Page** |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING  STATEMENTS**         |                                                                                                               | 3        |
|                                    |                                                                                                               |     |
| **PART I.  FINANCIAL INFORMATION** |                                                                                                               | 4        |
| Item 1.                            | Financial Statements                                                                                               |     | 4 |
|                                    | Unaudited Consolidated Balance Sheets  December 31, 2009 and June 30, 2010                               |     | 4 |
|                                    | Interim Unaudited Consolidated Statements of Income  Three Months and Six Months Ended June 30, 2009 and 2010 |     | 5 |
|                                    | Interim Unaudited Consolidated Statement of  Stockholders’ Equity Six Months Ended June 30, 2010         |     | 6 |
|                                    | Interim Unaudited Consolidated Statements of Cash  Flows Six Months Ended June 30, 2009 and 2010              |     | 7 |
|                                    | Notes to Interim Unaudited Consolidated Financial  Statements                                                      |     | 8 |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |     | 23 |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                        |     | 46 |
| Item 4.                            | Controls and  Procedures                                                                                           |     | 46 |
|                                    |                                                                                                               |     |   |
| **PART II.  OTHER INFORMATION**    |                                                                                                               | 47       |
| Item 1.                            | Legal Proceedings                                                                                                  |     | 47 |
| Item 1A.                           | Risk Factors                                                                                                       |     | 47 |
| Item 5.                                 | Other Information                                                                                                  |     | 48 |
| Item 6.                            | Exhibits                                                                                                           |     | 48 |
|                                    |                                                                                                               |     |   |
| **SIGNATURES**                          |                                                                                                               | 49       |
|                                    |                                                                                                               |     |   |
| **INDEX TO  EXHIBITS**                  |                                                                                                               | 50       |

 

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**FORWARD-LOOKING STATEMENTS**

 

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

 

The matters described in “Part I. Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2009and in “Part II. Item 1A. Risk Factors” of this Quarterly Report as wellas any cautionary language in this Quarterly 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, the examples weprovided.

 

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

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIALSTATEMENTS.**

 

**Advance America, Cash Advance Centers, Inc.**

 

**Unaudited Consolidated Balance Sheets**

 

**December 31,2009 and June 30, 2010**

 

**(in thousands, except per sharedata)**

 
| ** **                                                                                                                                                                                    | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                                                                    |       |                        |       |                    |       |
| Current assets                                                                                                                                                                                |       |                        |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                     |       | $                           | 38,189     |                    | $          | 14,232 |   |
| Advances and fees receivable, net                                                                                                                                                             |       | 204,234                     |       | 192,761                 |       |
| Deferred income taxes                                                                                                                                                                         |       | 19,145                      |       | 19,145                  |       |
| Other current assets                                                                                                                                                                          |       | 17,383                      |       | 20,934                  |       |
| Total current assets                                                                                                                                                                          |       | 278,951                     |       | 247,072                 |       |
| Restricted cash                                                                                                                                                                               |       | 4,366                       |       | 3,800                   |       |
| Property and equipment, net                                                                                                                                                                   |       | 31,839                      |       | 26,248                  |       |
| Goodwill                                                                                                                                                                                      |       | 127,031                     |       | 126,812                 |       |
| Other assets                                                                                                                                                                                  |       | 3,964                       |       | 3,501                   |       |
| Total assets                                                                                                                                                                                  |       | $                           | 446,151    |                    | $          | 407,433 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                |       |                        |       |                    |       |
| Current liabilities                                                                                                                                                                           |       |                        |       |                    |       |
| Accounts payable                                                                                                                                                                              |       | $                           | 13,562     |                    | $          | 11,634 |   |
| Accrued liabilities                                                                                                                                                                           |       | 31,432                      |       | 31,434                  |       |
| Income taxes payable                                                                                                                                                                          |       | 11,400                      |       | —                  |       |
| Accrual for third-party lender losses                                                                                                                                                         |       | 4,528                       |       | 3,973                   |       |
| Current portion of long-term debt                                                                                                                                                             |       | 851                         |       | 875                     |       |
| Total current liabilities                                                                                                                                                                     |       | 61,773                      |       | 47,916                  |       |
| Revolving credit facility                                                                                                                                                                     |       | 141,058                     |       | 106,299                 |       |
| Long-term debt                                                                                                                                                                                |       | 4,367                       |       | 3,861                   |       |
| Deferred income taxes                                                                                                                                                                         |       | 23,349                      |       | 23,349                  |       |
| Deferred revenue                                                                                                                                                                              |       | 2,717                       |       | 1,787                   |       |
| Other liabilities                                                                                                                                                                             |       | 274                         |       | 300                     |       |
| Total liabilities                                                                                                                                                                             |       | 233,538                     |       | 183,512                 |       |
| Commitments and contingencies (Note 6)                                                                                                                                                   |       |                        |       |                    |       |
| 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 61,614 and 62,156 outstanding as  of December 31, 2009 and June 30, 2010, respectively |       | 968                         |       | 968                     |       |
| Paid-in capital                                                                                                                                                                               |       | 290,146                     |       | 289,879                 |       |
| Retained earnings                                                                                                                                                                             |       | 182,765                     |       | 193,618                 |       |
| Accumulated other comprehensive loss                                                                                                                                                          |       | (1,934                      | )          | (2,468                  | )          |
| Common stock in treasury (35,207 and 34,665 shares  at cost at December 31, 2009 and June 30, 2010, respectively)                                                                   |       | (259,332                    | )          | (258,076                | )          |
| Total stockholders’ equity                                                                                                                                                               |       | 212,613                     |       | 223,921                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |       | $                           | 446,151    |                    | $          | 407,433 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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**Advance America, Cash Advance Centers, Inc.**

 

**Interim Unaudited Consolidated Statements of Income**

 

**ThreeMonths and Six Months Ended June 30, 2009 and 2010**

 

**(in thousands, except per sharedata)**

 
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                        | ** ** | **2009**                              | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| **Total Revenues**                                |       | $                                     | 150,124    |                                | $          | 141,357 |   | $ | 306,517 |   | $ | 285,755 |   |
| **Center Expenses:**                              |       |                                  |       |                                |       |   |   |   |   |
| Salaries and related payroll costs                |       | 45,404                                |       | 44,119                              |       | 92,917 |   | 91,704 |   |
| Provision for doubtful accounts                   |       | 33,012                                |       | 25,058                              |       | 54,110 |   | 37,792 |   |
| Occupancy costs                                   |       | 23,247                                |       | 21,993                              |       | 48,020 |   | 45,464 |   |
| Center depreciation expense                       |       | 3,260                                 |       | 2,559                               |       | 6,983 |   | 5,256 |   |
| Advertising expense                               |       | 8,935                                 |       | 6,567                               |       | 11,116 |   | 10,202 |   |
| Other center expenses                             |       | 11,606                                |       | 9,937                               |       | 24,312 |   | 21,448 |   |
| Total center expenses                             |       | 125,464                               |       | 110,233                             |       | 237,458 |   | 211,866 |   |
| Center gross profit                               |       | 24,660                                |       | 31,124                              |       | 69,059 |   | 73,889 |   |
| **Corporate and Other Expenses  (Income):**       |       |                                  |       |                                |       |   |   |   |   |
| General and administrative expenses               |       | 13,798                                |       | 16,623                              |       | 27,869 |   | 33,264 |   |
| Legal settlements                                 |       | —                                |       | 2,350                               |       | — |   | 2,388 |   |
| Corporate depreciation expense                    |       | 679                                   |       | 701                                 |       | 1,367 |   | 1,391 |   |
| Interest expense                                  |       | 1,595                                 |       | 1,097                               |       | 3,294 |   | 2,274 |   |
| Interest income                                   |       | (17                                   | )          | (5                                  | )          | (34 | ) | (18 | ) |
| (Gain)/loss on disposal of property and equipment |       | (80                                   | )          | 152                                 |       | (47 | ) | 320 |   |
| Loss on impairment of assets                      |       | —                                |       | 654                                 |       | 2,209 |   | 654 |   |
| Income before income taxes                        |       | 8,685                                 |       | 9,552                               |       | 34,401 |   | 33,616 |   |
| Income tax expense                                |       | 2,043                                 |       | 4,430                               |       | 12,616 |   | 15,007 |   |
| Net income                                        |       | $                                     | 6,642      |                                | $          | 5,122 |   | $ | 21,785 |   | $ | 18,609 |   |
| Net income per common share:                      |       |                                  |       |                                |       |   |   |   |   |
| Basic                                             |       | $                                     | 0.11       |                                | $          | 0.08 |   | $ | 0.36 |   | $ | 0.30 |   |
| Diluted                                           |       | $                                     | 0.11       |                                | $          | 0.08 |   | $ | 0.35 |   | $ | 0.30 |   |
| Dividends declared per common share               |       | $                                     | 0.0625     |                                | $          | 0.0625 |   | $ | 0.125 |   | $ | 0.125 |   |
| Weighted average number of shares outstanding:    |       |                                  |       |                                |       |   |   |   |   |
| Basic                                             |       | 60,865                                |       | 61,070                              |       | 60,862 |   | 61,020 |   |
| Diluted                                           |       | 61,657                                |       | 61,742                              |       | 61,545 |   | 61,680 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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**Advance America, Cash Advance Centers, Inc.**

 

**Interim Unaudited Consolidated Statement of Stockholders’Equity**

 

**Six MonthsEnded June 30, 2010**

 

**(in thousands, except per sharedata)**

 
| ** **                                              | ** ** | ** **       | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------|------------|------------|------------|-------------|------------|--------------|------------|-------------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **  | ** ** | **Other**    | ** ** | **Common Stock**  | ** ** | ** **      | ** ** |
| ** **                                              | ** ** | ** **       | ** ** | **Par**    | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **In Treasury** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Shares**       | ** ** | **Value**  | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Loss**          | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Total**  | ** ** |
| **Balances, December 31,  2009**                   |       | 96,821           |       | $          | 968        |        | $          | 290,146      |       | $                 | 182,765    |            | $          | (1,934     | )          | (35,207    | )          | $ | (259,332 | ) | $ | 212,613 |   |
| Comprehensive income:                                   |       |             |       |       |       |        |       |         |       |              |       |            |       |       |       |       |       |
| Net income                                              |       | —           |       | —     |       | —      |       | 18,609       |       | —            |       | —          |       | —     |       | 18,609     |       |
| Foreign currency translation                            |       | —           |       | —     |       | —      |       | —       |       | (534              | )          | —          |       | —     |       | (534       | )          |
| Total comprehensive income                              |       |             |       |       |       |        |       |         |       |              |       |            |       |       |       | 18,075     |       |
| Dividends paid ($0.0625 per share)                      |       | —           |       | —     |       | —      |       | (7,686       | )          | —            |       | —          |       | —     |       | (7,686     | )          |
| Dividends payable                                       |       | —           |       | —     |       | —      |       | (70          | )          | —            |       | —          |       | —     |       | (70        | )          |
| Purchases of treasury stock                             |       | —           |       | —     |       | —      |       | —       |       | —            |       | (52             | )          | (395       | )          | (395       | )          |
| Issuance of restricted stock                            |       | —           |       | —     |       | —      |       | —       |       | —            |       | 595             |       | —     |       | —     |       |
| Vesting of restricted stock issued from treasury  stock |       | —           |       | —     |       | (1,436      | )          | —       |       | —            |       | —          |       | 1,436      |       | —     |       |
| Forfeitures of restricted stock                         |       | —           |       | —     |       | —      |       | —       |       | —            |       | (42             | )          | —     |       | —     |       |
| Amortization of restricted stock                        |       | —           |       | —     |       | 790         |       | —       |       | —            |       | —          |       | —     |       | 790        |       |
| Stock option expense                                    |       | —           |       | —     |       | 594         |       | —       |       | —            |       | —          |       | —     |       | 594        |       |
| Stock option exercises                                  |       | —           |       | —     |       | (215        | )          | —       |       | —            |       | 41              |       | 215        |       | —     |       |
| **Balances, June 30, 2010**                        |       | 96,821           |       | $          | 968        |        | $          | 289,879      |       | $                 | 193,618    |            | $          | (2,468     | )          | (34,665    | )          | $ | (258,076 | ) | $ | 223,921 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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**Advance America, Cash Advance Centers, Inc.**

 

**Interim Unaudited Consolidated Statements of Cash Flows**

 

**Six MonthsEnded June 30, 2009 and 2010**

 

**(in thousands)**

 
| ** **                                                                                             | ** ** | **2009** | ** ** | **2010** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating  activities**                                                              |       |     |       |     |       |
| Net income                                                                                             |       | $        | 21,785     |     | $          | 18,609 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisitions |       |     |       |     |       |
| Depreciation and amortization                                                                          |       | 8,380    |       | 6,647    |       |
| Non-cash interest expense                                                                              |       | 320      |       | 320      |       |
| Provision for doubtful accounts                                                                        |       | 54,110   |       | 37,792   |       |
| (Gain)/loss on disposal of property and equipment                                                      |       | (47      | )          | 320      |       |
| Loss on impairment of assets                                                                           |       | 2,209    |       | 654      |       |
| Amortization of restricted stock                                                                       |       | 404      |       | 790      |       |
| Stock option expense                                                                                   |       | 615      |       | 594      |       |
| Common stock issued to director in lieu of cash                                                        |       | 7        |       | —   |       |
| Changes in operating assets and liabilities                                                            |       |     |       |     |       |
| Fees receivable, net                                                                                   |       | (11,713  | )          | (6,703   | )          |
| Other current assets                                                                                   |       | (7,947   | )          | (3,551   | )          |
| Other assets                                                                                           |       | 98       |       | 137      |       |
| Accounts payable                                                                                       |       | 348      |       | (1,906   | )          |
| Accrued liabilities                                                                                    |       | (3,644   | )          | (6       | )          |
| Income taxes payable                                                                                   |       | (1,625   | )          | (11,400  | )          |
| Deferred revenue                                                                                       |       | (1,119   | )          | (930     | )          |
| Net cash provided by operating activities                                                              |       | 62,181   |       | 41,367   |       |
| **Cash flows from investing  activities**                                                              |       |     |       |     |       |
| Changes in advances receivable                                                                         |       | (17,060  | )          | (20,410  | )          |
| Changes in restricted cash                                                                             |       | (3,048   | )          | 566      |       |
| Proceeds from sale of property and equipment                                                           |       | 219      |       | 2        |       |
| Purchases of property and equipment                                                                    |       | (1,874   | )          | (2,122   | )          |
| Net cash used in investing activities                                                                  |       | (21,763  | )          | (21,964  | )          |
| **Cash flows from financing  activities**                                                              |       |     |       |     |       |
| Payments on revolving credit facility, net                                                             |       | (31,582  | )          | (34,759  | )          |
| Payments on mortgage payable                                                                           |       | (218     | )          | (234     | )          |
| Payments on note payable                                                                               |       | (68      | )          | (248     | )          |
| Proceeds from overdraft facility, net                                                                  |       | 68       |       | —   |       |
| Purchases of treasury stock                                                                            |       | (5       | )          | (395     | )          |
| Payments of dividends                                                                                  |       | (7,623   | )          | (7,686   | )          |
| Changes in book overdrafts                                                                             |       | (2,326   | )          | (2       | )          |
| Net cash used in financing activities                                                                  |       | (41,754  | )          | (43,324  | )          |
| Effect of exchange rate changes on cash and cash  equivalents                                          |       | 73       |       | (36      | )          |
| Net decrease in cash and cash equivalents                                                              |       | (1,263   | )          | (23,957  | )          |
| Cash and cash equivalents, beginning of period                                                         |       | 16,017   |       | 38,189   |       |
| Cash and cash equivalents, end of period                                                               |       | $        | 14,754     |     | $          | 14,232 |   |
|                                                                                                   |       |     |       |     |       |
| Supplemental disclosures of cash flow information:                                                     |       |     |       |     |       |
| Cash paid during the period for:                                                                       |       |     |       |     |       |
| Interest                                                                                               |       | $        | 3,107      |     | $          | 2,380 |   |
| Income taxes                                                                                           |       | 20,307   |       | 30,389   |       |
| Supplemental schedule of non-cash investing and  financing activity:                                   |       |     |       |     |       |
| Property and equipment purchases included in  accounts payable and accrued expenses                    |       | 8        |       | 22       |       |
| Restricted stock dividends payable                                                                     |       | 81       |       | 70       |       |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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**Advance America, Cash Advance Centers, Inc.**

 

**Notes to Interim Unaudited Consolidated Financial Statements**

 

**1. Summaryof Significant Accounting Policies**

 

**Basis ofPresentation**

 

The accompanying interim unaudited consolidated financial statements ofAdvance America, Cash Advance Centers, Inc. (“AACACI”) and its whollyowned subsidiaries (collectively, the “Company”) have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and the rules and regulations of theU.S. Securities and Exchange Commission (the “SEC”). They do not include allinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. Although managementbelieves that the disclosures are adequate to prevent the information frombeing misleading, the interim unaudited consolidated financial statementsshould be read in conjunction with the Company’s audited financial statementsin the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009 filed with the SEC. In the opinion of the Company’smanagement, all adjustments, consisting of normal recurring accruals considerednecessary for a fair statement of the Company’s financial condition, have beenincluded. The results of operations for the six months ended June 30, 2010are not necessarily indicative of the results that may be expected for futureinterim periods or the entire year ending December 31, 2010.

 

**Descriptionof Business**

 

The Company conducts business in most states under the authority of avariety of enabling state statutes including cash advance, deferredpresentment, check-cashing, small loan, credit service organization and otherstate laws whereby cash advances are made directly to customers. The Company’soperations in the United Kingdom are conducted in accordance with applicableEnglish law. The Company’s operations in Canada are conducted in accordancewith applicable Canadian federal and provincial law.

 

**RevenueRecognition**

 

Revenues can be characterized as fees and/or interest depending on theCompany’s business operations and product offerings under enabling regulations.Revenue is generally recognized on a constant-yield basis ratably over the termof each cash advance.

 

Between November 2008 and February 2010, the Company offeredin Virginia a line of credit product with a 25-day billing cycle. In March 2010the Company discontinued offering new open-ended lines of credit but continuedto service existing lines of credit in Virginia. The Company will stopproviding new draws on existing lines of credit by October 1, 2010. Customersare not charged interest on any outstanding borrowings during a billing cycleif they have a zero balance at the close of business on their billing cycle enddate. Revenue for this product is recorded when fees and interest are chargedto the customer’s account and therefore revenue is not recognized on a ratablebasis.

 

The Company has entered into a long-term services contract for whichthe Company receives advance payments. These advance payments are recorded asdeferred revenue and recognized as revenue over the life of the contract,subject to certain terms and conditions.

 

**Concentrationof Risk**

 

For the three months ended June 30, 2009 and 2010, total revenueswithin the Company’s five largest states (measured by total revenues) accountedfor approximately 48% and 50%, respectively, of the Company’s total revenues.For the six months ended June 30, 2009 and 2010, total revenues within theCompany’s five largest states accounted for approximately 49% and 50%,respectively, of the Company’s total revenues. The states that represent theCompany’s five largest states change from time to time.

 

**FinancialInstrument Assets and Liabilities for Which Carrying Values Equal orApproximate Fair Value**

 

Financialassets and liabilities for which carrying values equal or approximate fairvalue include cash and cash equivalents, advances, fees, interest, installmentloans, lines of credit receivable, certain other assets, accounts payable, 

 

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accruedliabilities, and certain other liabilities. For these assets and liabilities,the carrying values approximate fair value due to their short-term nature.

 

**CenterClosing Costs**

 

Centerclosing costs represent management’s estimate of severance payments, costs toclean and vacate the premises, losses related to the write-off of leaseholdimprovements and signage, and lease cancellation expenses related to closing acenter. Additionally, closing or consolidating centers could result in theimpairment of receivables, long-lived assets, or goodwill. A liability forseverance payments is recognized when management: (i) decides to close acenter and this plan is unlikely to change; (ii) determines that anemployee cannot be relocated to another center; and (iii) informs theemployee of the termination and the benefits that will be paid. Costs toterminate the lease are recorded at the earlier of the date the lease isterminated or the date the leased property is no longer used. All otherexpenses are recorded when incurred.

 

**IncomeTaxes**

 

Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying value of existing assets and liabilities and their respective taxbases and for operating loss and tax credit carryforwards. Deferred tax assetsand liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which the related temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period that includesthe enactment date.

 

**Allowance for Doubtful Accounts and Accrual for Third-PartyLender Losses**

 

Theallowance for doubtful accounts represents management’s estimated probablelosses for advances made directly to customers and is recorded as a reductionof advances and fees receivable, net, on the Company’s balance sheet. Theaccrual for third-party lender losses represents management’s estimatedprobable losses for loans and certain related fees for loans that are processedby the Company for its current third-party lender in Texas (see Note 16)and is recorded as a current liability on the Company’s balance sheet.

 

Theallowance for doubtful accounts and the accrual for third-party lender lossesare primarily based upon models that analyze specific portfolio statistics andalso reflect, to a lesser extent, management’s judgment regarding overall accuracy.The analytical models take into account several factors, including the numberof transactions customers complete and charge-off and recovery rates.Additional factors such as changes in state laws, center closings, length oftime centers have been open in a state, and the relative mix of new centerswithin a state, are also evaluated to determine whether the results from theanalytical models should be revised.

 

TheCompany has charged the portion of advances and fees deemed to be uncollectibleagainst the allowance for doubtful accounts and credited any subsequentrecoveries, including sales of debt, to the allowance for doubtful accounts.

