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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark  One)**                                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                            |
| **x**                                                                                                                                 | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                            |
| **For the quarterly period ended September 30,  2009**                                                                           |
| ** **                                                                                                                            |
| **OR**                                                                                                                                |
| ** **                                                                                                                            |
| **o**                                                                                                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                            |
| **For the transition period  from        to        ** |

 

**COMMISSIONFILE NUMBER 001-32363**

 

**ADVANCE AMERICA, CASH ADVANCECENTERS, 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 NorthChurch Street**

**Spartanburg,South Carolina 29306**

(Address of principalexecutive offices) (Zip Code)

 

**864-342-5600**

(Registrant’s telephonenumber, including area code)

 

**None**

(Former name, former addressand former fiscal year, if changed since last 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 past90 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 definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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 November 6, 2009** |
|----------------------------------------|------------|---------------------------------------------|
| Common Stock, par value $.01 per share |       | 61,617,275 shares                           |

 

 

 

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**ADVANCEAMERICA, CASH ADVANCE CENTERS, INC.**

**Form 10-Q**

**For thethree months and nine months ended September 30, 2009**

 
| ** **                     | ** **                                                                                                                    | **Page** |
|--------------------------------|-------------------------------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING STATEMENTS** | 3                                                                                                                             |
|                           |                                                                                                                          |     |
| **PART I.**               | **FINANCIAL INFORMATION**                                                                                                     | 4        |
| Item 1.                   | Financial  Statements                                                                                                         | 4        |
|                           | Unaudited  Consolidated Balance Sheets December 31, 2008 and September 30,  2009                                    | 4        |
|                           | Interim Unaudited Consolidated Statements of Income  Three Months and Nine Months Ended September 30, 2008 and 2009 | 5        |
|                           | Interim Unaudited Consolidated Statement of  Stockholders’ Equity Nine Months Ended September 30, 2009              | 6        |
|                           | Interim Unaudited Consolidated Statements of Cash  Flows Nine Months Ended September 30, 2008 and 2009                   | 7        |
|                           | Notes to Interim Unaudited Consolidated Financial  Statements                                                                 | 8        |
| Item 2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   | 22       |
| Item 3.                   | Quantitative  and Qualitative Disclosures About Market Risk                                                                   | 44       |
| Item 4.                   | Controls and Procedures                                                                                                       | 44       |
|                           |                                                                                                                          |     |
| **PART II.**              | **OTHER  INFORMATION**                                                                                                        | 45       |
| Item 1.                   | Legal Proceedings                                                                                                             | 45       |
| Item 1A.                  | Risk Factors                                                                                                                  | 45       |
| Item 2.                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                  | 45       |
| Item 6.                   | Exhibits                                                                                                                      | 45       |
|                           |                                                                                                                          |     |
| **SIGNATURES**                 | 46                                                                                                                            |
|                           |                                                                                                                          |     |
| **INDEX TO EXHIBITS**          | 47                                                                                                                            |

 

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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 actual resultsto differ materially from the results expressed in, or implied by, theseforward-looking statements. These statements can be identified by the fact thatthey do not relate strictly to historical or current facts. They use words suchas “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “may,” “will,”“should,” “would,” “could,” “estimate,” “continue” and other words and terms ofsimilar meaning in conjunction with a discussion of future operating orfinancial 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, 2008,in “Part II. Item 1A. Risk Factors” of the Quarterly Report on Form 10-Qfor the quarter ended June 30, 2009, and in “Part II. Item 1A. RiskFactors” in this Quarterly Report, as well as any cautionary language in thisQuarterly Report, provide examples of risks, uncertainties and events that maycause our actual results to differ materially from the expectations we describein our forward-looking statements. Although we believe that our expectationsare based on reasonable assumptions, actual results may differ materially fromthose in the forward-looking statements as a result of various factors,including, but not limited to, the examples we provided.

 

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**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**AdvanceAmerica, Cash Advance Centers, Inc.**

 

**Unaudited Consolidated Balance Sheets**

 

**December 31,2008 and September 30, 2009**

 

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

 
| ** **                                                                                                                                                                                         | ** ** | **December 31,  2008** | ** ** | **September 30,  2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                                                                                                         |       |                        |       |                         |       |
| Current assets                                                                                                                                                                                     |       |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                          |       | $                           | 16,017     |                         | $          | 12,910 |   |
| Advances and fees receivable, net                                                                                                                                                                  |       | 220,115                     |       | 212,182                      |       |
| Deferred income taxes                                                                                                                                                                              |       | 13,008                      |       | 13,008                       |       |
| Other current assets                                                                                                                                                                               |       | 15,721                      |       | 16,281                       |       |
| Total current assets                                                                                                                                                                               |       | 264,861                     |       | 254,381                      |       |
| Restricted cash                                                                                                                                                                                    |       | 4,633                       |       | 4,510                        |       |
| Property and equipment, net                                                                                                                                                                        |       | 46,091                      |       | 34,738                       |       |
| Goodwill                                                                                                                                                                                           |       | 126,661                     |       | 127,030                      |       |
| Other assets                                                                                                                                                                                       |       | 4,764                       |       | 4,231                        |       |
| Total assets                                                                                                                                                                                       |       | $                           | 447,010    |                         | $          | 424,890 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                     |       |                        |       |                         |       |
| Current liabilities                                                                                                                                                                                |       |                        |       |                         |       |
| Accounts payable                                                                                                                                                                                   |       | $                           | 13,977     |                         | $          | 12,023 |   |
| Accrued liabilities                                                                                                                                                                                |       | 33,917                      |       | 32,674                       |       |
| Income taxes payable                                                                                                                                                                               |       | 1,625                       |       | —                       |       |
| Accrual for third-party lender losses                                                                                                                                                              |       | 3,960                       |       | 4,334                        |       |
| Current portion of long-term debt                                                                                                                                                                  |       | 545                         |       | 469                          |       |
| Total current liabilities                                                                                                                                                                          |       | 54,024                      |       | 49,500                       |       |
| Revolving credit facility                                                                                                                                                                          |       | 189,817                     |       | 149,039                      |       |
| Long-term debt                                                                                                                                                                                     |       | 4,590                       |       | 4,236                        |       |
| Deferred income taxes                                                                                                                                                                              |       | 22,311                      |       | 22,311                       |       |
| Deferred revenue                                                                                                                                                                                   |       | 4,791                       |       | 3,222                        |       |
| Other liabilities                                                                                                                                                                                  |       | 218                         |       | 302                          |       |
| Total liabilities                                                                                                                                                                                  |       | 275,751                     |       | 228,610                      |       |
| 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 61,087 and 61,621 outstanding as  of December 31, 2008 and September 30, 2009, respectively |       | 968                         |       | 968                          |       |
| Paid in capital                                                                                                                                                                                    |       | 288,635                     |       | 289,922                      |       |
| Retained earnings                                                                                                                                                                                  |       | 143,961                     |       | 166,780                      |       |
| Accumulated other comprehensive loss                                                                                                                                                               |       | (2,585                      | )          | (1,846                       | )          |
| Common stock in treasury (35,734 and 35,200 shares  at cost at December 31, 2008 and September 30, 2009, respectively)                                                                   |       | (259,720                    | )          | (259,544                     | )          |
| Total stockholders’ equity                                                                                                                                                                    |       | 171,259                     |       | 196,280                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                    |       | $                           | 447,010    |                         | $          | 424,890 |   |