 

Unpaidadvances and the related fees and/or interest are generally charged off60 days after the date a customer’s check was returned, the AutomatedClearing House (“ACH”) authorization was rejected by the customer’s bank, orthe default date, unless the customer has paid at least 15% of the total of hisor her loan plus all applicable fees, or 15% of the outstanding balance andrelated interest and fees for our line of credit and installment loan products.Unpaid advances, installment loans, or lines of credit customers who file forbankruptcy are charged off upon receipt of the bankruptcy notice.

 

Managementbelieves that the allowance for doubtful accounts and accrual for third-partylender losses are adequate. Management’s ongoing evaluation of the adequacy ofthe allowance for doubtful accounts and accrual for third-party lender lossesis based on its evaluation of the advances and loans outstanding, historicalexperience, and such other factors that, in management’s judgment, deserveconsideration in estimating probable losses.

 

**Goodwill**

 

The Company has approximately $126.8 million ofgoodwill as of June 30, 2010. Goodwill represents the excess cost over thefair value of assets acquired. The Company tests its goodwill for impairmentannually as of September 30 or whenever events or changes in circumstancesindicate that the carrying value may not be recoverable.  Estimated cash flows and related goodwill aregrouped at the reporting unit level. A reporting unit is an operating segment,or under certain 

 

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circumstances, a component of an operating segmentthat constitutes a business. When estimated future cash flows are less than thecarrying value of the net assets and related goodwill, an impairment test isperformed to measure and recognize the amount of the impairment loss, if any.Impairment losses, related to the carrying value of goodwill, represent theexcess of the carrying amount of a reporting unit’s goodwill over the impliedfair value of that goodwill. In determining the estimated future cash flows,the Company considers current and projected future levels of income, as well asbusiness trends, prospects, and market and economic conditions. Impairmenttests involve the use of judgments and estimates related to the fair marketvalue of the business operations with which goodwill is associated, taking intoconsideration both historical operating performances and anticipated futureearnings.

 

The Company has approximately $4.2 million of goodwill in itsUnited Kingdom operations. As of June 30, 2010, these operations havecumulatively generated negative cash flow and have not reached break-even atthe center gross profit level for the trailing twelve months. The Company’sexpansion efforts in the United Kingdom began during the third quarter of 2007.The goodwill impairment assessment model projects future positive cash flowssufficient to support the goodwill and long-lived asset base. If the UnitedKingdom operations continue to generate negative cash flow and do notbreak-even, an impairment charge related to its goodwill is possible.

 

**Litigation Accrual**

 

In view of the inherent difficulty of predicting the outcome oflitigation and regulatory matters, particularly where the claimants seek verylarge or indeterminate damages or where the matters present novel legaltheories or involve a large number of parties, the Company cannot state withconfidence what the eventual outcome of pending matters will be, what thetiming of the ultimate resolution of these matters will be, what the eventualloss, fines, or penalties related to each pending matter may be, or the extentto which such amounts may be recoverable under the Company’s insurancepolicies.

 

In accordance with applicable accounting guidance, the Company establishesreserves for litigation and regulatory matters when those matters present losscontingencies that are both probable and estimable. When loss contingencies arenot both probable and estimable, the Company does not establish reserves. Inmost of the matters described in Note 6, loss contingencies are not bothprobable and estimable in the view of management and, accordingly, reserveshave not been established for those matters. Based on current knowledge,management does not believe that loss contingencies, if any, arising frompending litigation and regulatory matters, including the litigation andregulatory matters described in Note 6, will have a material adverseeffect on the consolidated financial position or liquidity of the Company, butmay be material to the Company’s results of operations for any particularreporting period.

 

**EarningsPer Share**

 

Basic earnings per share is computed by dividing net income by theweighted average number of common shares outstanding for the period excludingunvested restricted stock. Diluted earnings per share is computed by dividingnet income by the weighted average number of common shares outstanding for theperiod, after adjusting for the dilutive effect of unvested restricted stockand outstanding stock options. For the three months ended June 30, 2009and 2010, 219,851 and 163,902, respectively, unvested shares of restrictedstock were not included in the computation of diluted earnings per sharebecause the effect of including them would be anti-dilutive. For the six monthsended June 30, 2009 and 2010, 219,851 and 167,236, respectively, unvestedshares of restricted stock were not included in the computation of dilutedearnings per share because the effect of including them would be anti-dilutive.For the three and six months ended June 30, 2009 and 2010, options topurchase 1,567,500 and 1,555,000 shares of common stock, respectively, thatwere outstanding at those dates were not included in the computation of dilutedearnings per share because the effect of including them would be anti-dilutive.

 

The following table presents the reconciliation of the denominator usedin the calculation of basic and diluted earnings per share for the three andsix months ended June 30, 2009 and 2010 (in thousands):

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                   | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Reconciliation of denominator:                                     |       |                                       |       |                                |       |   |   |   |   |
| Weighted average number of common shares  outstanding—basic   |       | 60,865                                     |       | 61,070                              |       | 60,862 |   | 61,020 |   |
| Effect of dilutive unvested restricted stock                       |       | 421                                        |       | 334                                 |       | 386 |   | 318 |   |
| Effect of dilutive outstanding stock options                       |       | 371                                        |       | 338                                 |       | 297 |   | 342 |   |
| Weighted average number of common shares  outstanding—diluted |       | 61,657                                     |       | 61,742                              |       | 61,545 |   | 61,680 |   |

 

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**Recently Issued Accounting Pronouncements**

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued the Accounting Standards Codification (“ASC”) Standard ASC 810-30, “VariableInterest Entities” (“ASC 810-30”). ASC 810-30 changes how a reporting entitydetermines whether an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated. Thedetermination of whether a reporting entity is required to consolidate anotherentity is based on, among other things, the other entity’s purpose and designand the reporting entity’s ability to direct the activities of the other entitythat most significantly impact the other entity’s performance. ASC 810-30 iseffective for a reporting entity’s first fiscal year beginning afterNovember 15, 2009. The adoption of ASC 810-30 during the quarter ended March 31,2010 did not have a material impact on the Company’s financial position orresults of operations.

 

In July 2010, FASB issued Accounting Standard Update (“ASU”) No. 2010-20,Receivables (Topic 310): Disclosures about the Credit Quality of FinancingReceivables and the Allowance for Credit Losses (“ASU No. 2010-20”). TheASU amends FASB Accounting Standards CodificationTM Topic 310,Receivables, to improve the disclosures that an entity provides about thecredit quality of its financing receivables and the related allowance forcredit losses. As a result of these amendments, an entity is required todisaggregate, by portfolio segment or class of financing receivable, certainexisting disclosures and provide certain new disclosures about its financingreceivables and related allowance for credit losses. For public entities, the disclosuresas of the end of a reporting period are effective for interim and annualreporting periods ending on or after December 15, 2010. The disclosuresabout activity that occurs during a reporting period are effective for interimand annual reporting periods beginning on or after December 15, 2010.  Management has not yet evaluated the impactof ASU No. 2010-20 on the Company’s financial position or results ofoperations.

 

**2. Advancesand Fees Receivable, Net**

 

Advances and fees receivable, net, consisted of the following (inthousands):

 

| ** **                        | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Advances receivable               |       | $                           | 200,110    |                    | $          | 186,279 |   |
| Fees and interest receivable      |       | 34,497                      |       | 31,600                  |       |
| Returned items receivable         |       | 36,255                      |       | 30,633                  |       |
| Other                             |       | 6,112                       |       | 4,002                   |       |
| Allowance for doubtful accounts   |       | (53,031                     | )          | (45,636                 | )          |
| Unearned revenues                 |       | (19,709                     | )          | (14,117                 | )          |
| Advances and fees receivable, net |       | $                           | 204,234    |                    | $          | 192,761 |   |

 

Includedin advances, fees and interest receivables are amounts that may be past duethat do not have bank presentment authorizations.

 

**3. Allowance for Doubtful Accounts and Accrual forThird-Party Lender Losses**

 

Changes in the allowance for doubtful accounts for the three and sixmonths ended June 30, 2009 and 2010 were as follows (in thousands):

 

| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **2009**                              | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Beginning balance               |       | $                                     | 53,254     |                                | $          | 40,538 |   | $ | 59,441 |   | $ | 53,031 |   |
| Provision for doubtful accounts |       | 32,319                                |       | 24,448                              |       | 54,217 |   | 38,347 |   |
| Charge-offs                     |       | (34,862                               | )          | (23,157                             | )          | (71,405 | ) | (57,759 | ) |
| Recoveries                      |       | 6,199                                 |       | 3,807                               |       | 14,657 |   | 12,017 |   |
| Ending balance                  |       | $                                     | 56,910     |                                | $          | 45,636 |   | $ | 56,910 |   | $ | 45,636 |   |

 

Changes in the accrual for third-party lender losses for the three andsix months ended June 30, 2009 and 2010 were as follows (in thousands):

 

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| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Beginning balance               |       | $                                               | 3,160      |                                          | $          | 3,363 |   | $ | 3,960 |   | $ | 4,528 |   |
| Provision for doubtful accounts |       | 693                                             |       | 610                                           |       | (107 | ) | (555 | ) |
| Ending balance                  |       | $                                               | 3,853      |                                          | $          | 3,973 |   | $ | 3,853 |   | $ | 3,973 |   |

 

The total changes in the allowance for doubtful accounts and theaccrual for third-party lender losses for the three and six months ended June 30,2009 and 2010 were as follows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Beginning balance               |       | $                                               | 56,414     |                                          | $          | 43,901 |   | $ | 63,401 |   | $ | 57,559 |   |
| Provision for doubtful accounts |       | 33,012                                          |       | 25,058                                        |       | 54,110 |   | 37,792 |   |
| Charge-offs                     |       | (34,862                                         | )          | (23,157                                       | )          | (71,405 | ) | (57,759 | ) |
| Recoveries                      |       | 6,199                                           |       | 3,807                                         |       | 14,657 |   | 12,017 |   |
| Ending balance                  |       | $                                               | 60,763     |                                          | $          | 49,609 |   | $ | 60,763 |   | $ | 49,609 |   |

 

**4. Other Current Assets**

 

Other current assets consisted of the following (in thousands):

 
| ** **                             | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Prepaid income taxes                   |       | $                           | 3,637      |                    | $          | 7,621 |   |
| Prepaid rent                           |       | 6,287                       |       | 5,995                   |       |
| Prepaid insurance                      |       | 2,874                       |       | 2,404                   |       |
| Prepaid taxes and licenses             |       | 1,558                       |       | 1,241                   |       |
| Prepaid workers compensation loss fund |       | 346                         |       | 346                     |       |
| Other                                  |       | 2,681                       |       | 3,327                   |       |
| Total                                  |       | $                           | 17,383     |                    | $          | 20,934 |   |

 

**5. Accrued Liabilities**

 

Accrued liabilities consisted of the following (in thousands):

 
| ** **                          | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Employee compensation               |       | $                           | 9,191      |                    | $          | 12,567 |   |
| Workers’ compensation          |       | 4,996                       |       | 4,950                   |       |
| Legal fines and settlements         |       | 6,666                       |       | 2,948                   |       |
| Straight-line rent accrual          |       | 2,142                       |       | 1,668                   |       |
| Deferred revenue                    |       | 1,709                       |       | 1,625                   |       |
| Leasehold maintenance expenses      |       | 1,130                       |       | 1,545                   |       |
| Center closing costs                |       | 817                         |       | 1,541                   |       |
| Legal fees                          |       | 547                         |       | 1,086                   |       |
| Property, sales and franchise taxes |       | 519                         |       | 908                     |       |
| Accounting and tax fees             |       | 528                         |       | 865                     |       |
| Severance                           |       | 41                          |       | 225                     |       |
| Advertising                         |       | 770                         |       | 101                     |       |
| Construction in progress            |       | 72                          |       | 22                      |       |
| Other                               |       | 2,304                       |       | 1,383                   |       |
| Total                               |       | $                           | 31,432     |                    | $          | 31,434 |   |

 

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**6.Commitments and Contingencies**

 

The Company is involved in a number of active lawsuits, includinglawsuits filed by private litigants and matters arising out of actions taken bystate regulatory authorities. The Company is also involved in various otherlegal proceedings with state and federal regulators. In addition, the Companyis obligated to advance expenses, and, in certain circumstances, indemnify fordamages, incurred by certain of its current and former officers and directorsin responding to inquiries, or defending against claims or proceedings thathave arisen by reason of the fact that such person is or was an officer ordirector of the Company. Under certain circumstances, the Company may also beobligated to defend and indemnify other parties against whom claims have beenasserted. Unless otherwise stated below, the Company is vigorously defendingagainst these actions and will, when management believes appropriate inconsideration of ongoing litigation expenses and other factors, evaluatereasonable settlement opportunities. The amount of losses and/or theprobability of an unfavorable outcome, if any, cannot be reasonably estimatedfor these legal proceedings unless otherwise stated below. Accordingly, except asotherwise specified below, no accrual has been recorded for any of thesematters as of June 30, 2010.

 

*KerriStone v. Advance America, Cash Advance Centers, Inc. et al.*

 

On July 16, 2008, Kerri Stone filed a putative class actioncomplaint in the Superior Court of California in San Diego against the Companyand its California subsidiary. Defendants removed the case to the United StatesDistrict Court for the Southern District of California. The amended complaintalleges violations of the California Deferred Deposit Transaction Law and theCalifornia Unfair Competition Law and seeks an order requiring defendants todisgorge and/or make restitution of all revenue and loan principal, pay threetimes the amount of damages the class members actually incurred, reasonableattorneys’ fees and costs of suit, and punitive damages.  The complaint also seeks certain injunctiverelief. The parties are engaged in discovery and the Company anticipates thatthe case will proceed to trial in 2011.

 

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

 

The Company and the Company’s subsidiary, McKenzie Check Advance ofFlorida, LLC (“McKenzie”), are defendants in a putative class actionlawsuit commenced by former customers, Wendy Betts and Donna Reuter, on January 11,2001, and a third named class representative, Tiffany Kelly, in the CircuitCourt of Palm Beach County, Florida. This putative class action alleges thatMcKenzie, 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 the named defendants could be required to refund fees and/orinterest collected, refund the principal amount of cash advances, pay multipledamages, and pay other monetary penalties. Ms. Reuter’s claim has beenheld to be subject to binding arbitration, which the Company expects to proceedin parallel with this case. However, the trial court has denied the defendants’motion to compel arbitration of Ms. Kelly’s claims. The Company hasappealed this decision.

 

*Reuter andBetts v. Advance America, Cash Advance Centers of Florida, Inc. et al.*

 

A second Florida lawsuit was filed on August 24, 2004, in theCircuit Court of Palm Beach County by former customers Gerald Betts andMs. Reuter against the Company, the Company’s Florida subsidiary, AdvanceAmerica, Cash Advance Centers of Florida, Inc., and certain officers anddirectors. The allegations, relief sought, and the Company’s defenses in thislawsuit are nearly identical to those alleged in the first *Betts and Reuter* lawsuit described above.The case is currently stayed, pending a decision from the Florida Supreme Courtin *Pendergast v. Sprint Nextel Corp.*, whichis a separate case, to which the Company is not a party, involving arbitrationissues.

 

*Hooper andVaughn v. Advance America, Cash Advance Centers of Missouri, Inc.*

 

On March 10, 2008, Trishia Hooper and Josephine Vaughn filed aputative class action lawsuit in the United States District Court for theWestern District of Missouri against the Company’s Missouri subsidiary, AdvanceAmerica, Cash Advance Centers of Missouri, Inc. The action alleged thatthe arbitration clause and class action waiver in the Company’s subsidiary’scustomer loan agreements were unconscionable, that the Company’s subsidiary’spractices violated the Missouri statutes governing unfair and deceptive tradepractices, interest rates, loan renewals, debt reduction, and consideration ofborrower’s ability to repay. The lawsuit sought certification as a classaction, unspecified monetary damages, and a declaratory judgment that thearbitration clause and class action waiver was unconscionable and injunctiverelief. On May 27, 2010, the Company and the class representatives enteredinto a settlement agreement. The settlement agreement does not involve an admissionof wrongdoing or liability and is subject to court approval and certain otherconditions before it becomes final and the lawsuit is concluded. Pursuant tothe terms of the settlement agreement, the 

 

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casewill be dismissed, the Company and all other defendants will be released fromany and all claims and liability, the Company will establish a settlement poolof approximately $2 million for payments and/or credits to settle the claims ofcertain customers of the Company’s Missouri subsidiary and payment of allattorney fees, class action administration fees, and other fees and expensesrelated to the litigation, and the Company’s subsidiary will offer discounts onthe repayment of certain defaulted loans and on fees to certain class membersfor future loans. The Company has taken a charge against earnings in the secondquarter of 2010 of approximately $2 million to cover the estimated costs ofsettlement.

 

*Kucan etal. v. Advance America, Cash Advance Centers of North Carolina, Inc. etal.*

 

On July 27, 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 previously marketed, processed, andserviced 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 the Company and Mr. William M. Webster IV,Chairman of the Company’s Board of Directors and the Company’s former ChiefExecutive Officer, alleging, among other things, that the relationship betweenthe Company’s North Carolina subsidiary and Republic constituted an alleged “renta charter” relationship and therefore Republic was not the “true lender” of thecash advances it offered. The lawsuit also claims that the cash advances weremade, administered, and collected in violation of numerous North Carolinaconsumer protection laws. The lawsuit seeks an injunction barring thesubsidiary from continuing to do business in North Carolina, the return of theprincipal amount of the cash advances made to the plaintiff class since August 2001,along with three times the interest and/or fees associated with those advances,which could, under certain circumstances, total approximately $220 million,plus attorneys’ fees and other unspecified costs. The Company sought to enforcethe arbitration provisions in the customer agreements. The trial court grantedclass certification and ruled that the arbitration clause is unenforceable. TheCompany has appealed this ruling.

 

*NorthCarolina Commissioner of Banks Order*

 

On February 1, 2005, the Commissioner of Banks of North Carolinainitiated a contested case against the Company’s North Carolina subsidiary foralleged violations of the North Carolina Consumer Finance Act. In December 2005,the Commissioner of Banks ordered that the Company’s North Carolina subsidiaryimmediately cease and desist operating. In accordance with the Commissioner ofBanks’ order, the Company’s North Carolina subsidiary ceased all businessoperations on December 22, 2005. The Company appealed the Commissioner’sorder to the Superior Court of North Carolina, which denied the appeal. TheCompany has appealed this decision to the North Carolina Court of Appeals.

 

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

 

On September 27, 2006, the Pennsylvania Department of Bankingfiled a lawsuit in the Commonwealth Court of Pennsylvania alleging that theCompany’s Delaware subsidiary, NCAS of Delaware, LLC, was providing linesof credit to borrowers in Pennsylvania without a license required underPennsylvania’s financial licensing law and charging interest and fees in excessof the amounts permitted by Pennsylvania’s usury law. In July 2007, thecourt determined that certain aspects of the Company’s Choice Line of Creditrequired the Company to be licensed under Pennsylvania’s Consumer DiscountCompany Act (“CDCA”) and enjoined the Company from continuing its lendingactivities in Pennsylvania for so long as the CDCA violations continued andfrom collecting monthly participation fees. The Company appealed to thePennsylvania Supreme Court and, in May 2008, the Pennsylvania SupremeCourt upheld the lower court’s ruling. The Pennsylvania Department of Bankingsubsequently amended its complaint to add the Pennsylvania Attorney General asa plaintiff, to name the Company as a defendant, and to seek damages, fines,and penalties under Pennsylvania’s CDCA, usury laws, and consumer protectionlaws. In April 2010, the Pennsylvania Commonwealth Court dismissed thealleged CDCA and usury allegations and partially dismissed the alleged consumerprotection law violations. The remaining alleged consumer protection law claimswill proceed before the trial court. These remaining claims could, undercertain circumstances, total approximately $45 million in damages, plus civilpenalties of $1,000 for each violation of the Pennsylvania Consumer ProtectionLaw and an additional $2,000 for violations against customers over the age of60, and attorneys’ fees and costs. 

 

*SharleneJohnson, Helena Love and Bonny Bleacher v. Advance America, Cash AdvanceCenters, Inc. et al.*

 

On August 1, 2007, Sharlene Johnson, Helena Love, and BonnyBleacher filed a putative class action lawsuit in the United States DistrictCourt, Eastern District of Pennsylvania against the Company and two of itssubsidiaries alleging that they provided lines of credit to borrowers inPennsylvania without a license required under Pennsylvania law and withinterest and fees in excess of the amounts permitted by Pennsylvania law. Thecomplaint seeks, among other things, a declaratory judgment that the monthlyparticipation fee charged to customers with a line of credit is illegal, aninjunction prohibiting the collection of the monthly participation fee, andpayment of damages equal to three times the monthly 

 

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participationfees paid by customers since June 2006, which could total approximately$135 million in damages, plus attorneys’ fees and costs. In January 2008,the trial court entered an order compelling the purported class representativesto arbitrate their claims on an individual basis, unless determined otherwiseby the arbiter. All parties appealed that order and the appeal was stayed,pending a decision from the United States Supreme Court in *Stolt-Nielsen S.A. v. AnimalFeeds InternationalCorp*. In April 2010, the United States Supreme Court issued itsopinion in *Stolt-Nielsen*.  The appeals of the parties in this case willnow proceed.

 

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

 

On January 18, 2007, Raymond King and Sandra Coates, who werecustomers of BankWest Inc., the lending bank for which the Companypreviously marketed, processed, and serviced cash advances in Pennsylvania,filed a putative class action lawsuit in the United States District Court,Eastern District of Pennsylvania alleging various causes of action, includingthat the Company’s Pennsylvania subsidiary made illegal cash advance loans inPennsylvania in violation of Pennsylvania’s usury law, the PennsylvaniaConsumer Discount Company Act, the Pennsylvania Unfair Trade Practices andConsumer Protection Law, the Pennsylvania Fair Credit Extension Uniformity Act,and the Pennsylvania Credit Services Act. The complaint alleges that BankWest Inc.was not the “true lender” and that the Company’s Pennsylvania subsidiary wasthe “lender in fact.” The complaint seeks compensatory damages, attorneys’fees, punitive damages, and the trebling of any compensatory damages. In January 2008,the trial court entered an order compelling the purported class representativesto arbitrate their claims on an individual basis, unless determined otherwiseby the arbiter. All parties appealed that order and the appeal was stayedpending a decision from the United States Supreme Court in *Stolt-Nielsen S.A. v. AnimalFeeds InternationalCorp*.  In April 2010, theUnited States Supreme Court issued its opinion in*Stolt-Nielsen.*Theappeals of the parties**in thiscase will now proceed*.*

 

*Clerk  v. NCAS of Delaware, LLC, d/b/a AdvanceAmerica, Cash Advance Centers, Inc., of Pennsylvania, et al.*

 

On April 21, 2009, Yulon Clerk filed a putative class actionlawsuit in the Court of Common Pleas of Philadelphia County, Pennsylvania,against the Company’s subsidiaries, Advance America, Cash Advance Centers ofPennsylvania, Inc., and NCAS of Delaware, LLC, as well asBankWest, Inc., whose defense the Company is handling pursuant to anindemnification agreement, and other unrelated lenders and banks. The complaintalleges that the practices of the Company’s subsidiaries andBankWest, Inc. violated the Pennsylvania Consumer Discount Protection Act,the Pennsylvania Loan Interest Protection Law, and Pennsylvania ConsumerProtection Laws. The complaint seeks certification of a class of individualsfor the alleged violations, a declaration that all loans made to class membersare unenforceable, injunctive relief, and monetary damages. The complaintrepeats allegations asserted in other putative class actions filed inPennsylvania that have been stayed in favor of mandatory individualarbitrations. The Company removed the case to the United States District Courtfor the Eastern District of Pennsylvania and filed a motion to compelarbitration and stay the underlying action’s proceedings. In August 2009,the District Court issued an order severing the claims against the individualdefendants. On September 21, 2009, plaintiffs filed three separatecomplaints seeking the same relief as the April 21, 2009 complaint againstAdvance America, Cash Advance Centers of Pennsylvania, Inc., NCAS ofDelaware, LLC, and BankWest, Inc. The case against the Company’sPennsylvania subsidiaries was subsequently dismissed by consent of the partieson November 11, 2009. Motions to stay and to compel individual arbitrationhave been filed in the other cases. The matter was stayed pending a decisionfrom the United States Supreme Court in *Stolt-Nielsen S.A. v.Animal Feeds International Corp*. In April 2010, the United States Supreme Court issued its opinionin *Stolt-Nielsen*. The litigation will nowproceed before the trial court.

 

*Class ActionsAgainst South Carolina Subsidiary*

 

Eight separate putative class actions have been filed in South Carolinaagainst the Company’s subsidiary Advance America, Cash Advance Centers of SouthCarolina, Inc. and several other unaffiliated defendants. John and RebeccaMorgan filed a complaint on August 27, 2007 in the Horry County Court ofCommon Pleas; Margaret Horne filed a complaint on September 6, 2007 in theSpartanburg County Court of Common Pleas; Tawan Smalls filed a complaint onSeptember 10, 2007 in the Charleston County Court of Commons Pleas;Chadric and Lisa Wiley filed a complaint on September 27, 2007 in theRichland County Court of Common Pleas; Mildred Weaver filed a complaint onSeptember 27, 2007 in the Darlington County Court of Common Pleas; LisaJohnson and Gilbert Herbert filed a complaint on October 2, 2007 in theGeorgetown County Court of Common Pleas; Kimberly Kinney filed a complaint onOctober 12, 2007 in the Marion County Court of Common Pleas; and Carl G.Ferrell filed a complaint on October 30, 2008 in the Richland County Courtof Common Pleas (collectively the “South Carolina Claimants”). The allegationsand relief sought are similar in each case. Plaintiffs allege that the Company’sSouth Carolina subsidiary violated the South Carolina Deferred PresentmentServices Act and the Consumer Protection Code by failing to perform a creditcheck and evaluate a customer’s ability to repay the advance. Each complaintseeks an injunction to prohibit the Company from continuing its operations, thereturn of fees and interest, unspecified actual damages, punitive damages, andattorneys’ fees and costs. Each of the lawsuits has been joined to ongoinglitigation in the 

 

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SouthCarolina state court system pursuant to an order of the South Carolina SupremeCourt consolidating all cases brought against the industry. In December 2009,a group of industry defendants, including the Company, reached an agreement inprinciple, subject to reaching a definitive agreement and obtaining courtapproval, for the settlement and release of all claims brought by the SouthCarolina Claimants. On June 2, 2010, the Company, several otherunaffiliated defendants, and the class representatives entered into a settlementagreement. The settlement agreement does not involve an admission of wrongdoingor liability on the part of the Company or its South Carolina subsidiary.Pursuant to the terms of the settlement agreement, the Company and its SouthCarolina subsidiary will be released from any and all claims associated withthis lawsuit. The Company does not expect to incur any charges in connectionwith the settlement beyond the charge of $0.9 million the Company recorded forthe fourth quarter of 2009.

 

*OtherMatters*

 

The Company is also involved in other litigation and administrativeproceedings that are incidental to its business, including, without limitation,regulatory enforcement matters, individual consumer claims, contractualdisputes, employee claims for workers’ compensation, wrongful termination,harassment, discrimination, payment of wages due, and customer claims relatingto collection practices and violations of state and/or federal consumerprotection laws.

 

**SEC Investigation**

 

On July 22, 2009, the Company was informed that Kenneth E.Compton, its President and Chief Executive Officer, received a “Wells Notice”from the SEC. The Company understands that the staff intends to recommend thatthe SEC file a civil injunctive action against Mr. Compton allegingthat he violated Section 17(a) of the Securities Act of 1933 andSection 10(b) of the Securities Exchange Act of 1934 andRule 10b-5 thereunder in connection with alleged insider trading involvingless than a material amount of losses avoided by third parties selling Companystock during 2007. The Company did not receive a Wells Notice and does notbelieve it is a subject of this investigation; however, the Company isobligated to advance expenses incurred by its current and former officers anddirectors in connection with this matter.

 

**Changes in Legislation**

 

*OhioLegislation*

 

In November 2008, the State of Ohio capped interest rates on cashadvance loans and limited the number of cash advances a customer may take inany one year. As a result of this legislation, the Company began offering smallloans pursuant to the Ohio Small Loan Act and check-cashing services. The smallloan product and check cashing services generate less revenue than the Company’sformer cash advance product and, as a result, the Company has closed some ofits centers in Ohio. In the third quarter of 2009, the Company stopped offeringsmall loans and began offering cash advances pursuant to the Ohio SecondMortgage Act through a registered Second Mortgage Lender.

 

In the first quarter of 2010, the Ohio Division of FinancialInstitutions issued a rule restricting certain activities by licensedcheck cashers which would have a negative impact on the Company’s operations inOhio. This rule was scheduled to become effective by May 1, 2010, buthas been temporarily stayed by the Court of Common Pleas of Franklin County,Ohio pending the outcome of certain litigation involving the state andunrelated third parties.

 

*VirginiaLegislation*

 

A Virginia law that went into effect in January 2009 substantiallychanged the terms for cash advance services in Virginia and severely restrictedviable operations for short-term lenders. The Company continues to offer cashadvances in Virginia in conformance with the new regulations, and between November 2008and February 2010 also offered an open-ended line of credit product.However, a subsequent Virginia Corporation Commission ruling limited theCompany’s ability to offer the open-ended lines of credit effectiveMarch 1, 2010.  As a result, theCompany ceased offering new open-ended lines of credit in February 2010and will stop providing advances on existing lines of credit on or before October 1,2010.

 

During the six months ended June 30, 2010, the Company closed 53centers in Virginia. For the three and six months ended June 30, 2010,closing costs of approximately $1.3 million are included in the incomestatement as an increase in other center expenses of $0.9 million, a loss ondisposal of property and equipment of $0.1 million, and center salaries andrelated payroll costs of $0.3 million. At this time, the Company is not able todetermine the amount of goodwill impairment, if any, that could result from thecessation of operations in Virginia.

 

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*WashingtonLegislation*

 

A law became effective on January 1, 2010, in the State ofWashington that limits the number of cash advances a customer may take in anyone year, limits the cash advance amount that can be taken out at any one time,and implements a statewide database to monitor the number of cash advances. TheCompany believes this law will negatively impact its revenue and profitability.The Company may close or consolidate some or all of its centers in Washingtonif management determines that it is no longer economically viable to operateall of its Washington centers.

 

During the six months ended June 30, 2010, the Company closed 17centers in Washington. For the three and six months ended June 30, 2010,closing costs of approximately $0.3 million and $0.5 million, respectively, areincluded in the income statement.

 

In July 2010, the Company announced our intention to closeapproximately 30 additional centers in Washington. If the Company closes all ofits centers in Washington, the estimated closing costs, including severance,center tear-down costs, lease termination costs, and the write-down of fixedassets would range from $1.9 million to $4 million, and thecollectability of advances and fees receivable in Washington may be impaired.As of June 30, 2010, advances and fees receivable, net of allowance fordoubtful accounts, in Washington was approximately $4.2 million. At thistime the Company is not able to determine the amount of goodwill impairment, ifany, that could result from the cessation of operations in Washington.

 

*ArizonaLegislation*

 

An existing law permitting cash advancesin Arizona expired June 30, 2010. The Company announced that it intends tocease operations in its remaining 47 centers in Arizona. The Company estimatesthe closing costs, including severance, center tear-down costs, leasetermination costs, and the write-down of fixed assets to range from $1.1million to $2 million. An impairment charge of approximately $191,000 wasrecognized during the three months ended June 30, 2010. The cessation ofthe Company’s Arizona operations did not result in any impairment of goodwill. 

 

*SouthCarolina Legislation*

 

A new law in South Carolina became effective January 1, 2010 that,among other things, implements a statewide database to monitor the number ofcash advances made to customers within that state. Although the Company expectsthis law to negatively impact its revenue and profitability in South Carolina,management currently believes operations will remain economically viable inthis state.

 

*KentuckyLegislation*

 

A new law in Kentucky became effective in the first half of 2010 that,among other things, implements a statewide database to monitor the number ofcash advances made to customers within that state. Although the Company expectsthis law to negatively impact its revenue and profitability in Kentucky,management currently believes operations will remain economically viable inthis state.

 

*Rhode Island**Legislation*

 

A new law became effective in Rhode Island on July 1, 2010, thatreduced the maximum allowable fees to be charged on a cash advance from $15 per$100 to $10 per $100. Although the Company expects this law to have a negativeimpact on its revenue and profitability in Rhode Island, management currentlybelieves operations will remain economically viable in this state.

 

*Colorado**Legislation*

 

Anew law becomes effective in Colorado on August 11, 2010, that expands theminimum term of cash advances to six months, allows repayment in multipleinstallments, and creates a new regime of permitted finance, interest, andother charges. The Company believes that this law will negatively impact itsrevenue and profitability in Colorado. If management determines that it is nolonger economically viable to operate these centers, the Company may close orconsolidate some or all of its centers.

 

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During the six months ended June 30, 2010, the Company closed fivecenters in Colorado.  For the three andsix months ended June 30, 2010, closing costs of approximately $0.4 million are included in the incomestatement as an increase in other center expenses of $0.2 million and a loss onimpairment of assets of $0.2 million.

 

In July 2010, the Company announced our intention to closeapproximately 25 additional centers in Colorado. If the Company closes all ofits centers in Colorado, the estimated closing costs, including severance,center tear-down costs, lease termination costs, and the write-down of fixedassets would range from $1.3 million to $2.4 million, and the collectability ofadvances and fees receivable in Colorado most likely would be impaired. As of June 30,2010, advances and fees receivable, net of allowance for doubtful accounts, inColorado was approximately $4.5 million. At this time the Company is not ableto determine the amount of goodwill impairment, if any, that could result from thecessation of operations in Colorado.

 

*Wisconsin**Legislation*

 

A new law becomes effective in Wisconsin on January 1, 2011 thatlimits the total amount of cash advances a customer may have outstanding,allows an extended payment plan on each cash advance, and implements astatewide database to monitor the number of cash advances. Although the Companyexpects this law to have a negative impact on its revenue and profitability inWisconsin, management currently believes operations will remain economicallyviable in this state.

 

*Illinois**Legislation*

 

A new law becomes effective in Illinois on March 21, 2011 thatwill change the terms of the installment loan product currently offered inIllinois and negatively affect the profitability of this product. However, thenew law creates a longer term product with multiple installments and applicablefees. The Company intends to offer products in conformance with the newlegislation. Although the Company expects this law to have a negative impact onits revenue and profitability in Illinois, management currently believesoperations will remain economically viable in this state.

 

*Federal Financial Reform*

 

On July 21, 2010, the United States Congress passed the Dodd-FrankWall Street Reform and Consumer Protection Act. This new federal legislationcreates the Bureau of Consumer Financial Protection (the “BCFP”), which willhave authority to regulate the Company’s industry. It is unknown what effectthis legislation will have on the Company until such time as the BCFPpromulgates regulations.

 

**OtherCommitments and Contingencies**

 

At June 30, 2010, the Company had approximately $2.1 million inunfunded commitments to lend to customers in Virginia under existing lines ofcredit.

 

**7. CapitalStock and Stock-Based Compensation Plans**

 

The Company measures the cost of its stock-based employee compensationat fair value on the grant date and recognizes such cost in the financialstatements on a straight-line basis over the requisite service period of theawards, which is generally the vesting period.

 

The Company’s 2004 Omnibus Stock Plan provides for the granting ofrestricted stock, stock options, and other stock awards to certain directors,officers and other key employees of the Company. Under these plans, 5,200,000shares of authorized common stock have been reserved for issuance pursuant togrants approved by the Compensation Committee of the Board of Directors. As of June 30,2010, 1,615,965 shares were available for grant under the plans. Additionally,during 2005, the Company granted stock options and shares of restricted stockto its President and Chief Executive Officer under a Nonqualified Stock OptionAgreement and a Restricted Stock Agreement, respectively. Both of theseagreements are separate from the Company’s 2004 Omnibus Stock Plan.

 

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

 

All stock options were granted with an exercise price equal to the fairmarket value of the Company’s common stock on the dates of grant as determinedpursuant to the Company’s 2004 Omnibus Stock Plan. The Company estimated the 

 

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fairvalue of stock options on the date of grant using the Black-Scholes optionpricing model using the following assumptions:

 

·                  *Expectedterm*—The expected term represents the period during which the Company’sstock options are expected to be outstanding. The Company based itsdetermination of the expected term by giving consideration to the contractualterms of the stock option awards, vesting schedules, expectations of futureemployee behavior and published academic research regarding exercise behavior.  For the options granted in the first sixmonths of 2009, the Company assumed that the options would be exercised ontheir exercise date because the high dividend rate on the grant date relativeto the strike price would make immediate exercise the likely behavior.

 

·                  *Expectedvolatility*—The expected volatility represents the amount bywhich the price of the underlying shares has fluctuated or is expected tofluctuate during the expected term. The Company based its estimated volatilityon its historical stock price volatility and the stock price volatility ofother public companies in its industry, which the Company believes isrepresentative of its expected future volatility over the expected term of itsoptions.

 

·                  *Expecteddividends*—The Company assumes its dividend yield iscontinuous over the life of the option in its Black-Scholes option pricingmodel.  For the 2009 stock option grants,the Company used its current dividend rate of $0.0625 per share per quarter andassumed discreet quarterly dividend dates consistent with past practices overthe life of the options.

 

·                  *Risk-freerate*—The Company used risk-free interest rates for periods within theexpected terms of the options based on the U.S. Treasury yield curve in effectat each option grant date.

 

To estimate each stock option’s weighted average fair value on thegrant dates, the following weighted average assumptions were used in theBlack-Scholes option pricing model for all stock options granted during the sixmonths ended June 30, 2009: an expected term of two years; an expectedvolatility of 66%; an expected dividend yield of 21.9%; and a risk-free rate of1.03%. There were no stock options granted during the six months ended June 30,2010.

 

The weighted average grant date fair value of options granted duringthe six months ended June 30, 2009 is $0.12 per option, which is beingexpensed ratably over each award’s respective vesting period.

 

The following table provides certain information with respect to stockoptions outstanding and exercisable at June 30, 2010 under the Company’sstock-based compensation plans:

 
| ** **                                           | ** ** | **Outstanding** | ** **    | **Exercisable** | ** ** |
|------------------------------------------------------|------------|-----------------|---------------|-----------------|------------|
| Number of stock options                              |       | 1,996,336       |          | 982,333         |       |
| Range of exercise prices                             |       | $               | 1.14 - $14.70 |            | $          | 1.14 - $14.70 |   |
| Weighted average exercise price                      |       | $               | 9.49          |            | $          | 11.23 |   |
| Aggregate intrinsic value (in thousands)             |       | $               | —        |            | $          | — |   |
| Weighted average remaining contractual term  (years) |       | 5.9             |          | 6.1             |       |

 

A summary of the Company’s restricted stock activity for the six monthsended June 30, 2010 and the weighted average grant date fair values follows:

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value   Per Share** | ** ** |
|-------------------------------------|------------|------------|------------|-----------------------------------------------|------------|
| Nonvested at December 31, 2009 |       | 722,743    |       | $                                             | 3.10       |   |
| Granted                             |       | 594,202    |       | $                                             | 5.29       |   |
| Vested                              |       | (139,992   | )          | $                                             | 1.60       |   |
| Forfeited                           |       | (93,908    | )          | $                                             | 2.57       |   |
| Nonvested at June 30, 2010     |       | 1,083,045  |       | $                                             | 4.87       |   |

 

The total grant date fair value of restricted shares vested during boththe six months ended June 30, 2009 and 2010 was approximately$0.2 million. The total fair market value of these shares on the datesvested was approximately $26,000 and $0.7 million, for the six monthsended June 30, 2009 and 2010, respectively.

 

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A summary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three and six months ended June 30, 2009 and 2010 follows (inthousands):

 
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Restricted stock                       |       | $                                               | 207        |                                          | $          | 458 |   | $ | 404 |   | $ | 790 |   |
| Stock options                          |       | 302                                             |       | 296                                           |       | 615 |   | 594 |   |
| Total stock-based compensation expense |       | $                                               | 509        |                                          | $          | 754 |   | $ | 1,019 |   | $ | 1,384 |   |

 

As of June 30, 2010, the total compensation cost not yetrecognized related to nonvested stock awards under the Company’s plans isapproximately $6.4 million. The weighted average period over which this expenseis expected to be recognized is approximately 2.8 years.

 

**8.Transactions with Variable Interest Entities**

 

The Company conducts business in Texas through a wholly ownedsubsidiary registered as a Credit Services Organization (“CSO”) under Texaslaw. In connection with operating as a CSO, the Company entered into a creditservices organization agreement (“CSO Agreement”) with an unaffiliated third-partylender in 2007. The agreement governs the terms by which the Company referscustomers in Texas to that lender, on a non-exclusive basis, for a possibleextension of credit. The Company processes loan applications and commits toreimburse the lender for any loans or related fees that are not collected fromthose customers.

 

The Company has determined that the lender is a variable interestentity (“VIE”) but that the Company is not the primary beneficiary of this VIE.Therefore, the Company has not consolidated the lender as of and for the threeand six months ended June 30, 2009 and 2010.

 

Under the terms of the Company’s agreement with its third-party lender,the Company is contractually obligated to reimburse the lender for the fullamount of the cash advances and certain related fees that are not collectedfrom the customers. As of June 30, 2009 and 2010, the third-party lender’soutstanding cash advances and interest receivable, which were not recorded onthe Company’s balance sheet, totaled approximately $17.5 million and $17.8million, respectively, which is the amount the Company would be obligated topay the third-party lender if these amounts were to become uncollectible.Additionally, if these cash advances were to become uncollectible, the Companywould also be required to pay the third-party lender all related non-sufficientfunds (“NSF”) fees and late fees on these advances.

 

Because of the Company’s economic exposure for losses related to thethird-party lender’s advances and interest receivable, the Company hasestablished an accrual for third-party lender losses to reflect the Company’sestimated probable losses related to uncollectible third-party lender cashadvances. The accrual for third-party lender losses that was reported in theCompany’s balance sheet at June 30, 2009 and 2010 was approximately$3.9 million and $4 million, respectively, and was established on a basissimilar to the allowance for doubtful accounts.

 

**9. Related Party Transactions**

 

In January 2009, the Company entered into a one-year consultingarrangement with Mr. Tony S. Colletti, a member of the Board of Directors,for his support of government relations initiatives on the Company’s behalf inIllinois and Washington, D.C.  Includedin general and administrative expenses, for the three and six months ended June 30,2009, are expenses of approximately $70,000 and $121,000, respectively, relatedto this consulting arrangement.  Inaddition, in connection with his appointment to the Board of Directors inFebruary 2009, Mr. Colletti was granted 15,000 shares of restrictedstock with a fair market value of $16,650 and a three year vesting period.  Included in general and administrativeexpense related to the amortization of this restricted stock grant isapproximately $1,000 and $1,400 during the three months ended June 30,2009 and 2010, respectively, and approximately $2,000 and $2,800, during thesix months ended June 30, 2009 and 2010, respectively.