 

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

 

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**AdvanceAmerica, Cash Advance Centers, Inc.**

 

**Interim Unaudited Consolidated Statements of Income**

 

**ThreeMonths and Nine Months Ended September 30, 2008 and 2009**

 

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

 
| ** **                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| **Total Revenues**                                |       | $                                          | 173,861    |                                      | $          | 167,920 |   | $ | 501,459 |   | $ | 474,437 |   |
| **Center Expenses:**                              |       |                                       |       |                                      |       |   |   |   |   |
| Salaries and related payroll costs                |       | 47,783                                     |       | 44,508                                    |       | 148,489 |   | 137,425 |   |
| Provision for doubtful accounts                   |       | 42,126                                     |       | 38,783                                    |       | 93,132 |   | 92,893 |   |
| Occupancy costs                                   |       | 25,204                                     |       | 23,399                                    |       | 75,233 |   | 71,419 |   |
| Center depreciation expense                       |       | 4,115                                      |       | 3,159                                     |       | 12,638 |   | 10,142 |   |
| Advertising expense                               |       | 6,109                                      |       | 4,235                                     |       | 16,099 |   | 15,351 |   |
| Other center expenses                             |       | 11,095                                     |       | 10,558                                    |       | 36,730 |   | 34,870 |   |
| Total center expenses                             |       | 136,432                                    |       | 124,642                                   |       | 382,321 |   | 362,100 |   |
| Center gross profit                               |       | 37,429                                     |       | 43,278                                    |       | 119,138 |   | 112,337 |   |
| **Corporate and Other Expenses  (Income):**       |       |                                       |       |                                      |       |   |   |   |   |
| General and administrative expenses               |       | 18,312                                     |       | 14,259                                    |       | 50,696 |   | 42,128 |   |
| Legal settlements                                 |       | —                                     |       | 6,399                                     |       | — |   | 6,399 |   |
| Corporate depreciation expense                    |       | 760                                        |       | 671                                       |       | 2,320 |   | 2,038 |   |
| Interest expense                                  |       | 3,029                                      |       | 1,556                                     |       | 8,246 |   | 4,850 |   |
| Interest income                                   |       | (37                                        | )          | (126                                      | )          | (107 | ) | (160 | ) |
| (Gain)/loss on disposal of property and equipment |       | 221                                        |       | (197                                      | )          | 439 |   | (244 | ) |
| Loss on impairment of assets                      |       | —                                     |       | —                                    |       | 236 |   | 2,209 |   |
| Income before income taxes                        |       | 15,144                                     |       | 20,716                                    |       | 57,308 |   | 55,117 |   |
| Income tax expense                                |       | 6,689                                      |       | 8,135                                     |       | 24,775 |   | 20,751 |   |
| Net income                                        |       | $                                          | 8,455      |                                      | $          | 12,581 |   | $ | 32,533 |   | $ | 34,366 |   |
| Net income per common share:                      |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                             |       | $                                          | 0.14       |                                      | $          | 0.21 |   | $ | 0.50 |   | $ | 0.56 |   |
| Diluted                                           |       | $                                          | 0.14       |                                      | $          | 0.20 |   | $ | 0.50 |   | $ | 0.56 |   |
| Dividends declared per common share               |       | $                                          | 0.125      |                                      | $          | 0.0625 |   | $ | 0.375 |   | $ | 0.1875 |   |
| Weighted average number of shares outstanding:    |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                             |       | 61,000                                     |       | 60,866                                    |       | 65,375 |   | 60,863 |   |
| Diluted                                           |       | 61,008                                     |       | 61,712                                    |       | 65,378 |   | 61,613 |   |

 

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

 

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**AdvanceAmerica, Cash Advance Centers, Inc.**

 

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

 

**Nine MonthsEnded September 30, 2009**

 

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

 
| ** **                                              | ** ** | **Common  Stock** | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated  Other** | ** ** | **Common  Stock** |       |             |       |
|---------------------------------------------------------|------------|-------------------|------------|------------|------------|-------------|------------|------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** **        | ** ** | **Par**    | ** ** | **Paid-In** | ** ** | **Retained**           | ** ** | **Comprehensive** | ** ** | **In  Treasury** | ** ** |   |   |
| ** **                                              | ** ** | **Shares**        | ** ** | **Value**  | ** ** | **Capital** | ** ** | **Earnings**           | ** ** | **Loss**          | ** ** | **Shares**       | ** ** | **Amount** | ** ** | **Total** | ** ** |
| **Balances, December 31, 2008**                    |       | 96,821            |       | $          | 968        |        | $          | 288,635                |       | $                 | 143,961    |             | $          | (2,585 | ) | (35,734 | ) | $ | (259,720 | ) | $ | 171,259 |   |
| Comprehensive  income:                                  |       |              |       |       |       |        |       |                   |       |              |       |             |       |   |   |   |   |
| Net  income                                             |       | —            |       | —     |       | —      |       | 34,366                 |       | —            |       | —           |       | — |   | 34,366 |   |
| Foreign  currency translation                           |       | —            |       | —     |       | —      |       | —                 |       | 739               |       | —           |       | — |   | 739 |   |
| Total  comprehensive income                             |       |              |       |       |       |        |       |                   |       |              |       |             |       |   |   | 35,105 |   |
| Dividends  paid ($0.1875 per share)                     |       | —            |       | —     |       | —      |       | (11,429                | )          | —            |       | —           |       | — |   | (11,429 | ) |
| Dividends  payable                                      |       | —            |       | —     |       | —      |       | (118                   | )          | —            |       | —           |       | — |   | (118 | ) |
| Purchases  of treasury stock                            |       | —            |       | —     |       | —      |       | —                 |       | —            |       | (4               | )          | (11 | ) | (11 | ) |
| Issuance  of restricted stock                           |       | —            |       | —     |       | —      |       | —                 |       | —            |       | 564              |       | — |   | — |   |
| Vesting  of restricted stock issued from treasury stock |       | —            |       | —     |       | (156        | )          | —                 |       | —            |       | —           |       | 156 |   | — |   |
| Forfeitures  of restricted stock                        |       | —            |       | —     |       | —      |       | —                 |       | —            |       | (30              | )          | — |   | — |   |
| Amortization  of restricted stock                       |       | —            |       | —     |       | 558         |       | —                 |       | —            |       | —           |       | — |   | 558 |   |
| Stock  option expense                                   |       | —            |       | —     |       | 909         |       | —                 |       | —            |       | —           |       | — |   | 909 |   |
| Issuance  of common stock to director in lieu of cash   |       | —            |       | —     |       | (24         | )          | —                 |       | —            |       | 4                |       | 31 |   | 7 |   |
| **Balances, September 30, 2009**                   |       | 96,821            |       | $          | 968        |        | $          | 289,922                |       | $                 | 166,780    |             | $          | (1,846 | ) | (35,200 | ) | $ | (259,544 | ) | $ | 196,280 |   |

 

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

 

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**AdvanceAmerica, Cash Advance Centers, Inc.**

 

**Interim Unaudited Consolidated Statements of Cash Flows**

 

**Nine MonthsEnded September 30, 2008 and 2009**

 