 

Included in general and administrative expenses are expenses withrelated parties, relating primarily to aircraft operating expenses, legalexpenses, and operating leases for office space, of approximately $67,000 and$44,000 for the three

 

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monthsended June 30, 2009 and 2010, respectively, and approximately $124,000 and$129,000 for the six months ended June 30, 2009 and 2010, respectively.

 

Under a time-share arrangement, the Company’s current Chairman andformer Chairman have used the Company’s aircraft for private purposes inexchange for the Company’s use of an identical aircraft owned by the Company’sformer Chairman and formerly owned, in part, by the Company’s current Chairman.Included in accounts receivable at June 30, 2010 is a $4,000 net receivablerelated to this arrangement.

 

In addition, on July 13, 2009, the Company entered into a one-yearAircraft Dry Lease Agreement with Carabo Capital, LLC, an entity of which theCompany’s current Chairman is a member. Under the Aircraft Dry Lease, the Company may use Carabo’s aircraft fromtime to time in exchange for one dollar and the Company’s fulfillment of itsobligations under the Aircraft Dry Lease.

 

The Company pays rent of $350 per month for office space used by theCompany’s current Chairman at an office building owned by the Company’s formerChairman.

 

The Company’s former Chairman’s brother is a partner of a law firm thatprovides the Company with certain routine legal services. During the three andsix months ended June 30, 2010, the Company incurred costs and expenses ofapproximately $16,000 and $27,000, respectively, for those services.

 

The Company incurred costs and expenses of approximately $158,000 and$241,000 for the six months ended June 30, 2009 and 2010, respectively, for theadvancement of the expenses incurred by certain of the Company’s current andformer officers and directors in connection with their responses to requests forinformation and subpoenas as part of an investigation by the U.S. Securitiesand Exchange Commission (“SEC”) into alleged insider trading by third partiesin the Company’s securities. These costs were incurred by the Company pursuantto indemnification agreements that require the Company to advance expenses to,and may require the Company to indemnify its current and former officers anddirectors for, damages incurred by them in responding to the pending SECinvestigation or defending against any related enforcement proceedings,including the “Wells Notice” issued by the SEC to the Company’s Chief ExecutiveOfficer on July 22, 2009.

 

**10.Revolving Credit Facility and Long-Term Debt**

 

In March 2008, the Company amended and restated its prior revolvingcredit facility with a syndicate of banks. This credit facility now providesthe Company with a $270 million revolving line of credit, which includesthe ability to issue up to $25 million in letters of credit. Thisrevolving credit facility matures on March 24, 2013. The Company has theoption to increase the revolving credit facility by an additional$95 million, subject to compliance with the credit agreement’s covenantsand conditions and upon receipt of sufficient commitments from lenders in thelending syndicate.

 

The credit facility is collateralized by substantially all of theCompany’s assets and contains various financial covenants that require, amongother things, the maintenance of a minimum net worth and certain leverage andfixed charge coverage ratios and also restricts the encumbrance of assets andthe creation of indebtedness. A breach of a covenant or an event of defaultcould prohibit the Company from accessing otherwise available borrowings, orcould cause all amounts outstanding under the revolving credit facility tobecome due and payable. The Company was in compliance with all financialcovenants at June 30, 2010.

 

In general, the Company’s borrowings under the revolving creditfacility bear interest, at the Company’s option, at a base rate plus anapplicable margin or a LIBOR-based rate plus an applicable margin. The baserate equals the greater of: (i) the prime rate set by Bank of America; and(ii) the sum of the federal funds rate plus 0.50%. The applicable marginis determined each quarter by a pricing grid based on the Company’s totalleverage ratio of consolidated debt to consolidated EBITDA. The base rateapplicable margin ranges from 1.50% to 2.25% based upon the Company’s totalleverage ratio. The LIBOR-based applicable margin ranges from 2.50% to 3.25%based upon the Company’s total leverage ratio. As of June 30, 2010, theapplicable margin for the prime-based rate was 1.50% and the applicable marginfor the LIBOR-based rate was 2.50%.

 

Asof June 30, 2010, the Company had $106.3 million outstanding on therevolving portion of the credit facility and $0.7 million of standbyletters of credit outstanding. Borrowings under the revolving credit facilityare subject to compliance with certain covenants and conditions.

 

The carrying value of the credit facility approximated its fair valueat December 31, 2009 and June 30, 2010.

 

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The Company owns its headquarters building and related land subject toa mortgage loan, the principal amount of which was approximately$4.6 million and $4.4 million at December 31, 2009 and June 30, 2010,respectively. The mortgage loan is payable to an insurance company and iscollateralized by our corporate headquarters building and related land. Themortgage loan is payable in 180 monthly installments of approximately$66,400, including principal and interest, and bears interest at a fixed rateof 7.30% over its term. The mortgage loan matures on June 10, 2017. Thecarrying amount of the Company’s corporate headquarters (land, landimprovements and building) was approximately $4.6 million and $4.5 millionat December 31, 2009 and June 30, 2010, respectively.

 

The fair market value of the Company’s long-term debt is estimatedusing a discounted cash flow analysis and was approximately $5.9 million atDecember 31, 2009 and $5.3 million at June 30, 2010.

 

**11.  Income Taxes**

 

The effective income tax rate as a percentage of income before incometaxes was 23.5% and 46.4% for the three months ended June 30, 2009 and 2010,respectively. The effective income tax rate as a percentage of income beforeincome taxes was 36.7% and 44.6% for the six months ended June 30, 2009 and 2010,respectively.

 

The Company adopted FASB ASC 740-10 on January 1, 2007. As a result ofthe implementation of FASB ASC 740-10, the Company recognized no adjustments tothe January 1, 2007 balance of retained earnings. At the adoption date, theCompany did not have any unrecognized tax benefits and did not have anyinterest or penalties accrued. As of December 31, 2009 and June 30, 2010, theCompany had $0.7 million and $0.9 million of total gross unrecognized taxbenefits including interest, respectively. Of this total approximately $0.7million and $0.9 million, respectively, represents the amount of unrecognizedtax benefits that are permanent in nature and, if recognized, would affect theannual effective tax rate. The increase in the total gross unrecognized taxbenefit including interest during the three months ended June 30, 2010, isprimarily attributable to the accrual of another three months of interest andthe accrual of the current year’s uncertain positions.

 

The Company’s continuing practice is to recognize interest andpenalties related to income tax matters in income tax expense. As of June 30,2010, the Company had approximately $0.1 million accrued for gross interest, ofwhich approximately $13,000 was a current period expense. The Company has determinedthat it is possible that the total amount of unrecognized tax benefits thatrelate to various state examinations will significantly increase or decreasewithin twelve months of the reporting date. However, at this time, a reasonableestimate of the range of possible change cannot be made until furthercorrespondence has been conducted with the state taxing authorities.

 

The Company is subject to U.S. income taxes, as well as various otherforeign, state and local jurisdictions. With few exceptions, the Company is nolonger subject to U.S. federal, state and local, or non-U.S. income taxexaminations by tax authorities for years before the tax year ended September30, 2005, although carry forward attributes that were generated prior to 2005may still be adjusted upon examination by the taxing authorities if they eitherhave been used or will be used in a future period. The income tax returns forthe years 2005 through 2008 are under examination by a state taxing authoritythat has completed its examinations and issued a proposed assessment for taxyears 2005 through 2008. In consideration of the proposed assessment, the totalgross unrecognized tax benefit was increased by $0.9 million through June 30,2010. At this time, it is too early to predict the final outcome of thismatter.

 

**12. Subsequent Events**

 

On July 28, 2010, the Company’s Board of Directors declared a cashdividend of $0.0625 per share of common stock, payable on September 3, 2010 toshareholders of record on August 24, 2010.

 

In July 2010, theCompany announced its intention to close approximately 30 additional centers inWashington and approximately 25 additional centers in Colorado. See Note 6.Commitments and Contingencies — Changes in Legislation.

 

On August 5, 2010, the Company entered into a Time SharingAgreement with Johnson Management, LLC, a limited liability company that isowned by George D. Johnson, Jr., the Company’s former Chairman and thebeneficial owner of more than five percent of the Company’s common stock. Thisagreement provides the Company with the right to lease an aircraft from JohnsonManagement, LLC for a period of one year, subject to automatic renewal on amonth-to-month basis, at a lease rate equal to the cost of operating theaircraft, plus an additional charge equal to 100% of the cost of fuel, oil, andlubricants used on the flight. The Company intends to use the aircraft forbusiness purposes when the Company-owned aircraft is unavailable.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

*The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements and the related notes in “Part I. Item 1. FinancialStatements.” This discussion contains forward-looking statements that involverisks and uncertainties such as our plans, objectives, expectations andintentions. Our actual results could differ materially from those anticipatedby these forward-looking statements. Please see “Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2009 and “PartII. Item 1.A “Risk Factors” of this Quarterly Report and “Forward-LookingStatements” at the end of this section for further discussion of theuncertainties, risks and assumptions associated with these statements.*

 

**Overview**

 

Headquartered in Spartanburg, South Carolina, we are the largestnon-bank provider of cash advance services in the United States as measured bythe number of centers operated. Our centers typically provide short-term,unsecured cash advances that are due on the customers’ next payday. As of June30, 2010, we operated 2,438 centers in 32 states in the United States, 21centers in the United Kingdom and 17 centers in Canada, and had 66 limitedlicensees in the United Kingdom.

 

Our industry has been significantly affected by increasing regulatory challenges.Legislation that negatively impacts cash advance services, whether throughpreclusions, interest rate ceilings, fee reductions, mandatory extensions ofterm length, limits on the amount or term of our products and services, orlimits on consumers’ use of our products and services could materially andadversely affect our business. We are very active in monitoring and evaluatingregulatory initiatives in all of the states and are closely involved with theefforts of the Community Financial Services Association of America (“CFSA”),which is an industry trade group composed of our Company and more than 100other companies engaged in the cash advance services industry.

 

***Cash Advance Services***

 

Our primary business is offering cash advance services, which includecash advances, installment loans, and lines of credit. However, we offeradditional complimentary products and services.

 

In most states where we operate, we originate cash advance servicesunder the authority of state-specific enabling statutes that allow for cashadvances ranging from single and installment closed-end terms to revolvinglines of credit with open-ended terms. The particular cash advance servicesoffered in any given location may change from time to time depending uponchanges in state law and federal law. Additionally, where permitted byapplicable law, we may service customers for a third-party lender. In Texas,where we operate as a Credit Services Organization (“CSO”), we offer afee-based credit services package to assist customers in trying to improvetheir credit and in obtaining an extension of consumer credit through athird-party lender. Under the terms of our agreement with this lender, weprocess customer applications and are contractually obligated for all losses.The permitted size of a cash advance varies by jurisdiction and ranges from $50to $5,000. However, our typical cash advance ranges from $50 to $1,000. Thefinance charges on cash advance services currently offered also vary byjurisdiction and range up to 22% of the amount of the cash advance.

 

A customer may obtain a cash advance in one of three ways: (1) byvisiting one of our centers in-person and completing an application;(2) by visiting our website, beginning the application process online,then visiting one of our centers in person to complete the application andreceive a cash advance; or (3) by visiting our website, completing anapplication online and receiving a cash advance from a third-party lender thatis directly deposited in the customer’s bank account.

 

Our customers also may obtain online cash advances made by third-partylenders that are governed by the laws of the state where the customer resides.We receive revenue from online cash advances made by third-party lenders basedon a percentage of the net fees, defined as advance fees less a provision fordoubtful accounts and a cost of capital charge, but otherwise are notcontractually obligated for losses.

 

Additional fees that we may charge and collect include originationfees, annual participation fees, fees for returned checks, late fees, and otherfees as permitted by applicable law. Currently, none of the cash advanceservices we offer include annual participation fees. Origination fees on cashadvance services currently offered by us range from $15 to $30, but future cashadvance services may have higher or lower origination fees depending onapplicable state law. Fees for returned checks 

 

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orelectronic debits that are declined for non-sufficient funds (“NSF”) vary bystate and range up to $30, and late fees vary by state and range up to$50.  In Texas and online, thethird-party lenders charge NSF fees and late fees in accordance with applicablelaw.

 

Each new customer must provide us with certain personal informationsuch as his or her name, address, phone number, proof of identification,employment information or source of income, bank account, and references. Thisinformation is entered into our information system and, where applicable, thatof the third-party lender. The customer’s identification, proof of incomeand/or employment and proof of bank account are verified. In jurisdictionswhere we provide the cash advance, we determine whether to approve a cashadvance and the size of a cash advance based primarily on a customer’s income.We do not perform credit checks through consumer reporting agencies. In thefuture, we may consider other criteria in evaluating loans. When a third-partylender provides the cash advance, such as in Texas and online, the applicablethird-party lender decides whether to approve a cash advance and establishesall of the underwriting criteria and terms, conditions, and features of thecustomer agreements.

 

After the documents presented by the customer have been reviewed forcompleteness and accuracy, copied for record-keeping purposes and the cashadvance has been approved, the customer enters into an agreement governing theterms of the cash advance. The customer then provides a personal check or anAutomated Clearing House (“ACH”) authorization, which enables electronicpayment from the customer’s account, to cover the amount of the cash advanceplus charges for applicable fees and/or interest and/or the balance due underthe agreement, and makes an appointment to return on a specified due date,typically his or her next payday, to repay the cash advance plus the applicablecharges. However, in some states, customers are not required to provide us witha personal check or ACH authorization, and payment cycles may vary dependingupon state law and type of service. At the specified due date, the customer isrequired to make the applicable payment, usually payment in full of the cashadvance plus fees and interest if applicable. Payment is usually made inperson, in cash at the center where the cash advance was initiated or issuedunless the cash advance was completed on the internet, in which case thecustomer makes payment by ACH authorization.

 

Upon payment in full, the customer’s check is returned and/or his orher ACH authorization is deemed to be revoked. If the customer does not repaythe outstanding cash advance in full on or before the due date, we will seek tocollect from the customer the amount of the cash advance and any applicablefees, including late and NSF fees due, and may deposit the customer’s personalcheck or initiate the electronic payment from the customer’s bank account.

 

***Other Products***

 

We may offer alternative products and services to our customers wherepermissible under applicable law. For instance, in Ohio, we currently offercheck cashing services at state authorized rates. We may also offer theproducts or services of a third party that we market, process, and/or serviceat our centers pursuant to an agreement with the third party. For instance, wecurrently offer pre-paid debit cards and money orders, money transmission, andbill payment services. Our Advance America branded pre-paid Visa debit card isissued by a federally chartered bank and regulated by the Office of ThriftSupervision. The card allows a cardholder to load cash onto the card and usethe card wherever VISA debit cards are accepted. We are compensated under anagreement with the bank based on a number of factors related to the bank’srevenue from purchases and subsequent cardholder activity, such as charges forloads, ATM withdrawals, account maintenance/plan charges and purchases. We alsosell money orders, and provide money transfer services and bill paymentservices as an agent of a licensed third-party money transmitter. We arecompensated by the money transmitter based upon the number and value of moneytransfers, money orders, and bill payments made by our centers.

 

***Approval Process***

 

Although there are numerous differences under the various enablingregulations, the application and approval process, underwriting criteria,delivery method, repayment and collection practices, customer and marketcharacteristics and underlying economics of our principal products and servicesgenerally are substantially similar in most jurisdictions.

 

In order for a new customer to be approved for a cash advance, he orshe is required to have a bank account and a regular source of income, such as ajob. To obtain a cash advance, a customer typically:

 

·                  completes an application andpresents the required documentation, usually proof of identification, a paystub or other evidence of income, and a bank statement;

 

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·                  enters into an agreementgoverning the terms of the cash advance, including the customer’s agreement torepay the amount advanced in full on or before a specified due date (usuallythe customer’s next payday), and our agreement to defer the presentment ordeposit of the customer’s check or ACH authorization until the due date;

 

·                  writes a personal check orprovides an ACH authorization to cover the amount advanced plus charges forapplicable fees and/or interest; and

 

·                  makes an appointment toreturn on the specified due date to repay the amount advanced plus theapplicable charges and to reclaim his or her check.

 

In jurisdictions where we provide cash advances, we determine whetherto approve the cash advance to our customers. We require proof ofidentification, bank account, and income source, as described above, and weprimarily consider the customer’s income in determining the amount of the cashadvance. In the future we may consider other criteria in evaluating cashadvances. When a third-party lender provides the cash advance, such as in Texasand online, the applicable third-party lender decides whether to approve a cashadvance and establishes all of the underwriting criteria and terms, conditions,and features of the customer agreements.

 

***Payment Plans***

 

In most states, a customer may qualify for an extended payment plan (“PaymentPlan”). Generally, the terms of our Payment Plans conform to the CFSA BestPractices for extended payment plans. Certain states have specified their ownterms and eligibility requirements for Payment Plans. Typically, a customer mayenter into a Payment Plan for no additional fee once every twelve months andthe Payment Plan will call for scheduled payments that coincide with thecustomer’s next four paydays. In some states, a customer may enter into aPayment Plan more frequently. We do not engage in collection efforts while acustomer is enrolled in a Payment Plan. If a customer misses a scheduledpayment under a Payment Plan, we may resume our normal collection procedures.We do not offer a Payment Plan for installment loans or lines of credit. Thethird-party lender in Texas does not offer a Payment Plan for advances to itscustomers. The third-party internet lenders offer Payment Plans as required bystate law.

 

Certain states also provide for credit counseling plans. If a customerinforms us that he or she has entered into a credit counseling plan, we workwith the credit counselor and the customer to create a modified payment plan. 

 

***Collection Process***

 

Repayment terms vary depending upon state law, the type of cash advanceservice offered, and whether the cash advance was completed online or in one ofour centers. Generally, as part of the closing process, we explain the customer’srepayment obligations and establish the expectation that the customer will payus in cash on or before the due date in accordance with their agreement withus. The day before the due date, we generally call the customer to confirmtheir payment.

 

If a customer does not pay the amount due, our center management hasthe discretion to either commence past-due collection efforts, which typicallymay proceed for up to 14 days in most states, or deposit the customer’spersonal check or debit their bank account in accordance with their ACHauthorization. If center management decides to commence past-due collectionefforts, employees typically contact the customer by telephone or in person toobtain a payment or a promise to pay and, in cases where we hold a check,attempt to exchange the customer’s check for a cashier’s check, if funds areavailable.

 

If, at the end of this past-due collection period or Payment Plan, thecenter has been unable to collect the amount due, the customer’s check isdeposited or their ACH authorization is processed. Additional collectionefforts are not required if the customer’s deposited check or ACH debit clears.For the year ended December 31, 2009, and the six months ended June 30,2010, we deposited customer checks or presented an ACH authorization forapproximately 5.9% and 6.1%, respectively, of all customer checks we receivedand approximately 30% and 36%, respectively, of these deposited customer checksor presented ACH’s cleared.  If thecustomer’s check or ACH debit 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, we begin additional collection efforts. 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 to exchange the customer’s check for a cashier’scheck, if funds become available. We also send out a series of collectionletters, which are automatically distributed from a central location based on aset of pre-determined criteria.

 

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In the case of cash advances in the form of lines of credit, if acustomer fails to make payment when due in accordance with the terms of theiragreement with us, center management may close the line of credit, acceleratethe maturity date, and take the steps outlined above or work with the customerto bring his or her payments current. If we close the line of credit andaccelerate the maturity date, we stop charging interest on the outstandingamount and begin collection efforts as described above.

 

***Selected Operating Data***

 

The following table presents key operating data for our business:

 
| ** **                                                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Number of centers open at end of period                                                                      |       | 2,635                                           |       | 2,476                                         |       | 2,635 |   | 2,476 |   |
| Number of customers served—all credit products  (thousands)                                             |       | 743                                             |       | 738                                           |       | 944 |   | 933 |   |
| Number of cash advances originated (thousands) (1)                                                           |       | 2,553                                           |       | 2,413                                         |       | 4,975 |   | 4,699 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                      |       | $                                               | 916,093    |                                          | $          | 888,266 |   | $ | 1,789,462 |   | $ | 1,727,254 |   |
| Average amount of each cash advance originated (1)                                                           |       | $                                               | 359        |                                          | $          | 368 |   | $ | 360 |   | $ | 368 |   |
| Average charge to customers for providing and  processing a cash advance (1)                                 |       | $                                               | 53         |                                          | $          | 55 |   | $ | 53 |   | $ | 55 |   |
| Average duration of a cash advance (days) (1),(2)                                                            |       | 17.5                                            |       | 18.0                                          |       | 17.4 |   | 18.0 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 26                                              |       | 12                                            |       | 30 |   | 12 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                               | 11,363     |                                          | $          | 4,078 |   | $ | 15,341 |   | $ | 4,553 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                               | 421        |                                          | $          | 273 |   | $ | 497 |   | $ | 282 |   |
| Number of installment loans originated (thousands)  (4)                                                      |       | 9                                               |       | 9                                             |       | 16 |   | 17 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                                  |       | $                                               | 3,938      |                                          | $          | 4,506 |   | $ | 6,723 |   | $ | 7,879 |   |
| Average principal amount of each installment loan  originated (4)                                            |       | $                                               | 436        |                                          | $          | 475 |   | $ | 431 |   | $ | 474 |   |

 

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(1)           Excludes lines of credit and installment loans.

(2)           Excludes the impact of extended payment plans.

(3)           We began offering lines of credit inVirginia in November 2008 and ceased offering new lines of credit to customersin Virginia in February 2010.

(4)           The installment loan activity reflects loans weoriginated as the lender in Illinois.