**(in thousands)**

 
| ** **                                                                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating  activities**                                                             |       |     |       |     |       |
| Net income                                                                                            |       | $        | 32,533     |     | $          | 34,366 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisition |       |     |       |     |       |
| Depreciation and amortization                                                                         |       | 14,993   |       | 12,223   |       |
| Non-cash interest expense                                                                             |       | 548      |       | 483      |       |
| Provision for doubtful accounts                                                                       |       | 93,132   |       | 92,893   |       |
| Deferred income taxes                                                                                 |       | 2,355    |       | —   |       |
| (Gain)/loss on disposal of property and equipment                                                     |       | 439      |       | (244     | )          |
| Loss on impairment of assets                                                                          |       | 236      |       | 2,209    |       |
| Amortization of restricted stock                                                                      |       | 665      |       | 558      |       |
| Stock option expense                                                                                  |       | 979      |       | 909      |       |
| Common stock issued to director in lieu of cash                                                       |       | 71       |       | 7        |       |
| Changes in operating assets and liabilities                                                           |       |     |       |     |       |
| Fees receivable, net                                                                                  |       | (13,360  | )          | (17,858  | )          |
| Other current assets                                                                                  |       | (8,825   | )          | (517     | )          |
| Other assets                                                                                          |       | 209      |       | 65       |       |
| Accounts payable                                                                                      |       | (1,379   | )          | 441      |       |
| Accrued liabilities                                                                                   |       | (4,092   | )          | (1,335   | )          |
| Income taxes payable                                                                                  |       | —   |       | (1,625   | )          |
| Deferred revenue                                                                                      |       | 5,365    |       | (1,569   | )          |
| Net cash provided by operating activities                                                             |       | 123,869  |       | 121,006  |       |
| **Cash flows from investing  activities**                                                             |       |     |       |     |       |
| Changes in advances receivable                                                                        |       | (70,413  | )          | (66,564  | )          |
| Changes in restricted cash                                                                            |       | 500      |       | 123      |       |
| Acquisition of business, net of cash acquired                                                         |       | (769     | )          | —   |       |
| Proceeds from sale of property and equipment                                                          |       | 22       |       | 472      |       |
| Purchases of property and equipment                                                                   |       | (7,743   | )          | (3,042   | )          |
| Net cash used in investing activities                                                                 |       | (78,403  | )          | (69,011  | )          |
| **Cash flows from financing  activities**                                                             |       |     |       |     |       |
| (Payments on)/proceeds from revolving credit  facility, net                                           |       | 60,703   |       | (40,778  | )          |
| Payments on mortgage payable                                                                          |       | (307     | )          | (330     | )          |
| Payments on note payable                                                                              |       | (97      | )          | (101     | )          |
| Payments of financing costs                                                                           |       | (1,622   | )          | —   |       |
| Purchases of treasury stock                                                                           |       | (88,953  | )          | (11      | )          |
| Payments of dividends                                                                                 |       | (24,377  | )          | (11,429  | )          |
| Changes in book overdrafts                                                                            |       | (2,872   | )          | (2,459   | )          |
| Net cash used in financing activities                                                                 |       | (57,525  | )          | (55,108  | )          |
| Effect of exchange rate changes on cash and cash  equivalents                                         |       | (191     | )          | 6        |       |
| Net decrease in cash and cash equivalents                                                             |       | (12,250  | )          | (3,107   | )          |
| Cash and cash equivalents, beginning of period                                                        |       | 28,251   |       | 16,017   |       |
| Cash and cash equivalents, end of period                                                              |       | $        | 16,001     |     | $          | 12,910 |   |
|                                                                                                  |       |     |       |     |       |
| Supplemental disclosures of cash flow information:                                                    |       |     |       |     |       |
| Cash paid during the period for:                                                                      |       |     |       |     |       |
| Interest                                                                                              |       | $        | 7,681      |     | $          | 4,726 |   |
| Income taxes                                                                                          |       | 28,029   |       | 22,177   |       |
| Supplemental schedule of non-cash investing and  financing activity:                                  |       |     |       |     |       |
| Property and equipment purchases included in  accounts payable and accrued expenses                   |       | 42       |       | 3        |       |
| Restricted stock dividends payable                                                                    |       | 105      |       | 118      |       |
| Net assets acquired through acquisition of business                                                   |       | 61       |       | —   |       |

 

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

 

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**AdvanceAmerica, Cash Advance Centers, Inc.**

 

**Notes to Interim Unaudited Consolidated Financial Statements**

 

**1. Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying interim unaudited consolidated financial statements ofAdvance America, Cash Advance Centers, Inc.  (“AACACI”) and its wholly owned subsidiaries(collectively, the “Company”) have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andthe rules and regulations of the U.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 management believes that thedisclosures are adequate to prevent the information from being misleading, theinterim unaudited consolidated financial statements should be read inconjunction with the Company’s audited financial statements in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008,filed with the SEC.  In the opinion ofthe Company’s management, all adjustments, consisting of normal recurringaccruals considered necessary for a fair statement of the Company’s financialcondition, have been included.  Theresults of operations for the nine months ended September 30, 2009, arenot necessarily indicative of the results that may be expected for futureinterim periods or the entire year ending December 31, 2009.

 

**Description of Business**

 

The Company conducts business under the authority of a variety ofenabling state statutes including payday advance, deferred presentment,check-cashing, small loan, credit service organization and other state lawswhereby advances are made directly to customers.  The Company’s operations in the UnitedKingdom are conducted in accordance with applicable English law.  The Company’s operations in Canada are conductedin accordance with applicable Canadian federal and provincial law.

 

**Revenue Recognition**

 

Revenues can be characterized as fees and/or interest depending on theCompany’s business operations and product offerings under enablingregulations.  Revenue is recognized on aconstant-yield basis ratably over the term of each advance.

 

In Virginia, we offer a line of credit product with a 25-day billingcycle.  Customers are not chargedinterest on any outstanding borrowings during a billing cycle if they have azero balance at the close of business on their billing cycle end date.  Revenue for this product is recorded whenfees and interest are charged to the customer’s account and therefore revenueis not recognized on a ratable basis.

 

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

 

**Concentration of Risk**

 

For the three months ended September 30, 2008 and 2009, totalrevenues within the Company’s five largest states (measured by total revenues)accounted for approximately 47% of the Company’s total revenues.  For the nine months ended September 30,2008 and 2009, total revenues within the Company’s five largest states(measured by total revenues) accounted for approximately 48% of the Company’stotal revenues.  The states thatrepresent the Company’s five largest states (measured by total revenues) changefrom 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 fairvalues include cash and cash equivalents, advances, fees, interest, installmentloans, lines of credit receivable, certain other assets, accounts payable,accrued liabilities, and certain other liabilities.  For these assets and liabilities, thecarrying values approximate fair value due to their short-term nature.

 

**IncomeTaxes**

 

Income taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying value of existing assetsand liabilities and 

 

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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.  Deferred tax assetsand liabilities are adjusted on an annual basis.

 

**Earnings Per 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.  Dilutedearnings per share is computed by dividing net income by the weighted averagenumber of common shares outstanding for the period, after adjusting for thedilutive effect of unvested restricted stock and outstanding stockoptions.  For the three months and ninemonths ended September 30, 2008 and 2009, 278,947 and 209,851 restrictedshares, respectively, were not included in the computation of diluted earningsper share because the effect of including them would be anti-dilutive.   For the three and nine months ended September 30,2008, options to purchase 1,612,500 shares of common stock were not included inthe computation of diluted earnings per share because the effect of includingthem would be anti-dilutive.  For thethree and nine months ended September 30, 2009, options to purchase1,555,000 shares of common stock were not included in the computation ofdiluted earnings per share because the effect of including them would beanti-dilutive.

 

The following table presents the reconciliation of the denominator usedin the calculation of basic and diluted earnings per share for the three andnine months ended September 30, 2008 and 2009 (in thousands):

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                        | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| Reconciliation of denominator:                                     |       |                                            |       |                                      |       |   |   |   |   |
| Weighted average number of common shares  outstanding—basic   |       | 61,000                                          |       | 60,866                                    |       | 65,375 |   | 60,863 |   |
| Effect of dilutive unvested restricted stock                       |       | 8                                               |       | 448                                       |       | 3 |   | 407 |   |
| Effect of dilutive outstanding stock options                       |       | —                                          |       | 398                                       |       | — |   | 343 |   |
| Weighted average number of common shares  outstanding—diluted |       | 61,008                                          |       | 61,712                                    |       | 65,378 |   | 61,613 |   |

 

**Recently Issued Accounting Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued ASC 105-10-05, “Generally Accepted Accounting Principles” (“ASC105-10-05”)*,*which establishesthe Accounting Standards Codification (“Codification” or “ASC”) as the singlesource of authoritative U.S. generally accepted accounting principles (“GAAP”)recognized by the FASB to be applied by nongovernmental entities. Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of GAAP for SECregistrants. The Codification supersedes all existing non-SEC accounting andreporting standards.

 

The FASB will no longerissue new standards in the form of Statements, FASB Staff Positions, orEmerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates which will serve toupdate the Codification, provide background information about the guidance, andprovide the basis for conclusions on changes to the Codification.

 

The ASC is not intended tochange GAAP but does change the way the guidance is organized and presented. Asa result, these changes have a significant effect on how companies referenceGAAP in their financial statements and in their accounting policies forfinancial statements issued for interim and annual periods ending after September 15,2009. The Company has included the references to the Codification, asappropriate, in these consolidated financial statements.   The adoption of ASC 105-10-05 hadno impact on the Company’s financial position or results of operations.

 

In December 2007, the FASB issued ASC 805-10-65, “TransitionRelated to FASB No. 141 (Revised 2007), Business Combinations” (“ASC805-10-65”). ASC 805-10-65 modifies the accounting for businesscombinations and requires, with limited exceptions, the acquirer in a businesscombination to recognize 100 percent of the assets acquired, liabilitiesassumed, and any non-controlling interest in the acquiree at theacquisition-date fair value.  Inaddition, ASC 805-10-65 requires the expensing of acquisition-relatedtransaction and restructuring costs and requires that certain contingent assetsand liabilities acquired, as well as contingent consideration, be recognized atfair value.  ASC 805-10-65 alsomodifies the accounting for certain acquired income tax assets andliabilities.  ASC 805-10-65 iseffective for acquisitions consummated on or after January 1, 2009.  The adoption of ASC 805-10-65 did nothave a material impact on the Company’s financial position or results ofoperations.

 

In December 2007, the FASB issued ASC 810-10-65 (“ASC 810-10-65”),“Transition Related to FASB Statement No. 160, Noncontrolling Interests inConsolidated Financial Statements – an amendment to ARB No. 51”, whichestablishes accounting and reporting standards for a noncontrolling interest ina subsidiary and for the deconsolidation of a subsidiary.  ASC 810-10-65 clarifies 

 

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thata noncontrolling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as a component of equity in the consolidated financialstatements.  Among other requirements,ASC 810-10-65 requires consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the noncontrollinginterest.  It also requires disclosure,on the face of the consolidated income statement, of the amounts ofconsolidated net income attributable to the parent and to the noncontrollinginterest.  ASC 810-10-65 is effective forfiscal years beginning after December 15, 2008.  The adoption of ASC 810-10-65 did not have amaterial impact on the Company’s financial position or results of operations.

 

In April 2009, the FASB issued ASC 825-10-65, “Transition Relatedto FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of FinancialInstruments” (“ASC 825-10-65”).  ASC825-10-65 amends the disclosure requirements in SFAS No. 107, “Disclosuresabout Fair Value of Financial Instruments”, and APB Opinion No. 28, “InterimFinancial Reporting”, to require disclosures about the fair value of financialinstruments, including disclosure of the method and significant assumptionsused to estimate the fair value of financial instruments, in interim financialstatements as well as in annual financial statements.  The Company has adopted the disclosurerequirements of ASC 825-10-65, with no material impact on the Company’sfinancial position or results of operations.

 

In May 2009,the FASB issued ASC 855-10-05 through ASC 855-10-55, “Subsequent Events”(collectively, ASC “855-10”), which establishes general standards of accountingfor disclosure of events that occur after the balance sheet date but before thefinancial statements are issued or are available to be issued.  ASC 855-10-25, “Recognition,” requires anentity to recognize, in the financial statements, subsequent events thatprovide additional information regarding conditions that existed at the balancesheet date.  Subsequent events thatprovide information about conditions that did not exist at the balance sheetdate shall not be recognized in the financial statements under ASC 855-10.  ASC 855-10 was effective for interim andannual reporting periods on or after June 15, 2009.  The Company adopted ASC 855-10 during thesecond quarter of 2009, and its application had no material impact on theCompany’s financial position or results of operations.  The Company evaluated subsequent eventsthrough the date the accompanying financial statements were issued, which was November 9,2009.

 

In June 2009,the FASB issued SFAS 166, “New Guidance for Transfers of Financial Assets, arevision to SFAS Statement No. 140, Accounting for Transfers and Servicingof Financial Assets and Extinguishments of Liabilities” (“SFAS 166”).  SFAS 166 will require more information aboutthe transfer of financial assets, including securitization transactions, whereentities have continuing exposure to the risks related to transferred financialassets.  SFAS 166 eliminates the conceptof a “qualifying special-purpose entity,” changes the requirements forderecognizing financial assets, and requires additional disclosures.  SFAS 166 will be effective for a reportingentity’s first fiscal year beginning after November 15, 2009.  Management does not presently believe SFAS166 will have a material impact on the Company’s financial position or resultsof operations.

 

In June 2009,the FASB issued SFAS 167, “New Consolidation Guidance for Variable InterestEntities, a revision to SFAS Interpretation No. 46 (Revised December 2003),Consolidation of Variable Interest Entities” (“SFAS 167”).  SFAS 167 changes how a reporting entitydetermines whether an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated.  The determination of whether a reportingentity is required to consolidate another entity is based on, among otherthings, the other entity’s purpose and design and the reporting entity’sability to direct the activities of the other entity that most significantlyimpact the other entity’s performance. SFAS 167 will be effective for a reporting entity’s first fiscal yearbeginning after November 15, 2009. Management has not yet evaluated the impact of SFAS 167 on the Company’sfinancial position or results of operations.

 

**2. Advances and Fees Receivable, Net**

 

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

 
| ** **                        | ** ** | **December 31,  2008** | ** ** | **September 30,  2009** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Advances receivable               |       | $                           | 215,577    |                         | $          | 204,471 |   |
| Fees and interest receivable      |       | 33,633                      |       | 35,246                       |       |
| Returned items receivable         |       | 42,996                      |       | 40,437                       |       |
| Other                             |       | 3,751                       |       | 5,491                        |       |
| Allowance for doubtful accounts   |       | (59,441                     | )          | (58,290                      | )          |
| Unearned revenues                 |       | (16,401                     | )          | (15,173                      | )          |
| Advances and fees receivable, net |       | $                           | 220,115    |                         | $          | 212,182 |   |

 

Includedin the advances, and fees and interest receivable balances are amounts that maybe past due but cannot be deposited because they do not have bank presentmentauthorizations.