 

***Revenues and Expenses***

 

Our revenues consist primarily of fees and/or interest paid to usdirectly by our customers. Our expenses relate primarily to the operation ofour centers. These expenses include salaries and related payroll costs,occupancy expense related to our leased centers, center depreciation expense,advertising expense, and other center expenses that consist principally ofcosts related to center closings, communications, delivery, supplies, travel,bank charges, various compliance and collection costs, and costs associatedwith theft.

 

***Provision for Doubtful Accounts, Allowance for Doubtful Accounts, andAccrual for Third-Party Lender Losses***

 

Our provision for doubtful accounts and accrual for third-party lenderlosses are primarily based upon models that analyze specific portfoliostatistics and also reflect, to a lesser extent, management’s judgmentregarding overall accuracy. The analytical models take into account severalfactors including the number of transactions customers complete and charge-offand recovery rates. Additional factors, such as changes in state laws, centerclosings, length of time centers have been open in a state, and relative mix ofnew centers within a state are also evaluated to determine whether the resultsfrom the analytical models should be revised.

 

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The provision for doubtful accounts decreased from 22% of revenues, or$33 million, and 17.7% of revenues, or $54.1 million, for the three months andsix months ended June 30, 2009, respectively, to 17.7% of revenues, or$25.1 million, and 13.2% of revenues, or $37.8 million, for the sameperiods in 2010.

 

This decrease is primarily due to an improvement in the loss rates inVirginia and a reduction of approximately $12.9 million in gross receivablesrelated to the Virginia line of credit product at June 30, 2010 compared toJune 30, 2009.

 

During the three and six months ended June 30, 2009, we also receivedproceeds from the sale of receivables in the amount of $2.2 million, comparedto $0.1 and $0.7 million for the three and six months ended June 30, 2010,respectively.

 

***Income Taxes***

 

The effective income tax rate as a percentage of income before incometaxes was 23.5% and 46.4% for the three months ended June 30, 2009 and 2010,respectively. The effective income tax rate as a percentage of income beforeincome taxes was 36.7% and 44.6% for the six months ended June 30, 2009 and2010, respectively.

 

***Changes in Legislation***

 

During the last few years, legislation that prohibits or severelyrestricts our products and services has been introduced or adopted in a numberof states and at the federal level, and we expect that trend to continue forthe foreseeable future. For example, in July 2010, the Dodd-Frank Wall StreetReform and Consumer Protection Act was signed into law. Among other items, thisact created the Bureau of Consumer Financial Protection, which will haveauthority to regulate companies that provide consumer financial services. Atthe state level, a 2009 law in Virginia prompted us to change our cash advanceproduct and to offer an open-ended line of credit product. However, asubsequent Virginia Corporation Commission ruling and additional legislationlimited our ability to offer and service the open-ended line of credit productin Virginia. As a result, we have consolidated a number of our centers inVirginia, and we may determine that further consolidation of centers inVirginia is appropriate if the cash advance product we now offer in Virginia isnot sufficiently profitable to maintain. In the State of Washington a January1, 2010 law places a number of restrictions on our cash advance productincluding limiting the number of cash advances a customer may take to eightadvances in any one year. As a result, we expect our revenues and profits inWashington will be significantly reduced. If we are unable to operateprofitably in Washington, we may cease operating in that state. New laws ineach of South Carolina and Kentucky implement a statewide database to monitorthe number of loans made to customers. New Colorado legislation permits amultiple installment loan that we expect will significantly lower our revenuesand profits in Colorado. Further, legislation permitting cash advances inArizona expired on July 1, 2010, and as a result, we have ceased operations inArizona. Legislation in Mississippi that is scheduled to expire in 2012 may notbe renewed or could be modified in a manner that affects our operationsnegatively. We are regularly refining our cash advance services and developingnew products and services or operations to address recent or anticipatedlegislative and regulatory changes. Some of these legislative and regulatorychanges may result in our discontinuing operations, while other changes mayresult in less significant short-term or long-term changes, interruptions inrevenues, and lower operating margins. We generally cannot estimate whateffect, if any, operational changes we make in response to legislative andregulatory changes may have on our financial results until we are able todevelop legal and financially viable alternative products and services.

 

***Operations in Ohio***

 

In November 2008, the State of Ohio capped interest rates on cashadvance loans and limited the number of cash advances a customer may take inany one year. As a result of this legislation, we began offering small loanspursuant to the Ohio Small Loan Act and check-cashing services. The small loanproduct and check cashing services generate less revenue than our former cashadvance product and, as a result, we have closed some of our centers in Ohio.In the third quarter of 2009, we stopped offering small loans and began tooffer cash advances pursuant to the Ohio Second Mortgage Act as a registeredsecond mortgage lender. A rule issued by the Ohio Division of FinancialInstitutions in the first quarter of 2010, and temporarily stayed by the Ohiocourts pending the outcome of certain litigation between that state andunrelated third parties, would, if enforced, restrict certain activities bylicensed check cashers and could have a further negative impact on ouroperations in Ohio.

 

For the three months ended June 30, 2009 and 2010, 5.5% and 7.2%,respectively, of our total revenues were generated from our operations in Ohio.For the six months ended June 30, 2009 and 2010, 5.3% and 7.1%, respectively,of our total revenues were generated from our operations in Ohio. The followingis a summary of financial information for our operations in Ohio for thoseperiods (in thousands):

 

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| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 8,221      |                                          | $          | 10,135 |   | $ | 16,295 |   | $ | 20,202 |   |
| Total center expenses      |       | 9,409                                           |       | 7,776                                         |       | 18,565 |   | 15,184 |   |
| Center gross profit (loss) |       | $                                               | (1,188     | )                                             | $          | 2,359 |   | $ | (2,270 | ) | $ | 5,018 |   |

 

***Operations in Virginia***

 

A Virginia law that went into effect in January 2009 substantiallychanged the terms for cash advance services in Virginia and severely restrictedviable operations for short-term lenders. We continue to offer cash advances in Virginia in conformance with thenew regulations, and between November 2008 and February 2010 also offered anopen-ended line of credit product. However, a subsequent Virginia CorporationCommission ruling limited our ability to offer the open-ended lines of crediteffective March 1, 2010. As a result, we ceased offering new open-ended linesof credit in February 2010 and have continued to service existing lines ofcredit since that time. Because of additional legislation that was passed in 2010,we will stop providing new draws on existing lines of credit on or beforeOctober 1, 2010.

 

During the six months ended June 30, 2010, we closed 53 centers inVirginia. For the three and six months ended June 30, 2010, closing costs ofapproximately $1.3 million are included in the income statement as an increasein other center expenses of $0.9 million, a loss on disposal of property andequipment of $0.1 million, and center salaries and related payroll costs of$0.3 million. At this time we are not able to determine the amount of goodwillimpairment, if any, that could result from the cessation of our operations in Virginia.

 

For the three months ended June 30, 2009 and 2010, 8.6% and 4.5%,respectively, of our total revenues were generated from our operations inVirginia. For the six months ended June 30, 2009 and 2010, 10.6% and 4.7%,respectively, of our total revenues were generated from our operations inVirginia. The following is a summary of financial information for ouroperations in Virginia for the three and six months ended June 30, 2009 and2010 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 12,902     |                                          | $          | 6,378 |   | $ | 32,591 |   | $ | 13,459 |   |
| Total center expenses      |       | 13,968                                          |       | 4,707                                         |       | 29,916 |   | 10,758 |   |
| Center gross profit (loss) |       | $                                               | (1,066     | )                                             | $          | 1,671 |   | $ | 2,675 |   | $ | 2,701 |   |

 

***Operations in Washington***

 

A law became effective in the State of Washington on January 1, 2010that limits the number of cash advances a customer may take in any one year, limitsthe cash advance amount that can be taken out at any one time, and implements astatewide database to monitor the number of cash advances. We believe this lawwill negatively affect our revenue and profitability in that state and, as aresult, we may close or consolidate some or all of our centers in Washington.

 

During the six months ended June 30, 2010, we closed 17 centers inWashington. For the three and six months ended June 30, 2010, closing costs ofapproximately $0.3 million and $0.5 million, respectively, are included in theincome statement.

 

In July 2010, we announced our intention to close approximately 30additional centers in Washington. If we close all of our centers in Washington,the estimated closing costs, including severance, center tear-down costs, leasetermination costs, and the write-down of fixed assets would range from$1.9 million to $4 million, and the collectability of advances and feesreceivable in Washington may be impaired. As of June 30, 2010, advances andfees receivable, net of allowance for doubtful accounts, in Washington wasapproximately $4.2 million. At this time, we are not able to determine theamount of goodwill impairment, if any, that could result from the cessation ofour operations in Washington.

 

For the three months ended June 30, 2009 and 2010, 4.3% and 1.1%,respectively, of our total revenues were generated from our operations inWashington. For the six months ended June 30, 2009 and 2010, 4.2% and 1.3%,respectively, of our total revenues were generated from our operations inWashington. The following is a summary of financial information for ouroperations in Washington for the three and six months ended June 30, 2009 and2010 (in thousands):

 

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| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 6,396      |                                          | $          | 1,584 |   | $ | 12,807 |   | $ | 3,792 |   |
| Total center expenses      |       | 4,867                                           |       | 3,393                                         |       | 9,671 |   | 7,004 |   |
| Center gross profit (loss) |       | $                                               | 1,529      |                                          | $          | (1,809 | ) | $ | 3,136 |   | $ | (3,212 | ) |

 

***Operations in South Carolina***

 

A new law in South Carolina became effective January 1, 2010 that,among other things, prohibits any consumer from having more than one cashadvance outstanding at any time and implements a statewide database to monitorthe number of cash advances made to customers within that state. Although webelieve this law will negatively affect our revenue and profitability in SouthCarolina, we currently believe operations will remain economically viable inthis state.

 

For the three months ended June 30, 2009 and 2010, 5.2% and 3.4%,respectively, of our total revenues were generated from our operations in SouthCarolina. For the six months ended June 30, 2009 and 2010, 5.2% and 3.8%,respectively, of our total revenues were generated from our operations in SouthCarolina. The following is a summary of financial information for ouroperations in South Carolina for the three and six months ended June 30,2009 and 2010 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 7,765      |                                          | $          | 4,818 |   | $ | 15,883 |   | $ | 10,783 |   |
| Total center expenses      |       | 5,644                                           |       | 5,118                                         |       | 10,776 |   | 9,773 |   |
| Center gross profit (loss) |       | $                                               | 2,121      |                                          | $          | (300 | ) | $ | 5,107 |   | $ | 1,010 |   |

 

***Operations in Kentucky***

 

A new law in Kentucky became effective in the second quarter of 2010that, among other things, prohibits any consumer from having more than two cashadvances outstanding at any time, establishes a maximum aggregate advanceamount of $500, and implements a statewide database to monitor the number anddollar amount of advances made to customers within that state. Although webelieve this law will negatively affect our revenue and profitability inKentucky, we currently believe operations will remain economically viable inthis state.

 

For the three months ended June 30, 2009 and 2010, 1.2% and 0.9%,respectively, of our total revenues were generated from our operations inKentucky. For the six months ended June 30, 2009 and 2010, 1.2% of ourtotal revenues were generated from our operations in Kentucky. The following isa summary of financial information for our operations in Kentucky for the threeand six months ended June 30, 2009 and 2010 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 1,864      |                                          | $          | 1,337 |   | $ | 3,747 |   | $ | 3,324 |   |
| Total center expenses      |       | 1,483                                           |       | 1,600                                         |       | 2,931 |   | 3,040 |   |
| Center gross profit (loss) |       | $                                               | 381        |                                          | $          | (263 | ) | $ | 816 |   | $ | 284 |   |

 

***Operations in Colorado***

 

A new law in Colorado will become effective on August 11, 2010,that expands the minimum term of cash advances to six months, allows repaymentin multiple installments, and creates a new regime of permitted finance, interest,and other charges. We believe that this law will negatively affect our revenueand profitability in Colorado. We may close or consolidate some or all of ourcenters in Colorado if we determine that it is no longer economically viable tooperate these centers.

 

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During the six months ended June 30, 2010, we closed five centersin Colorado. For the three and six months ended June 30, 2010, closingcosts of approximately $0.4 million are included in the income statement as anincrease in other center expenses of $0.2 million and a loss on impairment ofassets of $0.2 million.

 

In July 2010, we announced our intention to close approximately 25additional centers in Colorado. If we close all of our centers in Colorado, theestimated closing costs, including severance, center tear-down costs, leasetermination costs, and the write-down of fixed assets would range from $1.3million to $2.4 million, and the collectability of advances and fees receivablein Colorado may be impaired. As of June 30, 2010, advances and feesreceivable, net of allowance for doubtful accounts, in Colorado wasapproximately $4.5 million. At this time we are not able to determine theamount of goodwill impairment, if any, that could result from closing ourremaining centers in Colorado.

 

For the three months ended June 30, 2009 and 2010, 1.9% and 2.2%,respectively, of our total revenues were generated from our operations inColorado. For the six months ended June 30, 2009 and 2010, 1.9% and 2.1%,respectively, of our total revenues were generated from our operations inColorado. The following is a summary of financial information for our operationsin Colorado for the three and six months ended June 30, 2009 and 2010 (inthousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 2,887      |                                          | $          | 3,044 |   | $ | 5,771 |   | $ | 6,120 |   |
| Total center expenses      |       | 2,784                                           |       | 2,957                                         |       | 5,577 |   | 5,462 |   |
| Center gross profit (loss) |       | $                                               | 103        |                                          | $          | 87 |   | $ | 194 |   | $ | 658 |   |

 

***Closings***

 

*Closing of Operations in Arizona.*An existing law permittingcash advances in Arizona expired June 30, 2010. We announced that weintend to cease operations in our remaining 47 centers in Arizona. We estimatethe closing costs, including severance, center tear-down costs, leasetermination costs, and the write-down of fixed assets will range from $1.1 millionto $2 million. An impairment charge of approximately $191,000 was recognizedduring the three months ended June 30, 2010. The cessation of our Arizonaoperations did not result in any impairment of goodwill.

 

For the three months ended June 30, 2009 and 2010, 2.3% and 2.4%,respectively, of our total revenues were generated from our operations inArizona. For the six months ended June 30, 2009 and 2010, 2.4% of ourtotal revenues were generated from our operations in Arizona. The following isa summary of financial information for our operations in Arizona for the threeand six months ended June 30, 2009 and 2010 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 3,651      |                                          | $          | 3,226 |   | $ | 7,240 |   | $ | 6,933 |   |
| Total center expenses      |       | 2,458                                           |       | 2,260                                         |       | 4,902 |   | 4,448 |   |
| Center gross profit (loss) |       | $                                               | 1,193      |                                          | $          | 966 |   | $ | 2,338 |   | $ | 2,485 |   |

 

*Closing of Operations in New Hampshire.*  Legislation in New Hampshire became effectivein 2009 that effectively prohibits the offering of cash advances in NewHampshire. As a result of this legislation, we determined that it was no longereconomically viable to continue operating in New Hampshire. As a result, weclosed 22 centers in New Hampshire in the first quarter of 2009, one in thesecond quarter of 2009, and one in the fourth quarter of 2009.  Approximately $0.7 million of costsassociated with closing our New Hampshire operations were recognized during2008, and the remaining $0.6 million was recognized during the first quarter of2009.

 

The following is a summary of financial information for our operationsin New Hampshire for the three and six months ended June 30, 2009 and 2010 (inthousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                               | 9          |                                          | $          | — |   | $ | 134 |   | $ | — |   |
| Total center expenses      |       | 90                                              |       | 49                                            |       | 1,190 |   | 49 |   |
| Center gross profit (loss) |       | $                                               | (81        | )                                             | $          | (49 | ) | $ | (1,056 | ) | $ | (49 | ) |

 

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***Centers***

 

The following table illustrates the composition of our center networkat December 31, 2009 and June 30, 2010:

 
| **State**           | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
|---------------------|------------|-----------------------------|------------|-------------------------|------------|
| Alabama             |       | 142                         |       | 140                     |       |
| Arizona (1)         |       | 48                          |       | 47                      |       |
| California          |       | 282                         |       | 282                     |       |
| Colorado (2)        |       | 62                          |       | 57                      |       |
| Delaware            |       | 16                          |       | 14                      |       |
| Florida             |       | 241                         |       | 242                     |       |
| Idaho               |       | 7                           |       | 6                       |       |
| Illinois            |       | 65                          |       | 62                      |       |
| Indiana             |       | 100                         |       | 95                      |       |
| Iowa                |       | 34                          |       | 34                      |       |
| Kansas              |       | 53                          |       | 53                      |       |
| Kentucky            |       | 44                          |       | 44                      |       |
| Louisiana           |       | 84                          |       | 81                      |       |
| Michigan            |       | 151                         |       | 151                     |       |
| Mississippi         |       | 61                          |       | 61                      |       |
| Missouri            |       | 86                          |       | 84                      |       |
| Montana             |       | 2                           |       | 2                       |       |
| Nebraska            |       | 22                          |       | 20                      |       |
| Nevada              |       | 13                          |       | 12                      |       |
| North Dakota        |       | 6                           |       | 3                       |       |
| Ohio                |       | 181                         |       | 176                     |       |
| Oklahoma            |       | 67                          |       | 66                      |       |
| Rhode Island        |       | 21                          |       | 20                      |       |
| South Carolina      |       | 140                         |       | 139                     |       |
| South Dakota        |       | 11                          |       | 11                      |       |
| Tennessee           |       | 62                          |       | 62                      |       |
| Texas               |       | 244                         |       | 242                     |       |
| Utah                |       | 6                           |       | 4                       |       |
| Virginia            |       | 139                         |       | 86                      |       |
| Washington (3)      |       | 91                          |       | 74                      |       |
| Wisconsin           |       | 62                          |       | 58                      |       |
| Wyoming             |       | 10                          |       | 10                      |       |
| Total United States |       | 2,553                       |       | 2,438                   |       |
| Canada              |       | 13                          |       | 17                      |       |
| United Kingdom      |       | 21                          |       | 21                      |       |
| Total               |       | 2,587                       |       | 2,476                   |       |

 

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(1)          As previously announced, we will close all ofour centers in Arizona during 2010.

(2)          As previously announced, we intend to closeapproximately 25 additional centers in Colorado during 2010. 

(3)          As previously announced, we intend to closeapproximately 30 additional centers in Washington during 2010. 

 

***New centers***

 

We had no center openings during the three months ended June 30,2009.  We opened four and seven newcenters during the six months ended June 30, 2009 and 2010, respectively.All seven centers opened in 2010 occurred during the second quarter.

 

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***Closed centers***

 

We closed 105 and 26 centers during the three months ended June 30,2009 and 2010, respectively. We closed 166 and 118 centers during the sixmonths ended June 30, 2009 and 2010, respectively. We recorded expensesrelated to center closures and scheduled center closings of approximately$1.7 million and $1.4 million for the three months ended June 30,2009 and 2010, respectively. We recorded expenses related to center closuresand scheduled center closings of approximately $5.1 million and $3.2 million inthe six months ended June 30, 2009 and 2010, respectively. The costs areincluded in the income statements for the three and six months ended June 30,2009 and 2010, as shown below (in thousands).

 
| ** **                                 | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                    | ** ** | **2010**                                  | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                 | ** ** | ** **                                  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Center salaries and related payroll costs  |       | $                                           | 168        |                                      | $          | 34 |   | $ | 408 |   | $ | 211 |   |
| Occupancy and other center expenses        |       | 1,478                                       |       | 569                                       |       | 2,458 |   | 2,006 |   |
| Loss on disposal of property and equipment |       | 42                                          |       | 153                                       |       | 44 |   | 279 |   |
| Loss on impairment of assets               |       | —                                      |       | 654                                       |       | 2,209 |   | 654 |   |
|                                       |       | $                                           | 1,688      |                                      | $          | 1,410 |   | $ | 5,119 |   | $ | 3,150 |   |

 

***Seasonality***

 

Our business is seasonal due to the impact offluctuating demand for cash advances and fluctuating collection ratesthroughout the year. Demand has historically been highest in the third andfourth quarters of each year, corresponding to the back-to school and holidayseasons and lowest in the first quarter of each year, corresponding to ourcustomers’ receipt of income tax refunds. Our provision for doubtful accountsand allowance for doubtful accounts are historically lowest as a percentage ofrevenues in the first quarter of each year, corresponding to customers’ receiptof income tax refunds, and increase as a percentage of revenues for theremainder of each year.

 

**Critical Accounting Policies and Use of Estimates**

 

The preparation of our financial statements, in conformity withgenerally accepted accounting principles (“GAAP”) in the United States, requiresus to make estimates and assumptions that affect the reported amounts ofassets, liabilities, and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. In applying the accounting principles, wemust often make estimates and assumptions regarding expected outcomes oruncertainties. As might be expected, the actual results or outcomes aregenerally different than the estimated or assumed amounts. These differencesare usually minor and are included in our consolidated financial statements assoon as they are known. Estimates, judgments, and assumptions are continuallyevaluated based on available information and experience. Because of the use ofestimates inherent in the financial reporting process, actual results coulddiffer from those estimates.

 

Actual results related to the estimates and assumptions made inpreparing our consolidated financial statements will emerge over periods oftime, such as estimates and assumptions underlying the determination of theallowance for doubtful accounts, accrual for third-party lender losses, legalsettlements, and regulatory loss contingencies. These estimates and assumptionsare monitored and periodically adjusted as circumstances warrant. These amountsmay be adjusted based on higher or lower actual loss experience. Although thereis greater risk with respect to the accuracy of these estimates and assumptionsbecause of the period over which actual results may emerge, such risk ismitigated by the ability to make changes to these estimates and assumptionsover the same period.