 

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

 

Changes in the allowance for doubtful accounts for the three and ninemonths ended September 30, 2008 and 2009 were as follows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| Beginning balance               |       | $                                          | 53,496     |                                      | $          | 56,910 |   | $ | 61,306 |   | $ | 59,441 |   |
| Provision for doubtful accounts |       | 41,988                                     |       | 38,302                                    |       | 93,964 |   | 92,519 |   |
| Charge-offs                     |       | (41,164                                    | )          | (40,508                                   | )          | (116,668 | ) | (111,913 | ) |
| Recoveries                      |       | 4,544                                      |       | 3,586                                     |       | 20,262 |   | 18,243 |   |
| Ending balance                  |       | $                                          | 58,864     |                                      | $          | 58,290 |   | $ | 58,864 |   | $ | 58,290 |   |

 

Changes in the accrual for third-party lender losses for the three andnine months ended September 30, 2008 and 2009 were as follows (inthousands):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| Beginning balance               |       | $                                          | 3,617      |                                      | $          | 3,853 |   | $ | 4,587 |   | $ | 3,960 |   |
| Provision for doubtful accounts |       | 138                                        |       | 481                                       |       | (832 | ) | 374 |   |
| Ending balance                  |       | $                                          | 3,755      |                                      | $          | 4,334 |   | $ | 3,755 |   | $ | 4,334 |   |

 

The total changes in the allowance for doubtful accounts and theaccrual for third-party lender losses for the three and nine months ended September 30,2008 and 2009 were as follows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| Beginning balance               |       | $                                          | 57,113     |                                      | $          | 60,763 |   | $ | 65,893 |   | $ | 63,401 |   |
| Provision for doubtful accounts |       | 42,126                                     |       | 38,783                                    |       | 93,132 |   | 92,893 |   |
| Charge-offs                     |       | (41,164                                    | )          | (40,508                                   | )          | (116,668 | ) | (111,913 | ) |
| Recoveries                      |       | 4,544                                      |       | 3,586                                     |       | 20,262 |   | 18,243 |   |
| Ending balance                  |       | $                                          | 62,619     |                                      | $          | 62,624 |   | $ | 62,619 |   | $ | 62,624 |   |

 

**4. Other Current Assets**

 

Other current assets consisted of thefollowing (in thousands):

 
| ** **                             | ** ** | **December 31,  2008** | ** ** | **September 30,  2009** |   |
|----------------------------------------|------------|-----------------------------|------------|------------------------------|--------|
| Prepaid rent                           |       | $                           | 6,745      |                         | $      | 6,386 |   |
| Prepaid insurance                      |       | 2,848                       |       | 3,636                        |   |
| Prepaid taxes and licenses             |       | 1,430                       |       | 1,400                        |   |
| Prepaid income taxes                   |       | 1,568                       |       | 1,369                        |   |
| Prepaid workers compensation loss fund |       | 321                         |       | 346                          |   |
| Other                                  |       | 2,809                       |       | 3,144                        |   |
| Total                                  |       | $                           | 15,721     |                         | $      | 16,281 |   |

 

**5. Accrued Liabilities**

 

Accrued liabilities consisted of the following (in thousands):

 

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| ** **                          | ** ** | **December 31,  2008** | ** ** | **September 30,  2009** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Employee compensation               |       | $                           | 13,533     |                         | $          | 9,797 |   |
| Legal fines and settlements         |       | 2,600                       |       | 6,476                        |       |
| Workers’ compensation          |       | 4,851                       |       | 4,528                        |       |
| Straight-line rent accrual          |       | 3,011                       |       | 2,353                        |       |
| Deferred revenue                    |       | 1,830                       |       | 1,722                        |       |
| Accounting and tax                  |       | 1,158                       |       | 1,040                        |       |
| Center closing costs                |       | 871                         |       | 964                          |       |
| Advertising                         |       | 584                         |       | 948                          |       |
| Legal                               |       | 1,128                       |       | 855                          |       |
| Property, sales and franchise taxes |       | 558                         |       | 778                          |       |
| Severance                           |       | 374                         |       | 269                          |       |
| Construction in progress            |       | 99                          |       | 3                            |       |
| Other                               |       | 3,320                       |       | 2,941                        |       |
| Total                               |       | $                           | 33,917     |                         | $          | 32,674 |   |

 

**6.Commitments and Contingencies**

 

The Company is involved in a number of activelawsuits, including lawsuits filed by private litigants and those arising outof actions taken by state regulatory authorities, and is involved in variousother legal proceedings with state and federal regulators.  In addition, the Company is obligated toadvance expenses, and, in certain circumstances, indemnify for damages,incurred by each of its current or former officers and directorsresponding to inquiries, or defending against claims or proceedings, arising byreason of the fact that such person is or was an officer or director of theCompany.  Under certain circumstances, the Company mayalso be obligated to defend and indemnify other entities against which claimshave been asserted.  Unless otherwisestated below, the Company is vigorously defending against these actions andwill, when management believes appropriate in consideration of ongoinglitigation expenses and other factors, evaluate reasonable settlementopportunities.  The amount of lossesand/or the probability of an unfavorable outcome, if any, cannot be reasonablyestimated for these legal proceedings unless otherwise stated below.  Accordingly, except as otherwise specifiedbelow, no accrual has been recorded for any of these matters as of September 30,2009.

 

**LegalProceedings**

 

*BrendaMcGinnis v. Advance America Servicing of Arkansas, Inc. et al.*

 

On February 27, 2007, Brenda McGinnis filed a putative classaction in the Circuit Court of Clark County, Arkansas alleging violations ofthe Arkansas usury law, the Arkansas Deceptive Trade Practices Act, and a 2001class action settlement agreement entered into by the Company’s priorsubsidiary in Arkansas.  The complaintalleges that the Company’s current subsidiary made usurious loans under theArkansas Check Cashers Act and seeks compensatory damages in an amount equal totwice the interest paid on the deferred presentment transactions made from 2001to present (which would total approximately $21.4 million for deferredpresentment transactions made during that time or approximately$87 million in damages for all transactions originated, processed, andserviced during that time) as well as a declaration that the contracts arevoid, enforcement of the 2001 class action settlement agreement, attorneys’fees, and costs.

 

OnSeptember 23, 2009, the Company and the class representatives entered intoa settlement agreement in connection with the litigation.  The settlement agreement does not involve anadmission of wrongdoing or liability and is subject to court approval andcertain other conditions before it becomes final and the lawsuit is concluded.

 

Pursuant to the terms of the settlement agreement, the case will bedismissed, the Company will be released from any and all claims and liabilityin connection with deferred presentment transactions entered into in Arkansaspursuant to the Arkansas Check Casher’s Act, and the Company will pay thelesser of (1) $10.95 million, or (2) actual claims made plusplaintiff’s attorney fees, administrative costs, and other costs associatedwith the litigation.  If claims made pluscovered fees and costs exceed $10.95 million, then individual claim amountswill be reduced on a prorated basis. The Company has taken acharge against earnings in the third quarter of 2009 of approximately $6.0million to cover the estimated costs of settlement.

 

*Magee and Johnson v. Advance AmericaServicing of Arkansas, Inc.*

 

OnOctober 13, 2008, Gary Neil Magee and Charlotte Johnson filed a putativeclass action in the Circuit Court of Clark County, Arkansas alleging that theCompany’s Arkansas subsidiary violated the Arkansas usury law and the ArkansasDeceptive Trade Practices Act.  The complaint alleged that the feescharged by the Company’s subsidiary to cash checks were interest on consumerloans and usurious under state law.  The plaintiffs sought compensatorydamages in an amount equal to twice the combined interest plus unrelated checkcashing fees on the loans from April 2008 to October 2008, and adeclaration that the transactions are void, plus attorneys’ fees and costs. The Company removed the case to the United States District Court for theWestern District of Arkansas, where the court granted the Company’s motion tocompel individual arbitration.  As ofAugust 18, 2009, the case was settled for an immaterial amount and the Companywas released from all claims.

 

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

 

On July 18, 2008, Kerri Stone filed a putative class actioncomplaint in the Superior Court of California in San Diego against the Companyand its California subsidiary alleging violations of the California DeferredDeposit Transaction Law, the California Unfair Competition Law, and theCalifornia Consumer Legal Remedies Act. The case has been removed to the U.S. District Court for the SouthernDistrict of California.  The putativeclass action complaint seeks trebling of compensatory damages, disgorgement ofprofits, attorneys’ fees, punitive damages, and an order enjoining enforcementof class action waiver clauses in cash advance contracts.  The parties are engaged in jurisdictional andclass discovery.

 

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*Betts and Reuter v. McKenzie Check Advance ofFlorida, 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 Circuit Courtof Palm Beach County, Florida.  Thisputative class action alleges that McKenzie, by and through the actions ofcertain officers, directors and employees, engaged in unfair and deceptivetrade practices and violated Florida’s criminal usury statute, the FloridaConsumer Finance Act, and the Florida Racketeer Influenced and CorruptOrganizations Act.  The suit seeksunspecified damages, and the named defendants could be required to refund feesand/or interest collected, refund the principal amount of cash advances, paymultiple damages, and pay other monetary penalties.  Ms. Reuter’s claim has been held to besubject to binding arbitration, which the Company expects to proceed inparallel with this case.  However, thetrial court has denied the defendants’ motion to compel arbitration of Ms. Kelly’sclaims, the substituted named plaintiff, and the resulting appeal has beendismissed by the Florida court of appeals. The Company has sought review of the arbitration issue by the FloridaSupreme Court.

 

*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 and Ms. Reuteragainst the Company, the Company’s Florida subsidiary, Advance America, CashAdvance Centers of Florida, Inc., and certain officers and directors.  The allegations, relief sought, and theCompany’s defenses in this lawsuit are nearly identical to those alleged in thefirst *Betts and Reuter* lawsuitdescribed above.  The Company andindividual defendants appealed the trial court’s denial of certain defendants’motion to dismiss for lack of personal jurisdiction.  The appellate court affirmed the trial court’sruling.  A petition for certiorari hasbeen filed in the Florida Supreme Court on behalf of the individual AdvanceAmerica defendants, but the case will proceed against the Company.

 

*Trejo v. Advance America, CashAdvance Centers of Illinois, Inc.*

 

On March 4,2009, Martha Trejo filed a putative class action lawsuit in the Circuit Courtof Cook County against the Company’s Illinois subsidiary, Advance America, CashAdvance Centers of Illinois, Inc.  The complaint alleged that theIllinois subsidiary’s practices violate the Illinois Payday Reform Act, theIllinois Interest Act, the Illinois Consumer Installment Loan Act, and theIllinois Wage Assignment Act.  The complaint sought certification of aclass of individuals for the alleged violations as well as a declaration thatall loans made to class members are unenforceable, injunctive relief, andmonetary damages in an unspecified amount. The Company removed the case toUnited States District Court for the Northern District of Illinois and filed amotion to dismiss or, in the alternative, to compel arbitration.  The Company’s motion to stay the action andcompel arbitration was granted on June 23, 2009.  The order was vacated in part on September 4,2009, and the case was remanded to the Circuit Court of Cook County, where itis proceeding as an individual action, rather than a putative class action.

 

*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 our Missouri subsidiary, Advance America,Cash Advance Centers of Missouri, Inc. The action alleges that the arbitration clause and class action waiverin the Company’s subsidiary’s loan agreement is unconscionable, that theCompany’s subsidiary’s practices violate the Missouri statutes governing unfairand deceptive trade practices, interest rates, loan renewals, debt reduction,and consideration of borrower’s ability to repay.  The lawsuit seeks certification as a classaction, unspecified monetary damages, a declaratory judgment that thearbitration clause and class action waiver is unconscionable, and injunctiverelief.  The trial court denied theCompany’s motion to compel arbitration and the Company has appealed the denialof that motion.

 

*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 prior Chief Executive Officer,alleging, among other things, that the relationship between the Company’s NorthCarolina subsidiary and Republic was a “rent a charter” relationship andtherefore Republic was not the “true lender” of the cash advances itoffered.  The lawsuit also claims thatthe cash advances were made, administered, and collected in violation ofnumerous North Carolina consumer 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,the return of any interest or fees associated with those advances, trebledamages, attorneys’ fees, and other unspecified costs.  The Company sought to enforce the arbitrationprovisions in the customer agreements and in June 2009, the trial courtruled that the arbitration clause is unenforceable.  The Company is appealing 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 ofBanks ordered that the Company’s North Carolina subsidiary immediately ceaseand desist operating. In accordance with the Commissioner of Banks’ order, theCompany’s North Carolina subsidiary ceased all business operations on December 22,2005.  The Company has appealed theCommissioner’s order 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 lines ofcredit 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, the court determined thatcertain aspects of the Company’s Choice 

 

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Lineof Credit required the Company to be licensed under Pennsylvania’s ConsumerDiscount Company Act (“CDCA”) and enjoined the Company from continuing itslending activities in Pennsylvania for so long as the CDCA violations continuedand from collecting monthly participation fees. The Company appealed to the Pennsylvania Supreme Court and, in May 2008,the Pennsylvania Supreme Court upheld the lower court’s ruling.  The Pennsylvania Department of Bankingsubsequently amended its complaint to add the Pennsylvania Attorney General asa plaintiff and the Company as a defendant. The amended complaint also seeks to perfect a claim for alleged violationsof the state’s usury law by seeking unspecified damages, including disgorgementof profits earned in Pennsylvania, treble actual damages, and restitution,which could total approximately $135 million, plus civil penalties of$1,000 for each violation of the Pennsylvania Consumer Protection Law and anadditional $2,000 for violations against customers over the age of 60, andattorneys’ fees and costs.  The matter isproceeding before the trial court.  TheCompany has filed preliminary objections in response to the amended complaintand will continue to vigorously defend against the lawsuit.

 

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

 

On August 1, 2007, Sharlene Johnson, Helena Love and Bonny Bleacherfiled a putative class action lawsuit in the United States District Court,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.  The complaint seeks, among other things, adeclaratory judgment that the monthly participation fee charged to customerswith a line of credit is illegal, an injunction prohibiting the collection ofthe monthly participation fee, and the payment by the Company of damages equalto three times the monthly participation fees 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 appealedthat order and the appeal has been stayed, pending a decision from the UnitedStates Supreme Court in *Stolt-Nielsen S.A. v.AnimalFeeds International Corp*., a case involving enforceability ofarbitration clauses.