 

We believe that the following critical accounting policies affect themore significant estimates and assumptions used in the preparation of ourfinancial statements.

 

***Provision for Doubtful Accounts, Allowancefor Doubtful Accounts, and Accrual for Third-Party Lender Losses***

 

We believe the most significant estimates made in the preparation ofour accompanying consolidated financial statements relate to the determinationof an allowance for doubtful accounts for estimated probable losses on cashadvances we make directly to customers and an accrual for third-party lenderlosses for estimated probable losses on cash advances and certain related feesfor loans that we process for the third-party lender in Texas. See “Off-BalanceSheet Arrangement with Third-Party Lender” in this section. Our advances andfees receivable, net, on our balance sheet, do not include the advances

 

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andinterest receivable for loans processed by us for the third-party lender inTexas because these loans are owned by the third-party lender.

 

The provision for doubtful accounts decreased from 22% of revenues, or$33 million, and 17.7% of revenues, or $54.1 million, for the three andsix months ending June 30, 2009, respectively, to 17.7% of revenues, or$25.1 million, and 13.2% of revenues, or $37.8 million, for the same periods in2010.

 

This decrease is primarily due to an improvement in the loss rates inVirginia and a reduction of approximately $12.9 million in gross receivablesrelated to the Virginia line of credit product at June 30, 2010, comparedto June 30, 2009.

 

During the three and six months ended June 30, 2009, we alsoreceived proceeds from the sale of receivables in the amount of $2.2 millioncompared to $0.1 million and $0.7 million for the three and six months ended June 30,2010, respectively.

 

The allowance for doubtful accounts and accrual for third-party lenderlosses are primarily based upon financial 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 new products, changesin state laws, center closings, length of time centers have been open in astate, and relative mix of new centers within a state are also evaluated todetermine whether the results from the analytical models should be revised.

 

We record the allowance for doubtful accounts as a reduction ofadvances and fees receivable, net, on our balance sheet. We record the accrualfor third-party lender losses as a current liability on our balance sheet. Wecharge the portion of advances and fees deemed to be uncollectible against theallowance for doubtful accounts and credit any subsequent recoveries (includingsales of debt without recourse) to the allowance for doubtful accounts.

 

Unpaid advances and the related fees and/or interest are generallycharged off 60 days after the date a customer’s check was returned, theACH authorization was rejected by the customer’s bank, or the default date,unless the customer has paid at least 15% of the total of his or her cashadvance plus all applicable fees, or 15% of the outstanding balance and relatedinterest and fees for our line of credit and installment loan products. Unpaidcash advances or cash advances of customers who file for bankruptcy are chargedoff upon receipt of the bankruptcy notice. Although management uses the bestinformation available to make evaluations, future adjustments to the allowancefor doubtful accounts and accrual for third-party lender losses may benecessary if conditions differ substantially from our assumptions used inassessing their adequacy.

 

Our business experiences cyclicality in receivable balances from boththe time of year and the day of the week. Fluctuations in receivable balancesresult in a corresponding impact on the allowance for doubtful accounts,accrual for third-party lender losses, and provision for doubtful accounts.

 

Our receivables are traditionally lower at the end of the firstquarter, corresponding to tax refund season, and reach their highest levelduring the last week of December.

 

In addition to the seasonal fluctuations, the receivable balances canfluctuate throughout a week, generally being at their highest levels on aWednesday or Thursday and at their lowest levels on a Friday. In general,receivable balances decrease approximately 2% to 5% from a typical Thursday toa typical Friday. The second quarter of 2009 began on a Wednesday and ended ona Tuesday. The second quarter of 2010 began on a Thursday and ended on aWednesday.

 

To the extent historical credit experience is not indicative of futureperformance or other assumptions used by management do not prevail, our lossexperience could differ significantly, resulting in either higher or lowerfuture provisions for doubtful accounts. As of June 30, 2010, if theestimated rates used in calculating our allowance for doubtful accounts andthird-party lender losses were 5% higher or lower, it would have increased ordecreased our provision for doubtful accounts by approximately $2.5 million.

 

***Intangible Assets***

 

As a result of our acquisition of the National Cash Advance group ofaffiliated companies in October 1999, we recorded approximately$143 million of goodwill. During 2007 and 2008, we completed sixacquisitions in the United Kingdom, resulting in additional goodwill ofapproximately $5.4 million. As of June 30, 2010, the carrying valueof goodwill was $126.8 million due to the amortization of goodwill priorto the adoption of ASC 350-20-35, “Goodwill—Subsequent

 

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Measurement”,and the change in the exchange rate for our United Kingdom assets. Due to thesignificance of goodwill and the reduction of net income that would occur ifgoodwill were impaired, we assess the impairment of our long-lived andintangible assets annually, during the fourth quarter of each year, or wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. Factors that could trigger an impairment review includesignificant underperformance relative to historical or projected future cashflows, significant changes in the manner of use of the acquired assets or thestrategy of the overall business, and significant negative industry trends. Areporting unit is an operating segment, or under certain circumstances, acomponent of an operating segment that constitutes a business. Our reportingunits consist of multiple state-based operations and therefore the cessation ofoperations in any particular state does not imply that goodwill for the relevantreporting unit will be impaired. When estimated future cash flows are less thanthe carrying value of the net assets and related goodwill, an impairment testis performed to measure and recognize the amount of the impairment loss, ifany. Impairment losses, related to the carrying value of goodwill, representthe excess of the carrying amount of a reporting unit’s goodwill over theimplied fair value of that goodwill. In determining the estimated futurediscounted cash flows, we consider current and projected future levels ofincome, as well as business trends, prospects, and market and economicconditions. Impairment tests involve the use of judgments and estimates relatedto the fair market value of the business operations with which goodwill is associated,taking into consideration both historical operating performance and anticipatedfuture earnings. We believe that the estimates of future cash flows and fairvalue are reasonable. Changes in estimates of those cash flows and fair value,however, could affect the evaluation, and any impairment would lower our netincome.

 

We have approximately $4.2 million of goodwill in our UnitedKingdom operations. As of June 30, 2010, these operations havecumulatively generated negative cash flow and have not reached break-even atthe center gross profit level for the trailing twelve months. Our expansionefforts in the United Kingdom began in the third quarter of 2007. Our goodwillimpairment assessment model projects future positive cash flows sufficient to supportthe goodwill and long-lived asset base in our United Kingdom operations. If theUnited Kingdom operations continue to generate negative cash flow and do notbreak-even, an impairment charge related to its goodwill is possible.

 

We cannot predict the occurrence of certain events that might adverselyaffect the carrying value of our goodwill. Should the operations of thebusinesses with which goodwill is associated incur significant adverse changesin business, clients, adverse actions by regulators, unanticipated competition,loss of our revolving line of credit, and/or changes in technology or markets,some or all of our recorded goodwill could be impaired.

 

***Litigation Accrual***

 

In view of the inherent difficulty of predicting the outcome oflitigation and regulatory matters, particularly where the claimants seek verylarge or indeterminate damages or where the matters present novel legaltheories or involve a large number of parties, we cannot state with confidencewhat the eventual outcome of pending matters will be, what the timing of theultimate resolution of these matters will be, or what the eventual loss, fines,or penalties related to each pending matter may be or the extent to which suchamounts may be recoverable under our insurance policies.

 

In accordance with applicable accounting guidance, we establishreserves for litigation and regulatory matters when those matters present losscontingencies that are both probable and estimable. When loss contingencies arenot both probable and estimable, we do not establish reserves. In some of thematters described in “Part II. Other Information - Item 1. LegalProceedings” loss contingencies are not both probable and estimable in the viewof management, and accordingly, reserves have not been established for thosematters. Based on current knowledge, management does not believe that losscontingencies, if any, arising from pending litigation and regulatory matters,including the litigation and regulatory matters described in this QuarterlyReport on Form 10-Q, will have a material adverse effect on ourconsolidated financial position or liquidity, but may be material to ourresults of operations for any particular reporting period.

 

***Accrued Workers’ CompensationExpenses***

 

Accrued liabilities in our December 31, 2009 and June 30,2010, financial statements include an accrual of approximately $5 million forworkers’ compensation. The costs of both reported claims and claims incurredbut not reported, up to specified deductible limits, are estimated based on historicaldata, projected payroll numbers and other information. We review estimates andperiodically update our estimates and the resulting reserves and any necessaryadjustments are reflected in earnings currently. To the extent historicalclaims are not indicative of future claims, there are changes in payrollnumbers, workers’ compensation loss development factors change, or otherassumptions used by management do not prevail, our expense and related accruedliabilities could increase or decrease.

 

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***Income Taxes***

 

We use certain assumptions and estimates in determining income taxespayable or refundable for the current year, deferred income tax liabilities andassets for events recognized differently in our financial statements and incometax returns, and income tax expense. Determining these amounts requiresanalysis of certain transactions and interpretation of tax laws andregulations. We exercise considerable judgment in evaluating the amount andtiming of recognition of the resulting income tax liabilities and assets. Thesejudgments and estimates are re-evaluated on a continual basis as regulatory andbusiness factors change.

 

No assurance can be given that neither our tax returns nor the incometax reported on our Consolidated Financial Statements will be adjusted as aresult of adverse rulings by the U.S. Tax Court, changes in the tax code, orassessments made by the Internal Revenue Service (“IRS”). We are subject topotential adverse adjustments, including but not limited to, an increase in thestatutory federal or state income tax rates, the permanent non-deductibility ofamounts currently considered deductible either now or in future periods, andthe dependence on the generation of future taxable income, including capitalgains, in order to ultimately realize deferred income tax assets.

 

***Accounting for Stock-Based EmployeeCompensation***

 

In 2004, we adopted ASC 718, “Stock Compensation”. Accordingly, we measurethe cost of our stock-based employee compensation at the grant date based onfair value and recognize such cost in the financial statements over each award’srequisite service period. As of June 30, 2010, the total compensationexpense not yet recognized related to nonvested stock awards under ourstock-based employee compensation plans is approximately $6.4 million. Theweighted average period over which this expense is expected to be recognized isapproximately 2.8 years. See “Item 1. Financial Statements — Notes toInterim Unaudited Consolidated Financial Statements—Note 7. Capital Stockand Stock-Based Compensation Plans” for a description of our restricted stockand stock option awards and the assumptions used to calculate the fair value ofsuch awards, including the expected volatility assumed in valuing our stockoption grants.

 

***Recently Issued Accounting Pronouncements***

 

See “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 1. Summary of SignificantAccounting Policies” for a description of the most recent pronouncements.

 

**Results of Operations**

 

***Three Months Ended June 30, 2009 Compared to Three Months Ended June 30,2010***

 

The following tables set forth our results of operations for the threemonths ended June 30, 2009 compared to the three months ended June 30,2010:

 
| ** **                                        | ** ** | **Three Months Ended June 30,**                  | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                              | ** ** | **2010** | ** ** | **Variance** | ** ** |
| ** **                                        | ** ** | ** **                                            | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** | **Favorable/(Unfavorable)** | ** ** |
| ** **                                        | ** ** | **Dollars**                                           | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Total Revenues**                                |       | $                                                     | 150,124    |   | 100.0 | % | $ | 141,357 |   | 100.0 | % | $ | (8,767 | ) | (5.8 | )% |
| **Center Expenses:**                              |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                |       | 45,404                                                |       | 30.2 | % | 44,119 |   | 31.2 | % | 1,285 |   | 2.8 | % |
| Provision for doubtful accounts                   |       | 33,012                                                |       | 22.0 | % | 25,058 |   | 17.7 | % | 7,954 |   | 24.1 | % |
| Occupancy costs                                   |       | 23,247                                                |       | 15.5 | % | 21,993 |   | 15.6 | % | 1,254 |   | 5.4 | % |
| Center depreciation expense                       |       | 3,260                                                 |       | 2.2 | % | 2,559 |   | 1.8 | % | 701 |   | 21.5 | % |
| Advertising expense                               |       | 8,935                                                 |       | 6.0 | % | 6,567 |   | 4.6 | % | 2,368 |   | 26.5 | % |
| Other center expenses                             |       | 11,606                                                |       | 7.7 | % | 9,937 |   | 7.0 | % | 1,669 |   | 14.4 | % |
| Total center expenses                             |       | 125,464                                               |       | 83.6 | % | 110,233 |   | 77.9 | % | 15,231 |   | 12.1 | % |
| Center gross profit                               |       | 24,660                                                |       | 16.4 | % | 31,124 |   | 22.1 | % | 6,464 |   | 26.2 | % |
| **Corporate and Other Expenses  (Income):**       |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses               |       | 13,798                                                |       | 9.2 | % | 16,623 |   | 11.8 | % | (2,825 | ) | (20.5 | )% |
| Legal settlements                                 |       | —                                                |       | — | % | 2,350 |   | 1.7 | % | (2,350 | ) | (100.0 | )% |
| Corporate depreciation expense                    |       | 679                                                   |       | 0.4 | % | 701 |   | 0.5 | % | (22 | ) | (3.2 | )% |
| Interest expense                                  |       | 1,595                                                 |       | 1.0 | % | 1,097 |   | 0.8 | % | 498 |   | 31.2 | % |
| Interest income                                   |       | (17                                                   | )          | — | % | (5 | ) | — | % | (12 | ) | (70.6 | )% |
| (Gain)/loss on disposal of property and equipment |       | (80                                                   | )          | — | % | 152 |   | 0.1 | % | (232 | ) | (290.0 | )% |
| Loss on impairment of assets                      |       | —                                                |       | — | % | 654 |   | 0.5 | % | (654 | ) | (100.0 | )% |
| Total corporate and other expenses                |       | 15,975                                                |       | 10.6 | % | 21,572 |   | 15.4 | % | (5,597 | ) | (35.0 | )% |
| Income before income taxes                        |       | 8,685                                                 |       | 5.8 | % | 9,552 |   | 6.7 | % | 867 |   | 10.0 | % |
| Income tax expense                                |       | 2,043                                                 |       | 1.4 | % | 4,430 |   | 3.1 | % | (2,387 | ) | (116.8 | )% |
| Net income                                        |       | $                                                     | 6,642      |   | 4.4 | % | $ | 5,122 |   | 3.6 | % | $ | (1,520 | ) | (22.9 | )% |

 

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| ** **                                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                              | ** ** | **2010** | ** ** |
| **Center Information:**                                                                                 |       |                                  |       |   |   |
| Number of centers open at beginning of period                                                           |       | 2,740                                 |       | 2,495 |   |
| Opened                                                                                                  |       | —                                |       | 7 |   |
| Acquired                                                                                                |       | —                                |       | — |   |
| Closed                                                                                                  |       | (105                                  | )          | (26 | ) |
| Number of centers open at end of period                                                                 |       | 2,635                                 |       | 2,476 |   |
| Weighted average number of centers open during the  period                                              |       | 2,681                                 |       | 2,480 |   |
| Number of customers served—all credit products  (thousands)                                        |       | 743                                   |       | 738 |   |
| Number of cash advances originated (thousands) (1)                                                      |       | 2,553                                 |       | 2,413 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                 |       | $                                     | 916,093    |   | $ | 888,266 |   |
| Average amount of each cash advance originated (1)                                                      |       | $                                     | 359        |   | $ | 368 |   |
| Average charge to customers for providing and  processing a cash advance (1)                            |       | $                                     | 53         |   | $ | 55 |   |
| Average duration of a cash advance (days) (1)(2)                                                        |       | 17.5                                  |       | 18.0 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 26                                    |       | 12 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                     | 11,363     |   | $ | 4,078 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                     | 421        |   | $ | 273 |   |
| Number of installment loans originated (thousands)  (4)                                                 |       | 9                                     |       | 9 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                             |       | $                                     | 3,938      |   | $ | 4,506 |   |
| Average principal amount of each installment loan  originated (4)                                       |       | $                                     | 436        |   | $ | 475 |   |

 

----

| (1) | Excludes  lines of credit and installment loans.                                                                                                              |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Excludes  the impact of extended payment plans.                                                                                                               |
| (3) | We  began offering lines of credit in Virginia in November 2008 and ceased  offering new lines of credit to customers in Virginia in February 2010. |
| (4) | The installment loan  activity reflects loans we originated as the lender in Illinois.                                                                        |

 
| ** **                                                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                             | ** ** | **2010** | ** ** | **Variance  Favorable/** | ** ** |
| ** **                                                                            | ** ** | ** **                           | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** | **(Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                          | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Center revenues                                                                       |       | $                                    | 56.0       |   | 100.0 | % | $ | 57.0 |   | 100.0 | % | $ | 1.0 |   | 1.8 | % |
| Center expenses:                                                                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 16.9                                 |       | 30.2 | % | 17.8 |   | 31.2 | % | (0.9 | ) | (5.3 | )% |
| Provision for doubtful accounts                                                       |       | 12.3                                 |       | 22.0 | % | 10.1 |   | 17.7 | % | 2.2 |   | 17.9 | % |
| Occupancy costs                                                                       |       | 8.7                                  |       | 15.5 | % | 8.9 |   | 15.6 | % | (0.2 | ) | (2.3 | )% |
| Center depreciation expense                                                           |       | 1.2                                  |       | 2.2 | % | 1.0 |   | 1.8 | % | 0.2 |   | 16.7 | % |
| Advertising expense                                                                   |       | 3.3                                  |       | 6.0 | % | 2.6 |   | 4.6 | % | 0.7 |   | 21.2 | % |
| Other center expenses                                                                 |       | 4.3                                  |       | 7.7 | % | 4.0 |   | 7.0 | % | 0.3 |   | 7.0 | % |
| Total center expenses                                                                 |       | 46.7                                 |       | 83.6 | % | 44.4 |   | 77.9 | % | 2.3 |   | 4.9 | % |
| Center gross profit                                                                   |       | $                                    | 9.3        |   | 16.4 | % | $ | 12.6 |   | 22.1 | % | $ | 3.3 |   | 35.5 | % |

 

36

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***Revenue Analysis***

 

Total revenues decreased approximately $8.8 million during thethree months ended June 30, 2010 compared to the same period in 2009.Total revenues for the 2,463 centers opened prior to April 1, 2009 andstill open as of June 30, 2010 decreased $0.9 million, from$141.9 million for the three months ended June 30, 2009 to$141 million for the same period in 2010. Excluding revenues fromVirginia, Washington, Kentucky, and South Carolina for the three months ended June 30,2010, total revenues for the Company’s centers opened prior to April 1,2009 and still open as of June 30, 2010 increased 7.9% compared to thesame period in 2009. Centers opened prior to April 1, 2009 were at leastthree months and fifteen months old as of June 30, 2009 and 2010,respectively. Total revenues for the 13 centers opened after April 1, 2009and still open as of June 30, 2010 increased $0.2 million, from zerofor the three months ended June 30, 2009 to $0.2 million for the sameperiod in 2010. Total revenues for the remaining 26 centers that closedrepresented a decrease of approximately $0.6 million for the three months endedJune 30, 2010 compared to the same period in 2009.

 

***Center Expense Analysis***

 

*Salaries and related payroll costs.* The decrease of $1.3 million, or 2.8%, in salaries and related payrollcosts for the three months ended June 30, 2010 compared to the same periodin 2009 was primarily due to a reduction in the number of centers open duringthe three months ended June 30, 2010 as compared to June 30, 2009. Aportion of the per center increase in salaries and related payroll costs wasdue to an increase in the average number of full-time equivalent fieldemployees during the three months ended June 30, 2010 as compared to thesame period in 2009.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts decreased from 22% of revenues, or$33 million, for the three months ended June 30, 2009 to 17.7% ofrevenues, or $25.1 million, for the same period in 2010. This decrease isdue primarily to an improvement in the loss rates and a reduction in totalreceivables at June 30, 2010 compared to June 30, 2009. Theimprovement in loss rates resulted from the phase-out of our line of credit inVirginia. During the three months ended June 30, 2009 and 2010, wereceived proceeds from the sale of receivables in the amount of $2.2 and$0.1 million, respectively.

 

*Occupancy costs.*  The decrease of $1.3 million, or 5.4%, inoccupancy costs for the three months ended June 30, 2010 compared to thesame period in 2009 was due primarily to a decrease in the number of centersopen during the three months ended June 30, 2010 as compared to the same periodin 2009.

 

*Advertising expense.*  Advertising expense decreased for the threemonths ended June 30, 2010 compared to the same period in 2009 dueprimarily to a decrease of approximately $2.3 million in direct mailingcampaigns.

 

*Other center expenses.*  The decrease of $1.7 million, or 14.4%, inother center expenses for the three months ended June 30, 2010 compared tothe same period in 2009 was due primarily to a decrease in bank charges, centerclosing costs, and the number of centers open during the three months ended June 30,2010 as compared to the same period in 2009.

 

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

 

*General and administrative expenses.*  The increase in general and administrativeexpenses of approximately $2.8 million for the three months ended June 30,2010 compared to the same period in 2009 was due primarily to:

 
| · | higher  legal expenses, net of any insurance reimbursements, of approximately $1.1  million;   |
|--------|------------------------------------------------------------------------------------------------|
|   |                                                                                           |
| · | an  increase of approximately $0.9 million in salaries and expenses related to  personnel; and |
|   |                                                                                           |
| · | higher  expenses of approximately $0.7 million related to an increase in consulting  fees.     |

 

*Legal Settlements.*Theincrease in legal settlements of approximately $2.4 million for the threemonths ended June 30, 2010 compared to the same period in 2009 relatesprimarily to the $2.0 million settlement of the Missouri class action lawsuit.

 

37

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*Loss on disposal of property and equipment and losson impairment of assets.*  Theincrease of $0.9 million in these expenses for the three months ended June 30,2010 relates to the consolidation of centers in the second quarter of 2010.