 

*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 Company previouslymarketed, processed and serviced cash advances in Pennsylvania, filed aputative class action lawsuit in the United States District Court, EasternDistrict of Pennsylvania alleging various causes of action, including that theCompany’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 Actand the Pennsylvania Credit Services Act. The complaint alleges that BankWest Inc. was not the “true lender” andthat the Company’s Pennsylvania subsidiary was the “lender in fact.”  The complaint seeks compensatory damages,attorneys’ fees, punitive damages and the trebling of any compensatory damages. In January 2008, the trial courtentered an order compelling the purported class representatives to arbitratetheir claims on an individual basis, unless determined otherwise by thearbiter.  All parties appealed that orderand the appeal has been stayed, pending a decision from the United StatesSupreme Court in*Stolt-Nielsen S.A. v. AnimalFeedsInternational Corp*.

 

*Clerk v. NCAS of Delaware, LLC, d/b/a Advance America, CashAdvance Centers, Inc., et al.*

 

OnApril 21, 2009, Yulon Clerk filed a putative class action lawsuit in theCourt of Common Pleas of Philadelphia County, Pennsylvania, against the Company’ssubsidiaries, Advance America, Cash Advance Centers of Pennsylvania, Inc.,and NCAS of Delaware, LLC, as well as BankWest, Inc. and other non-relatedlenders and banks.   The complaintalleged that the practices of the Company’s subsidiaries and BankWest, Inc.violated the Pennsylvania Consumer Discount Protection Act, the PennsylvaniaLoan Interest Protection Law, and Pennsylvania Consumer Protection Laws.  The complaint sought certification of a classof individuals for the alleged violations, a declaration that all loans made toclass members are unenforceable, injunctive relief, and monetary damages.  The complaint repeated allegations assertedin other putative class actions filed in Pennsylvania that have been stayed infavor of mandatory individual arbitrations. The Company removed the case to the United States District Court for theEastern District of Pennsylvania and filed a motion to compel arbitration andstay the underlying action’s proceedings. In August 2009, the District Court issued an order severing theclaims against the individual defendants. On September 21, 2009, plaintiffs filed three separate complaintsseeking the same relief as the April 21, 2009 complaint against AdvanceAmerica, Cash Advance Centers of Pennsylvania, Inc., NCAS of Delaware,LLC, and BankWest, Inc., whose defense the Company is handling pursuant toan indemnification agreement, in the Court of Common Pleas of PhiladelphiaCounty, Pennsylvania.

 

*Class Actions Against South Carolina Subsidiary*

 

Eight separate putative class actions have been filed in South Carolinaagainst the Company’s subsidiary, Advance America, Cash Advance Centers ofSouth Carolina, Inc., and several other unaffiliated defendants.  John and Rebecca Morgan filed a complaint 

 

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onAugust 27, 2007 in the Horry County Court of Common Pleas; Margaret Hornefiled a complaint on September 6, 2007 in the Spartanburg County Court ofCommon Pleas; Tawan Smalls filed a complaint on September 10, 2007 in theCharleston County Court of Commons Pleas; Chadric and Lisa Wiley filed acomplaint on September 27, 2007 in the Richland County Court of CommonPleas; Mildred Weaver filed a complaint on September 27, 2007 in theDarlington County Court of Common Pleas; Lisa Johnson and Gilbert Herbert fileda complaint on October 2, 2007 in the Georgetown County Court of CommonPleas; Kimberly Kinney filed a complaint on October 12, 2007 in the MarionCounty Court of Common Pleas; and Carl G. Ferrell filed a complaint on October 30,2008.  The allegations and relief soughtare similar in each case.  Plaintiffsallege that the Company’s South Carolina subsidiary violated the South CarolinaDeferred Presentment Services Act and the Consumer Protection Code by failingto perform a credit check and evaluate a customer’s ability to repay theadvance.  Each complaint seeks aninjunction to prohibit the Company from continuing its operations, the returnof fees and interest, unspecified actual damages, punitive damages, andattorneys’ fees and costs.  Each of thelawsuits have been joined to ongoing litigation in the South Carolina statecourt system pursuant to an order of the South Carolina Supreme Courtconsolidating all cases brought against the industry.

 

*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 wasinformed that Kenneth E. Compton, its President and Chief Executive Officer,received a “Wells Notice” from the staff of the United States Securities andExchange Commission (the “SEC”).  TheCompany understands that the staff intends to recommend that the SEC file acivil injunctive action against Mr. Compton alleging that he violated Section 17(a) ofthe Securities Act of 1933 and Section 10(b) of the SecuritiesExchange Act of 1934 and Rule 10b-5 thereunder in connection with allegedinsider trading involving less than a material amount of losses avoided by thirdparties selling Company stock in 2007. The Company did not receive a Wells Notice and believes that it is not asubject of this investigation; however, the Company is obligated to advanceexpenses incurred by Mr. Compton in connection with this matter.

 

**Changes in Legislation**

 

*OhioLegislation*

 

On November 24, 2008, the State of Ohio capped interest rates oncash advance loans and limited the number of cash advances a customer may takein any one year.  As a result of thislegislation, the Company began offering small loans pursuant to the Ohio SmallLoan Act and check-cashing services.  Thesmall loan product and check cashing services generate less revenue than theCompany’s former cash advance product and, as a result, the Company has closedsome of its centers in Ohio. In the third quarter of 2009, the Company beganoffering cash advances pursuant to the Ohio Second Mortgage Act.

 

During the nine months ended September 30, 2009, the Companyclosed 63 centers in Ohio.  The estimatedcost to close these centers, including an impairment charge of approximately$0.9 million, is approximately $2.2 million, of which $0.1 million and $2.2million was recognized in the three and nine months ended September 30,2009, respectively.  For the three monthsended September 30, 2009, these amounts are included in the incomestatement as an increase in other center expenses. For the nine months ended September 30,2009, these amounts are included in the income statement as an increase inother center expenses of $1.2 million, a loss on impairment of fixed assets of$0.9 million, and an increase in center salaries and related payroll costs of$0.1 million.

 

If it is not economically viable to continue operating in Ohio and theCompany closes its remaining Ohio centers, the estimated range of closingcosts, including severance, center tear-down costs, lease termination costs,and the write-down of fixed assets would be approximately $5.0 million to $13.5million, and the collectability of advances and fees receivable in Ohio mostlikely would be impaired.  As of September 30,2009, the net advances and fees receivable balance in Ohio was approximately$20.6 million.  At this time theCompany is not able to determine the amount of goodwill impairment, if any,that would result from the cessation of operations in Ohio.

 

*South Carolina and KentuckyLegislation*

 

New laws in South Carolina and Kentucky will become effectiveduring the first half of 2010 that will, among other things, implement in each state a statewide database tomonitor the number of loans made to customers within that state.  The Company believes these laws willnegatively impact its revenue and profitability in South Carolina andKentucky.  The Company intends to complywith the new laws 

 

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whenthey become effective.  Although weexpect these laws to have a negative impact on our operations in those states,we expect our South Carolina and Kentucky operations to remain economicallyviable.

 

*WashingtonLegislation*

 

In the State of Washington, a law will becomeeffective on January 1, 2010 that will limit the number of cash advances acustomer may take in any one year, limit the advance amount that can be takenout at any one time,and implement a statewide database to monitor the number of loans.  The Company believes this law will negativelyimpact its revenue and profitability. The Company intends to comply with the new law when it becomes effectiveon January 1, 2010.  The Company mayclose or consolidate some or all of its centers in Washington if it does notcontinue to be economically viable to operate all of its centers.