 

*Interest expense.*  The decrease in interest expense of $0.5million for the three months ended June 30, 2010, as compared to 2009 wasdue to decreases in the average interest rates and the average outstanding loanbalance during the period.

 

*Income Tax Expense.*  The effective income tax rate was 23.5% and46.4% for the three months ended June 30, 2009 and 2010, respectively. Theincrease in income tax expense for the three months ended June 30, 2010 ascompared to the same period in 2009 was primarily due to a reduction in stateincome taxes recognized at June 30, 2009 and other discrete itemsrecognized at June 30, 2010.

 

**Results of Operations**

 

***Six Months Ended June 30, 2009 Compared to Six Months Ended June 30,2010***

 

The following tables set forth our results of operations for the sixmonths ended June 30, 2009 compared to the six months ended June 30,2010:

 
| ** **                                        | ** ** | **Six Months Ended June 30,**                    | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                              | ** ** | **2010** | ** ** | **Variance** | ** ** |
| ** **                                        | ** ** | ** **                                            | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** | **Favorable/(Unfavorable)** | ** ** |
| ** **                                        | ** ** | **Dollars**                                           | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Total Revenues**                                |       | $                                                     | 306,517    |   | 100.0 | % | $ | 285,755 |   | 100.0 | % | $ | (20,762 | ) | (6.8 | )% |
| **Center Expenses:**                              |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                |       | 92,917                                                |       | 30.3 | % | 91,704 |   | 32.1 | % | 1,213 |   | 1.3 | % |
| Provision for doubtful accounts                   |       | 54,110                                                |       | 17.7 | % | 37,792 |   | 13.2 | % | 16,318 |   | 30.2 | % |
| Occupancy costs                                   |       | 48,020                                                |       | 15.7 | % | 45,464 |   | 15.9 | % | 2,556 |   | 5.3 | % |
| Center depreciation expense                       |       | 6,983                                                 |       | 2.3 | % | 5,256 |   | 1.8 | % | 1,727 |   | 24.7 | % |
| Advertising expense                               |       | 11,116                                                |       | 3.6 | % | 10,202 |   | 3.6 | % | 914 |   | 8.2 | % |
| Other center expenses                             |       | 24,312                                                |       | 7.9 | % | 21,448 |   | 7.5 | % | 2,864 |   | 11.8 | % |
| Total center expenses                             |       | 237,458                                               |       | 77.5 | % | 211,866 |   | 74.1 | % | 25,592 |   | 10.8 | % |
| Center gross profit                               |       | 69,059                                                |       | 22.5 | % | 73,889 |   | 25.9 | % | 4,830 |   | 7.0 | % |
| **Corporate and Other Expenses  (Income):**       |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses               |       | 27,869                                                |       | 9.1 | % | 33,264 |   | 11.7 | % | (5,395 | ) | (19.4 | )% |
| Legal settlements                                 |       | —                                                |       | — | % | 2,388 |   | 0.8 | % | (2,388 | ) | (100.0 | )% |
| Corporate depreciation expense                    |       | 1,367                                                 |       | 0.4 | % | 1,391 |   | 0.5 | % | (24 | ) | (1.8 | )% |
| Interest expense                                  |       | 3,294                                                 |       | 1.1 | % | 2,274 |   | 0.8 | % | 1,020 |   | 31.0 | % |
| Interest income                                   |       | (34                                                   | )          | — | % | (18 | ) | — | % | (16 | ) | (47.1 | )% |
| (Gain)/loss on disposal of property and equipment |       | (47                                                   | )          | — | % | 320 |   | 0.1 | % | (367 | ) | (780.9 | )% |
| Loss on impairment of assets                      |       | 2,209                                                 |       | 0.7 | % | 654 |   | 0.2 | % | 1,555 |   | 70.4 | % |
| Total corporate and other expenses                |       | 34,658                                                |       | 11.3 | % | 40,273 |   | 14.1 | % | (5,615 | ) | (16.2 | )% |
| Income before income taxes                        |       | 34,401                                                |       | 11.2 | % | 33,616 |   | 11.8 | % | (785 | ) | (2.3 | )% |
| Income tax expense                                |       | 12,616                                                |       | 4.1 | % | 15,007 |   | 5.3 | % | (2,391 | ) | (19.0 | )% |
| Net income                                        |       | $                                                     | 21,785     |   | 7.1 | % | $ | 18,609 |   | 6.5 | % | $ | (3,176 | ) | (14.6 | )% |

 

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| ** **                                                                                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                            | ** ** | **2010** | ** ** |
| **Center Information:**                                                                                 |       |                                |       |   |   |
| Number of centers open at beginning of period                                                           |       | 2,797                               |       | 2,587 |   |
| Opened                                                                                                  |       | 4                                   |       | 7 |   |
| Acquired                                                                                                |       | —                              |       | — |   |
| Closed                                                                                                  |       | (166                                | )          | (118 | ) |
| Number of centers open at end of period                                                                 |       | 2,635                               |       | 2,476 |   |
| Weighted average number of centers open during the  period                                              |       | 2,744                               |       | 2,513 |   |
| Number of customers served—all credit products  (thousands)                                        |       | 944                                 |       | 933 |   |
| Number of cash advances originated (thousands) (1)                                                      |       | 4,975                               |       | 4,699 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                 |       | $                                   | 1,789,462  |   | $ | 1,727,254 |   |
| Average amount of each cash advance originated (1)                                                      |       | $                                   | 360        |   | $ | 368 |   |
| Average charge to customers for providing and  processing a cash advance (1)                            |       | $                                   | 53         |   | $ | 55 |   |
| Average duration of a cash advance (days) (1)(2)                                                        |       | 17.4                                |       | 18.0 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 30                                  |       | 12 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                   | 15,341     |   | $ | 4,553 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                   | 497        |   | $ | 282 |   |
| Number of installment loans originated (thousands)  (4)                                                 |       | 16                                  |       | 17 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                             |       | $                                   | 6,723      |   | $ | 7,879 |   |
| Average principal amount of each installment loan  originated (4)                                       |       | $                                   | 431        |   | $ | 474 |   |

 

----

| (1) | Excludes  lines of credit and installment loans.                                                                                                         |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Excludes  the impact of extended payment plans.                                                                                                          |
| (3) | We  began offering lines of credit in Virginia in November 2008 and ceased  offering new lines of credit to customers in Virginia in February 2010. |
| (4) | The installment loan  activity reflects loans we originated as the lender in Illinois.                                                                   |

 
| ** **                                                                            | ** ** | **Six Months Ended June 30,**   | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                             | ** ** | **2010** | ** ** | **Variance  Favorable/** | ** ** |
| ** **                                                                            | ** ** | ** **                           | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** | **(Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                          | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Center revenues                                                                       |       | $                                    | 111.7      |   | 100.0 | % | $ | 113.7 |   | 100.0 | % | $ | 2.0 |   | 1.8 | % |
| Center expenses:                                                                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 33.9                                 |       | 30.3 | % | 36.5 |   | 32.1 | % | (2.6 | ) | (7.7 | )% |
| Provision for doubtful accounts                                                       |       | 19.7                                 |       | 17.7 | % | 15.0 |   | 13.2 | % | 4.7 |   | 23.9 | % |
| Occupancy costs                                                                       |       | 17.5                                 |       | 15.7 | % | 18.1 |   | 15.9 | % | (0.6 | ) | (3.4 | )% |
| Center depreciation expense                                                           |       | 2.5                                  |       | 2.3 | % | 2.1 |   | 1.8 | % | 0.4 |   | 16.0 | % |
| Advertising expense                                                                   |       | 4.1                                  |       | 3.6 | % | 4.1 |   | 3.6 | % | — |   | — | % |
| Other center expenses                                                                 |       | 8.9                                  |       | 7.9 | % | 8.5 |   | 7.5 | % | 0.4 |   | 4.5 | % |
| Total center expenses                                                                 |       | 86.6                                 |       | 77.5 | % | 84.3 |   | 74.1 | % | 2.3 |   | 2.7 | % |
| Center gross profit                                                                   |       | $                                    | 25.1       |   | 22.5 | % | $ | 29.4 |   | 25.9 | % | $ | 4.3 |   | 17.1 | % |

 

***Revenue Analysis***

 

Total revenues decreased approximately $20.8 million during thesix months ended June 30, 2010 compared to the same period in 2009. Totalrevenues for the 2,459 centers opened prior to January 1, 2009 and stillopen as of June 30, 2010 decreased $3.5 million, from $285.9 millionfor the six months ended June 30, 2009 to $282.4 million for the sameperiod in 2010. Excluding revenues from Virginia, Washington, Kentucky, andSouth Carolina for the six months ended June 30, 2010,

 

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totalrevenues for the Company’s centers opened prior to January 1, 2009 andstill open as of June 30, 2010 increased 8.7% compared to the same periodin 2009. Centers opened prior to January 1, 2009 were at least six monthsand eighteen months old as of June 30, 2009 and 2010, respectively. Totalrevenues for the 17 centers opened after January 1, 2009 and still open asof June 30, 2010 increased $0.6 million, from zero for the six monthsended June 30, 2009 to $0.6 million for the same period in 2010.Total revenues for the remaining 338 centers that closed represented a decreaseof approximately $17.9 million for the six months ended June 30, 2010compared to the same period in 2009.

 

***Center Expense Analysis***

 

*Salaries and related payroll costs.*  The decrease of $1.2 million, or 1.3%, insalaries and related payroll costs for the six months ended June 30, 2010was primarily due to a reduction in the number of centers open during the sixmonths ended June 30, 2010 as compared to June 30, 2009. A portion ofthe per center increase in salaries and related payroll costs was due to anincrease in the average number of full-time equivalent field employees duringthe six months ended June 30, 2010 as compared to the same period in 2009.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts decreased from 17.7% of revenues, or$54.1 million, for the six months ended June 30, 2009 to 13.2% ofrevenues, or $37.8 million, for the same period in 2010. This decrease isdue primarily to an improvement in the loss rates and a reduction in totalreceivables at June 30, 2010 compared to June 30, 2009. Theimprovement in loss rates resulted from the phase-out of our line of credit inVirginia. During the six months ended June 30, 2009 and 2010, we receivedproceeds from the sale of receivables in the amount of $2.2 and$0.7 million, respectively.

 

*Occupancy costs.*  Occupancy costs for the six months ended June 30,2010 compared to the same period in 2009 decreased $2.6 million, or 5.3%, dueprimarily to a decrease in the number of centers open during the six monthsended June 30, 2010 as compared to June 30, 2009.

 

*Advertising expense.*  Advertising expense decreased for the sixmonths ended June 30, 2010 compared to the same period in 2009 dueprimarily to a decrease of approximately $1 million in direct mailing.

 

*Other center expenses.*  Other center expenses for the six monthsended June 30, 2010 compared to the same period in 2009 decreased $2.9million, or 11.8%, due primarily to a decrease in bank charges and the numberof centers open during the six months ended June 30, 2010 as compared to June 30,2009.

 

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

 

*General and administrative expenses.*  The increase in general and administrativeexpenses of approximately $5.4 million for the six months ended June 30,2010 compared to the same period in 2009 was due primarily to:

 
| · | higher  legal expenses, net of any insurance reimbursements, of approximately $2.7  million;   |
|--------|------------------------------------------------------------------------------------------------|
|   |                                                                                           |
| · | an  increase of approximately $1.1 million in salaries and expenses related to  personnel; and |
|   |                                                                                           |
| · | higher  expenses of approximately $0.7 million related to an increase in consulting  fees.     |

 

*Legal Settlements.*Theincrease in legal settlements of approximately $2.4 million for the six monthsended June 30, 2010 compared to the same period in 2009 relates primarilyto the $2 million settlement of the Missouri class action lawsuit.

 

*Loss on disposal of property and equipment and losson impairment of assets.*  Thedecrease of $1.2 million for the six months ended June 30, 2010, relatesprimarily to $1 million of expenses incurred in connection with the closing,consolidation, and impairment of assets for the six months ended June 30,2010, compared to $2.2 million for the six months ended June 30, 2009.

 

*Interest expense.*  The decrease in interest expense of $1million for the six months ended June 30, 2010, as compared to 2009 wasdue to decreases in the average interest rates and the average outstanding loanbalance during the period.

 

*Income Tax Expense.*  The effective income tax rate was 36.7% and44.6% for the six months ended June 30, 2009 and 2010, respectively. Theincrease in income tax expense for the six months ended June 30, 2010 ascompared to the same

 

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periodin 2009 was primarily due to a reduction in state income taxes recognized at June 30,2009 and other discrete items recognized at June 30, 2010.

 

**Liquidity and Capital Resources**

 

The following table presents a summary of cash flows for the six monthsended June 30, 2009 and 2010 (dollars in thousands):

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance  Favorable/(Unfavorable)** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Dollars**                           | ** ** | **%** | ** ** |
| Cash flows provided by (used in):                             |       |       |       |       |       |                                  |       |   |   |
| Operating activities                                          |       | $          | 62,181     |       | $          | 41,367                                |       | $ | (20,814 | ) | (33.5 | )% |
| Investing activities                                          |       | (21,763    | )          | (21,964    | )          | (201                                  | )          | (0.9 | )% |
| Financing activities                                          |       | (41,754    | )          | (43,324    | )          | (1,570                                | )          | (3.8 | )% |
| Effect of exchange rate changes on cash and cash  equivalents |       | 73         |       | (36        | )          | (109                                  | )          | (149.3 | )% |
| Net decrease in cash and cash equivalents                     |       | (1,263     | )          | (23,957    | )          | (22,694                               | )          | (1,796.8 | )% |
| Cash and cash equivalents, beginning of period                |       | 16,017     |       | 38,189     |       | 22,172                                |       | 138.4 | % |
| Cash and cash equivalents, end of period                      |       | $          | 14,754     |       | $          | 14,232                                |       | $ | (522 | ) | (3.5 | )% |

 

Our principal sources of cash are from operations and from borrowingsunder our revolving credit facility. See “Certain Contractual CashCommitments—Long-Term Debt Obligations” in this section for a detaileddescription of our revolving credit facility. We anticipate that our primaryuses of cash will be to provide working capital, finance capital expenditures,meet debt service requirements, fund advances, finance center growth, fundacquisitions, and pay dividends on our common stock.

 

We borrow under our revolving credit facility to fund our advances andto meet our other liquidity needs. Our day-to-day balances under our revolvingcredit facility, as well as our cash balances, vary because of seasonal andday-to-day requirements resulting from making and collecting advances. Forexample, if a month ends on a Friday (a typical payday), our borrowings and ourcash balances will be high compared to a month that does not end on a Friday.This is because a substantial portion of the advances will be repaid in cash onthat day but sufficient time will not yet have passed for the cash to reducethe outstanding borrowings under our revolving credit facility. Our borrowingsunder our revolving credit facility will also increase as the demand for advancesincreases during our peak periods such as the back-to-school and holidayseasons. Conversely, our borrowings typically decrease during the tax refundseason when cash receipts from customers’ peak or the customer demand for newadvances decreases. Advances and fees receivable, net, decreased approximately$2 million, or 1%, to $192.8 million at June 30, 2010 comparedto $194.8 million at June 30, 2009. Advances and fees receivable, net,decreased approximately $11.4 million, or 5.6%, to $192.8 million at June 30,2010 compared to $204.2 million at December 31, 2009 due primarily to taxrefund season.

 

During the six months ended June 30, 2009 and 2010, we repurchased3,272 and 51,908 shares of our common stock, respectively, at a cost ofapproximately $5,200 and $272,669, respectively. All of these shares weresurrendered by employees to satisfy their tax obligations with respect to thevesting of shares of restricted stock awarded pursuant to our 2004 OmnibusStock Plan.

 

During the six months ended June 30, 2009 and 2010, zero and37,432 stock options, respectively, were surrendered at a cost of zero andapproximately $211,636, respectively, in a net settlement in order to satisfythe exercise price and withholding obligations associated with stock optionexercises.

 

Although our revolving credit facility places restrictions on ourcapital expenditures and acquisitions, we believe that these restrictions donot prohibit us from pursuing our strategy or limit our current level ofoperations. Cash that is restricted due to certain states’ regulatory liquidityrequirements is not included in cash and cash equivalents. Instead, therestricted cash is shown on our consolidated balance sheet as a non-currentasset under the line item “Restricted cash.” Historically, these restrictions have not had, nor do we expect them tohave, an impact on our ability to meet our liquidity needs for operations.However, our ability to make dividends to our stockholders and repurchases ofour common stock has been, and in the future may be, restricted under ourrevolving credit facility.

 

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***Cash Flows from Operating Activities***

 

Net cash provided by operating activities decreased approximately 33.5%to $41.4 million for the six months ended June 30, 2010 compared to$62.2 million for the same period in 2009. The decrease in operating cash flowswas primarily attributable to the decrease in the provision for doubtfulaccounts of $16.3 million and a $3.2 million decrease in net income.

 

***Cash Flows from Investing Activities***

 

Net cash used in investing activities increased approximately 0.9% to$22 million for the six months ended June 30, 2010 compared to $21.8million for the same period in 2009. The increase was primarily a result of$0.2 million from insurance proceeds received during the six months ended June 30,2009.

 

***Cash Flows from Financing Activities***

 

Net cash used in financing activities increased 3.8% to$43.3 million for the six months ended June 30, 2010 compared to$41.8 million for the same period in 2009. During the six months ended June 30,2010, we had net repayments under the revolving credit facility ofapproximately $3.2 million, and an additional $0.4 million in treasury stockpurchases. This was partially offset by a decrease in our book overdrafts of$2.3 million.

 

**Capital Expenditures**

 

For the six months ended June 30, 2009 and 2010, we incurred costsrelated to capital expenditures of approximately $1.9 million and$2.1 million, respectively. Capital expenditures included expenditures fornew centers opened, center remodels, and computer equipment replacementsin our centers and at our corporate headquarters.

 

**Off-Balance Sheet Arrangement with Third-Party Lender**

 

In Texas, where we operate as a CSO, we offer a fee-based creditservices package to assist customers in trying to improve their credit and inobtaining an extension of consumer credit through a third-party lender. Underthe terms of our agreement with this lender, we process customer applicationsand are contractually obligated to reimburse the lender for the full amount ofthe cash advances and certain related fees that are not collected from thecustomers. As of June 30, 2009 and 2010, the third-party lender’soutstanding advances and interest receivable (which were not recorded on ourbalance sheet) totaled approximately $17.5 million and $17.8 million,respectively. We are obligated to pay the third-party lender to the extentthese amounts become uncollectible. Additionally, if these advances becomeuncollectible, we are also required to pay the third-party lender all relatedNSF fees and late fees on these advances.

 

Because of our economic exposure for losses related to the third-partylender’s advances and interest receivable, we have established an accrual forthird-party lender losses to reflect our estimated probable losses related touncollectible third-party lender advances. The accrual for third-party lenderlosses that was reported in our balance sheet at June 30, 2009 and 2010was approximately $3.9 million and $4 million, respectively, and wasestablished on a basis similar to the allowance for doubtful accounts. Ifactual losses on the third-party lender’s advances are materially greater thanour accrual for third-party lender losses, our business, results of operationsand financial condition could be adversely affected. See “Item 1.Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 8. Transactions with Variable Interest Entities.”

 

**Certain Contractual Cash Commitments**

 

Our principal future contractual obligations and commitments as of June 30,2010, including periodic interest payments, included the following (inthousands):

 
| ** **                                     | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| **Contractual Cash Obligations**               | ** ** | **Total**  | ** ** | **2010**                             | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **2015 and  thereafter** | ** ** |
| Long-term debt obligations:                    |       |       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Revolving credit facility                      |       | $          | 106,299    |                                 | $          | — |   | $ | — |   | $ | — |   | $ | 106,299 |   | $ | — |   | $ | — |   |
| Mortgage payable                               |       | 4,356      |       | 243                                  |       | 513 |   | 552 |   | 594 |   | 639 |   | 1,815 |   |
| Note payable                                   |       | 380        |       | 126                                  |       | 254 |   | — |   | — |   | — |   | — |   |
| Interest payable on long-term debt obligations |       | 1,226      |       | 158                                  |       | 286 |   | 245 |   | 203 |   | 158 |   | 176 |   |
| Operating lease obligations (1)           |       | 124,922    |       | 30,326                               |       | 48,116 |   | 30,802 |   | 12,380 |   | 2,281 |   | 1,017 |   |
| Purchase obligations                           |       | 7,004      |       | 3,075                                |       | 3,094 |   | 826 |   | 9 |   | — |   | — |   |
| Total                                          |       | $          | 244,187    |                                 | $          | 33,928 |   | $ | 52,263 |   | $ | 32,425 |   | $ | 119,485 |   | $ | 3,078 |   | $ | 3,008 |   |

 

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

 

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***Long-Term Debt Obligations***

 

In March 2008, we entered into an amendment and restatement of ourprior credit facility with a syndicate of banks. As amended and restated, ourrevolving credit facility provides us with a $270 million revolving lineof credit, including the ability to issue up to $25 million in letters ofcredit. Our revolving credit facility matures on March 24, 2013. We havethe option to increase the revolving credit facility by an additional$95 million upon receipt of sufficient commitments from lenders in thelending syndicate and other eligible lenders as defined in the creditagreement. Any portion of our revolving credit facility that is repaid may beborrowed again subject to any limitations based on financial covenants. In July 2008,we amended our credit facility to modify the consolidated net worth test toreduce the requirement by the cost of repurchases of common stock made afterJanuary 1, 2008.

 

As of June 30, 2010, we had approximately $106.3 millionoutstanding on the revolving portion of our credit facility and approximately$0.7 million of commitments under outstanding letters of credit, leavingapproximately $163 million available for future borrowings under this creditfacility, subject to additional limitations based on certain financialcovenants. As of June 30, 2010, the senior leverage covenant restrictedthat additional availability to approximately $105 million.

 

In general, our borrowings under our revolving credit facility bearinterest, at our option, at a base rate plus an applicable margin or aLIBOR-based rate plus an applicable margin. The base rate equals the greaterof: (i) the prime rate set by Bank of America, the administrative agentunder the revolving credit facility; and (ii) the sum of the federal fundsrate plus 0.50%. The applicable margin is determined each quarter by a pricing gridbased on our total leverage ratio of consolidated debt to consolidated earningsbefore interest, taxes, depreciation, and amortization (“EBITDA”) as defined inthe credit agreement. The base rate applicable margin ranges from 1.50% to2.25% based upon our total leverage ratio. The LIBOR-based applicable marginranges from 2.50% to 3.25% based upon our total leverage ratio. As of June 30,2010, the applicable margin for the prime-based rate was 1.50% and theapplicable margin for the LIBOR-based rate was 2.50%.

 

The applicable rate is chosen when we request a draw down under therevolving credit facility and is based on the forecasted working capitalrequirements and the required notice period for each type of borrowing.LIBOR-based rates can be selected for one-, two-, three-, or six-month terms.In the case of a base rate loan, we must notify the bank on the requested dateof any required borrowing and in the case of a LIBOR-based loan, we must notifythe bank three business days prior to the date of the requested borrowing. Baserate loans are variable, and the rates on those loans are changed whenever theunderlying rate changes. LIBOR-based loans bear interest for the term of theloan at the rate set at the time of borrowing for that loan.

 

Our obligations under the revolving credit facility are guaranteed byeach of our domestic subsidiaries. Our borrowings under the revolving creditfacility are collateralized 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 domestic subsidiaries and 65% of the voting capital stock, orsimilar equity interests, of our foreign subsidiaries. Our revolving creditfacility contains various financial covenants that require, among other things,the maintenance of minimum net worth, maximum leverage and senior leverage,minimum fixed charge coverage and maximum charge-off ratios. The maximumleverage allowed under the revolving credit facility is three and one half(3.5) times trailing 12-month EBITDA, as defined in the credit agreement. Themaximum senior leverage allowed under the revolving credit facility is twotimes trailing 12-month EBITDA as defined in the credit agreement. Our trailing12-month EBITDA, as defined in the credit agreement, as of June 30, 2010was approximately $111.3 million. The charge-off ratio, as defined in therevolving credit facility, limits the average of actual charge-offs incurredduring each fiscal month to a maximum of 4.50% of the average amount ofadjusted transaction receivables outstanding at the end of each fiscal monthduring the prior 12 consecutive months. At June 30, 2010, our charge offratio was 3.6% and was calculated based on average monthly charge-offs of$10 million and average transaction receivables of $274.3 million. Wehad charge-offs of $19.4 million during the three months ended June 30,2010 and could have charged off an additional $21.5 million within thelimits of this covenant for the three months ended June 30, 2010. Therevolving credit facility contains customary covenants, including covenantsthat restrict our ability to, among other things (i) incur liens,(ii) incur certain indebtedness (including guarantees or other contingentobligations), (iii) engage in mergers and consolidations, (iv) engagein sales, transfers, and other dispositions of property and assets (includingsale-leaseback transactions), (v) make loans, acquisitions, jointventures, and other

 

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investments,(vi) make dividends and other distributions to, and redemptions andrepurchases from, equity holders, (vii) prepay, redeem, or repurchasecertain debt, (viii) make changes in the nature of our business,(ix) amend our organizational documents, or amend or otherwise modifycertain of our debt documents, (x) change our fiscal quarter and fiscalyear ends, (xi) enter into transactions with our affiliates, and(xii) issue certain equity interests. The revolving credit facilitycontains customary events of default, including events of default resultingfrom (i) our failure to pay principal when due or interest, fees, or otheramounts after three or more business days, (ii) covenant defaults,(iii) our material breach of any representation or warranty,(iv) cross defaults to any other indebtedness in excess of $1 millionin the aggregate, (v) bankruptcy, insolvency, or other similarproceedings, (vi) our inability to pay debts, (vii) the failure topay monetary judgment’s within 30 days of the due date in excess of $1 millionin the aggregate (viii) customary ERISA defaults, (ix) actual orasserted invalidity of any material provision of the loan documentation orimpairment of a material portion of the collateral, and (x) a change ofcontrol. A breach of a covenant or an event of default could cause all amountsoutstanding under the revolving credit facility to become immediately due andpayable. We were in compliance with all financial covenants at June 30,2010. See “Liquidity and Capital Resources” in this section for a descriptionof how we utilize the revolving credit facility to meet our liquidity needs.

 

We borrow under our revolving credit facility to fund our advances andour other liquidity needs. Our day-to-day balances under our revolving creditfacility, as well as our cash balances, vary because of seasonal and day-to-dayrequirements resulting from making and collecting advances. For example, if amonth ends on a Friday (a typical payday), our borrowings and our cash balanceswill be high compared to a month that does not end on a Friday. This is becausea substantial portion of the advances will be repaid in cash on that day butsufficient time will not yet have passed for the cash to reduce the outstandingborrowings under our revolving credit facility. Our borrowings under ourrevolving credit facility will also increase as the demand for advancesincreases during our peak periods such as the back-to-school and holidayseasons. Conversely, our borrowings typically decrease during the tax refundseason when cash receipts from customers peak or the customer demand for newadvances decreases.

 

*United  Kingdom  Overdraft Facility.*  In October 2008, our United Kingdomoperations entered into an overdraft facility. The maximum available borrowingsunder the facility were GBP 400,000, which is equivalent to approximately$637,000 at December 31, 2009. The interest rate on any borrowings underthis facility was the Bank of England base rate plus 1.75%. This facilityexpired and was not renewed during the fourth quarter of 2009.

 

*Mortgage Payable.*  Our corporate headquarters building andrelated land are subject to a mortgage loan, the principal amount of which wasapproximately $4.6 million and $4.4 million at December 31, 2009 and June 30,2010, respectively. The mortgage loan is payable to an insurance company and iscollateralized by our corporate headquarters building and related land. Themortgage loan is payable in 180 monthly installments of approximately$66,400, including principal and interest, and bears interest at a fixed rateof 7.30% over its term. The mortgage loan matures on June 10, 2017. Thecarrying amount of our corporate headquarters (land, land improvements andbuilding) was approximately $4.6 million and $4.5 million atDecember 31, 2009 and June 30, 2010, respectively.

 

***Operating Lease Obligations***

 

We lease all of our centers from third-party lessors under operatingleases. These leases typically have initial terms of three to five years andmay contain provisions for renewal options, additional rental charges based onrevenue, and payment of real estate taxes and common area charges. In addition,we lease aircraft hangar space, warehouse space, and certain security andoffice equipment. The lessor under the aircraft hangar space lease is a companycontrolled by or affiliated with Mr. George D. Johnson, Jr., ourformer Chairman and a significant stockholder. In addition, on July 13,2009, the Company entered into a one-year Aircraft Dry Lease Agreement withCarabo Capital, LLC, an entity of which the Company’s current Chairman isa member. Under the Aircraft Dry Lease, the Company may use Carabo’s aircraftfrom time to time in exchange for one dollar, standard usage expenses, and theCompany’s fulfillment of its obligations under the Aircraft Dry Lease. See “Item 1.Financial Statements—Notes to Interim Unaudited Consolidated Financial Statements—Note 9.Related Party Transactions.”

 

***Purchase Obligations***

 

We enter into agreements with vendors to purchase furniture, fixtures,and other items used to open new centers and for marketing agreements. Thesepurchase commitments typically extend for a period of two to three months afterthe opening of a new center, up to one year for marketing agreements, and threeto four years for telephone and internet service agreements. As of June 30,2010, our purchase obligations totaled approximately $7 million.

 

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**Impact of Inflation**

 

We believe our results of operations are not dependent upon the levelsof inflation.

 

**Forward-Looking Statements**

 

This Quarterly Report on Form 10-Q includes forward-lookingstatements.  All statements other thanhistorical information or statements of current condition contained in thisQuarterly Report, including statements regarding our future financialperformance, our business strategy, and 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 are intended to identify forward-lookingstatements.

 

We have based these forward-looking statements on management’s currentviews and expectations. Although we believe that the current views andexpectations reflected in these forward-looking statements are reasonable,those views and expectations, and the related statements, are inherentlysubject to risks, uncertainties, and other factors, many of which are not underour control and may not even be predictable. These risks, uncertainties, andother factors could cause the actual results, performance or achievements todiffer materially from any future results, performance or achievementsexpressed or implied by the forward-looking statements. These risks, uncertainties,and factors include, but are not limited to:

 

·                  the extent to whichregulations written and implemented by the newly created federal Bureau of ConsumerFinancial Protection, and other federal, state, local, and foreign governmentalregulation of cash advance services, consumer lending, and related financialproducts and services limit or prohibit the operation of our business;

 

·                  the extent to which afederal law that imposes a national cap on our fees and interest or prohibitsor severely restricts cash advance services would likely eliminate our abilityto continue our current operations;

 

·                  our ability to continue togenerate sufficient cash flow to satisfy our liquidity needs and future cashdividends;

 

·                  current and futurelitigation and regulatory proceedings against us and our officers and directors;

 

·                  our ability to find growthopportunities and to identify and successfully implement new product andservice offerings;

 

·                  the effect of the currentadverse economic conditions on our revenues and loss rates;

 

·                  our ability to preventunauthorized disclosures of sensitive or confidential customer data;

 

·                  the possible impairment ofgoodwill;

 

·                  the fragmentation of ourindustry and competition from various other sources providing similar financialproducts, or other alternative sources of credit, to consumers;

 

·                  the adequacy of ourallowance for doubtful accounts, accrual for third- party lender losses andestimates of losses;

 

·                  the availability of adequatefinancing;

 

·                  the effect of extendedrepayment plans on our revenues, loss experience, provision for doubtfulaccounts, and results of operations;

 

·                  our ability to operate on aprofitable basis in Canada and the United Kingdom;

 

·                  our relationship with thebanks that are party to our revolving credit facility and that provide certainservices that are needed to operate our business;

 

·                  theft and employee errors;and

 

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·                  the other matters set forthunder “Item 1A. Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2009, and under “Part II. Item 1A. RiskFactors” in this Quarterly Report.

 

All forward-looking statements in this Quarterly Report are based oninformation available to us as of the date of this Quarterly Report. Except asrequired under federal securities laws and the rules and regulations ofthe U.S. Securities and Exchange Commission, we do not have any intention, anddo not undertake, to update any forward-looking statements to reflect events orcircumstances arising after the date of this Quarterly Report, whether as aresult of new information, future events or otherwise. As a result of theserisks and uncertainties, readers are cautioned not to place undue reliance onthe forward-looking statements included in this Quarterly Report or that may bemade elsewhere from time to time by, or on behalf of, us. All forward-lookingstatements attributable to us are expressly qualified by these cautionarystatements.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

 

We have no market-risk-sensitive instruments entered into for tradingpurposes, as defined by GAAP.

 

***Interest Rate Risk***

 

We are exposed to interest rate risk on our revolving credit facility. Ourvariable interest expense is sensitive to changes in the general level ofinterest rates. We may from time to time enter into interest rate swaps,collars or similar instruments with the objective of reducing our volatility inborrowing costs. We do not use derivative financial instruments for speculativeor trading purposes. We had no derivative financial instruments outstanding asof December 31, 2009 or June 30, 2010. The weighted average interestrate on our $141.1 million of variable interest debt as ofDecember 31, 2009 was approximately 3.13%. The weighted average interestrate on our $106.3 million of variable interest debt as of June 30,2010 was approximately 3.39%.

 

We had total interest expense of $1.6 million and$1.1 million for the three months ended June 30, 2009 and 2010,respectively. We had total interest expense of $3.3 million and $2.3 millionfor the six months ended June 30, 2009 and 2010, respectively. Theestimated change in interest expense from a hypothetical 200 basis-point changein applicable variable interest rates would have been approximately$0.7 million and $0.5 million for the three months ended June 30,2009 and 2010, respectively. The estimated change in interest expense from ahypothetical 200 basis-point change in applicable variable interest rates wouldhave been approximately $1.5 million and $1 million for the six months ended June 30,2009 and 2010, respectively.

 

***Foreign Currency Exchange Rate Risk***

 

The expansion of our operations to the United Kingdom and Canada in2007 has exposed us to shifts in currency valuations. We may from time to timeelect to purchase financial instruments as hedges against foreign exchange raterisks with the objective of protecting our results of operations in the UnitedKingdom and Canada against foreign currency fluctuations. We had no suchfinancial instruments outstanding as of December 31, 2009 or June 30,2010.

 

As currency exchange rates change, translation of the financial resultsof our United Kingdom and Canadian operations into United States dollars willbe impacted. Changes in exchange rates have resulted in cumulative translationadjustments which decreased our net assets by approximately $1.9 million and$2.5 million as of December 31, 2009 and June 30, 2010, respectively.These cumulative translation adjustments are included in accumulated othercomprehensive loss as a separate component of stockholders’ equity. Due to theimmateriality of our current operations in the United Kingdom and Canada, achange in foreign currency exchange rates is not expected to have a significantimpact on our consolidated financial position, results of operations or cashflows.

 

**ITEM 4.  CONTROLS AND PROCEDURES.**

 

Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we haveevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, as of theend of the period covered by this Report. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that those disclosurecontrols and procedures are effective. There were no changes in our internalcontrol over financial reporting during the quarter ended June 30, 2010,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

See “Part I. Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 6. Commitments andContingencies,” which is incorporated herein by reference.

 

**ITEM1A.  RISK FACTORS.**

 

Our operations and financial results are subject to various risks anduncertainties that could adversely affect our business, results of operations,financial condition, future results, and the trading price of our common stock.In addition to the other information set forth in this Quarterly Report, youshould carefully consider the factors described below and in “Part I. Item1A. Risk Factors.” of our Annual Report on Form 10-K for the year endedDecember 31, 2009, which could materially affect our business, results ofoperations, financial condition, future results, and the trading price of ourcommon stock. The following items are changes and additions to the risks anduncertainties previously disclosed.

 

**Risks Related to Our Business and Industry**

 

***Our industry is regulated under federal law and subject to federal andstate unfair and deceptive practices statutes. Our failure to comply with theseregulations and statutes could have a material adverse effect on our business,prospects, results of operations, and financial condition.***

 

Although states havehistorically provided the primary regulatory framework under which we offeradvances, certain federal laws also affect our business. See “Item 1.Business—Federal Regulation” in our Annual Report on Form 10-K for theyear ended December 31, 2009.  Wemust comply with the federal Truth-in-Lending Act and Regulation Z adoptedunder that Act. Additionally, we are subject to the Equal Credit OpportunityAct, the Fair Debt Collection Practices, the Fair and Accurate CreditTransaction Act, the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act.We are also subject to the Bank Secrecy Act, the Money Laundering Control Actof 1986, the Money Laundering Suppression Act of 1994, the Military FinancialServices Protection Act, and the PATRIOT Act. Any failure to comply with any ofthese federal laws and regulations could have a material adverse effect on ourbusiness, prospects, results of operations, and financial condition.

 

In July 2010, theUnited States Congress passed the Dodd-Frank Wall Street Reform and ConsumerProtection Act.  This legislationauthorizes the creation of a Bureau of Consumer Financial Protection (the“BCFP”) with broad regulatory powers over banks and non-depository companiesthat offer consumer financial services, including cash advances and otherconsumer credit products. Under this new legislation, the BCFP has theauthority to examine companies that offer consumer financial protectionservices, and the exclusive authority to enforce federal consumer financiallaws. The BCFP will also have rulemaking authority with respect to severalfederal consumer financial protection laws, including many of the statuteslisted above. Although we cannot currently predict how, when, or if the BCFPwill impose additional regulations that could affect us, the BCFP maypromulgate regulations that would impact the consumer credit products that weoffer and have a material adverse effect on our business, prospects, results ofoperations, and financial condition. Failure to comply with applicable regulations could subject us toregulatory enforcement action that could result in civil, monetary, or otherpenalties and could have a material adverse effect on our business, prospects,results of operations, and financial condition.

 

In addition, our marketingefforts and the representations we make about our products and services aresubject to federal and state unfair and deceptive practices statutes. TheFederal Trade Commission enforces the Federal Trade Commission Act and thestate attorneys general and private plaintiffs enforce analogous statestatutes. If we are found to have violated any of these statutes, it could havea material adverse effect on our business, prospects, results of operations,and financial condition.

 

***A federal law or regulation that imposes a national cap on our fees andinterest or prohibits or severely restricts cash advance services would likelyeliminate our ability to continue our current operations.***

 

Various anti-cash advancelegislation has been proposed or introduced in the U.S.Congress. Congressional members continue to receive pressure from consumeradvocates and other industry opposition groups to adopt such legislation. In 2008 and 2009, bills were introduced that would have placed a cap of 36% onthe effective annual percentage rate (“APR”) on all consumer loan transactions.Another bill would have placed a 15-cent-per-dollar borrowed ($0.15/$1.00) capon fees for cash advances and would have implemented other consumerprotections.  Other bills have been introduced that would have limited tosix the number of cash advances a customer would be permitted to receive in anytwelve-month

 

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period.  Any federallegislation or regulation that places restrictions on cash advances and similarservices could have a material adverse effect on our business, prospects,results of operation, and financial condition.  Any federal law that wouldimpose a national 36% APR limit or prohibit or severely restrict cash advanceservices would likely eliminate our ability to continue our current operations.

 

***Unauthorized disclosure of sensitiveor confidential customer data could expose us to protracted and costlylitigation, penalties and cause us to lose customers***.

 

Toconduct our business, we are required to manage, utilize, and store largeamounts of personally identifiable information, consisting primarily ofconfidential personal and financial data regarding our customers.  We also depend on our IT networks andsystems, and those of third parties, to process, store, and transmit thisinformation. As a result, we are subject to numerous U.S. and foreign lawsand regulations designed to protect this information, such as the EuropeanUnion Directive on Data Protection, Canadian federal and provincial laws, and variousU.S. federal and state laws governing the protection of financial or otherindividually identifiable information. Security breaches involving our files and infrastructure could lead tounauthorized disclosure of confidential information, as well as shutdowns ordisruptions of our systems.

 

Ifany person, including our employees or those of third party vendors,negligently disregards or intentionally breaches our established controls withrespect to such data or otherwise mismanages or misappropriates that data, wecould be subject to costly litigation, monetary damages, fines, and/or criminalprosecution. Unauthorized disclosure of sensitive or confidential customer databy any person, whether through systems failure, unauthorized access to our ITsystems, fraud, misappropriation, or negligence, could result in negativepublicity, damage to our reputation, and a loss of customers.  Any unauthorized disclosure of personallyidentifiable information could subject us to liability under data privacy lawsand adversely affect our business, results of operations, prospects, andfinancial condition.

 

**ITEM 5. OTHER INFORMATION.**

 

OnAugust 5, 2010, the Company entered into a Time Sharing Agreement withJohnson Management, LLC, a limited liability company that is owned by George D.Johnson, Jr., the Company’s former Chairman and the beneficial owner ofmore than five percent of the Company’s common stock. This agreement providesthe Company with the right to lease an aircraft from Johnson Management, LLCfor a period of one year, subject to automatic renewal on a month-to-monthbasis, at a lease rate equal to the cost of operating the aircraft, plus anadditional charge equal to 100% of the cost of fuel, oil, and lubricants usedon the flight. The Company intends to use the aircraft for business purposeswhen the Company-owned aircraft is unavailable.

 

**ITEM6.  EXHIBITS.**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                   |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Time  Sharing Agreement by and between Advance America, Cash Advance Centers, Inc.  and Johnson Management, LLC, dated as of August 5, 2010.                                                                      |
| 31(i)(A)    |       | Certification  of Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 31(i)(B)    |       | Certification  of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as amended.                                                    |
| 32.1        |       | Certification  of Chief Executive Officer of Advance America, Cash Advance  Centers, Inc. pursuant to 18 U.S.C. Section 1350 (adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002). |
| 32.2        |       | Certification  of Chief Financial Officer of Advance America, Cash Advance  Centers, Inc. pursuant to 18 U.S.C. Section 1350 (adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002). |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                 | ADVANCE  AMERICA, CASH ADVANCE |
|----------------------|--------------------------------|
|                 | CENTERS, INC.             |
|                 |                           |
| August 6,  2010 | By:                            | /s/  J. PATRICK O’SHAUGHNESSY |
|                 |                           |   |
|                 |                           | J.  Patrick O’Shaughnessy |
| * *             | * *                       | *Executive Vice President and* |
| * *             | * *                       | *Chief Financial Officer* |
| * *             | * *                       | *(Duly authorized officer and* |
| * *             | * *                       | *principal financial officer)* |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                   |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                    |       | Time  Sharing Agreement by and between Advance America, Cash Advance Centers, Inc.  and Johnson Management, LLC, dated as of August 5, 2010.                                                                      |
| 31(i)(A)                |       | Certification  of Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 31(i)(B)                |       | Certification  of Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 32.1                    |       | Certification  of Chief Executive Officer of Advance America, Cash Advance  Centers, Inc. pursuant to 18 U.S.C. Section 1350 (adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002). |
| 32.2                    |       | Certification  of Chief Financial Officer of Advance America, Cash Advance  Centers, Inc. pursuant to 18 U.S.C. Section 1350 (adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002). |

 

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