 

If the Company closes all of its centers inWashington, the estimated range of closing costs, including severance, centertear-down costs, lease termination costs, and the write-down of fixed assetswould be approximately $2.7 million to $9.5 million, and the collectibility of advances and fees receivablein Washington most likely would be impaired. As of September 30,2009, the net advances and fees receivable balance in Washington wasapproximately $9.2 million.  At this timethe Company is not able to determine the amount of goodwill impairment, if any,that would result from the cessation of operations in Washington.

 

**OtherCommitments and Contingencies**

 

At September 30, 2009, the Company had approximately $2.2 millionin unfunded commitments to lend to customers in Virginia under the line of creditproduct.

 

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

 

In July 2008, the Company completed the repurchase of its commonstock under its stock repurchase program that the Company’s Board of Directorsapproved on May 4, 2005, and twice extended, once on August 16, 2006,and again on February 13, 2008, for a total of $225.0 million inauthorized repurchases.  The followingtable provides certain information with respect to the stock purchased underthe Company’s approved stock repurchase program and stock surrendered byemployees to satisfy their tax obligations with respect to the vesting ofshares of restricted stock awarded pursuant to the Company’s 2004 Omnibus StockPlan (in thousands).

 
| ** **                | ** ** | **Three months ended September 30, 2008** | ** ** | **Three months ended September 30, 2009** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                | ** ** | **Shares**                                     | ** ** | **Dollars**                                    | ** ** | **Shares** | ** ** | **Dollars** | ** ** |
| Stock  Repurchase Program |       | 1,700                                          |       | $                                              | 9,045      |   | — |   | $ | — |   |
| Omnibus  Stock Plan       |       | 2                                              |       | 11                                             |       | 1 |   | 6 |   |
| Total                     |       | 1,702                                          |       | $                                              | 9,056      |   | 1 |   | $ | 6 |   |

 
| ** **                | ** ** | **Nine months ended September 30, 2008** | ** ** | **Nine months ended September 30, 2009** | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                | ** ** | **Shares**                                                   | ** ** | **Dollars**                                                  | ** ** | **Shares** | ** ** | **Dollars** | ** ** |
| Stock  Repurchase Program |       | 11,911                                                       |       | $                                                            | 88,915     |   | — |   | $ | — |   |
| Omnibus  Stock Plan       |       | 6                                                            |       | 38                                                           |       | 4 |   | 11 |   |
| Total                     |       | 11,917                                                       |       | $                                                            | 88,953     |   | 4 |   | $ | 11 |   |

 

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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.  Additionally, during 2005, the Companygranted stock options and shares of restricted stock to its President and ChiefExecutive Officer under a Nonqualified Stock Option Agreement and a RestrictedStock Agreement, respectively.  Both ofthese agreements 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.

 

The grant date fair value of all shares of restricted stock was basedon the market value of the Company’s common stock on the dates of grant.  These amounts are being expensed ratably overeach award’s respective vesting period.

 

All stock options were granted with an exercise price equal to themarket value of the Company’s common stock on the dates of grant.  The Company estimated the fair value of stockoptions on the date of grant using the Black-Scholes option pricing model usingthe following assumptions:

 

·                  *Expectedterm*—The expected term represents the period during which the Company’sstock options are expected to be outstanding. The Company based its determination of the expected term by givingconsideration to the contractual terms of the stock option awards, vestingschedules, expectations of future employee behavior, and published academicresearch regarding exercise behavior. For the options granted in the first quarter of 2009, the Companyassumed that the options would be exercised on their first available exercisedate because the high dividend rate on the grant date relative to the strikeprice 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.  TheCompany based its estimated volatility on its historical stock price volatilityand the stock price volatility of other public companies in its industry, whichthe Company believes is representative of its expected future volatility overthe expected term of its options.

 

·                  *Expecteddividends*—The Company used its historic dividend yield as anestimate for its expected dividend yield as of the 2008 stock option grantdate.  The Company assumed this dividendyield was continuous over the life of the option in its Black-Scholes optionpricing model.  For the 2009 stock optiongrants, the Company used its current dividend rate of $0.0625 per share perquarter and assumed discreet quarterly dividend dates consistent with pastpractices over the 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 the grantdates, the following weighted average assumptions were used in theBlack-Scholes option pricing model for all stock options granted during thenine months ended September 30, 2008 and 2009:

 
| ** **                  | ** ** | **2008** | ** ** | **2009** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Expected  term (years)      |       | 5.42     |       | 2.00     |       |
| Expected  volatility        |       | 48       | %          | 66       | %          |
| Expected  dividends (yield) |       | 4.1      | %          | 21.9     | %          |
| Risk-free  rate             |       | 2.93     | %          | 1.03     | %          |

 

The weighted average grant date fair values of options granted duringthe nine months ended September 30, 2008 and 2009 were $2.70 per optionand $0.12 per option, respectively, and are being expensed ratably over eachaward’s respective vesting period.

 

The following table provides certain information with respect to stockoptions outstanding and exercisable at September 30, 2009 under theCompany’s stock-based compensation plans:

 
| ** **                                           | ** ** | **Outstanding**                                                                                               | ** ** | **Exercisable**                                                                                               | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| Number  of stock options                             |       | 2,074,500                                                                                                     |       | 729,498                                                                                                       |       |
| Range  of exercise prices                            |       | $1.14 - $14.70                                                                                                |       | $8.48 - $14.70                                                                                                |       |
| Weighted  average exercise price                     |       | $              9.18                     |       | $            12.67                                |       |
| Aggregate  intrinsic value (in thousands)            |       | $                 — |       | $                 — |       |
| Weighted  average remaining contractual term (years) |       | 7.4                                                                                                           |       | 6.6                                                                                                           |       |

 

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A summary of the Company’s authorized and available shares, activityfor the nine months ended September 30, 2009, and the weighted averagestock option exercise prices under its stock-based compensation plans follows:

 
| ** **                  | ** ** | ** **     | ** ** | **Outstanding**       | ** ** | ** **         | ** ** | **Weighted Average**     | ** ** |
|-----------------------------|------------|----------------|------------|-----------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **Authorized** | ** ** | **Restricted  Stock** | ** ** | **Stock  Options** | ** ** | **Available  For Grant** | ** ** | **Stock Option  Exercise Price** | ** ** |
| At  December 31, 2008  |       | 5,200,000      |       | 549,988               |       | 1,582,500          |       | 3,067,512                |       | $ | 11.81 |   |
| Authorized                  |       | —         |       | —                |       | —             |       | —                   |       | — |   |
| Granted                     |       | —         |       | 564,500               |       | 539,500            |       | (1,104,000               | )          | 1.14 |   |
| Exercised                   |       | —         |       | —                |       | —             |       | —                   |       | — |   |
| Canceled                    |       | —         |       | (61,218               | )          | (47,500            | )          | 108,718                  |       | 5.46 |   |
| At  September 30, 2009 |       | 5,200,000      |       | 1,053,270             |       | 2,074,500          |       | 2,072,230                |       | $ | 9.18 |   |

 

A summary of the Company’s restricted stock activity for the ninemonths ended September 30, 2009 and the weighted average grant date fairvalues follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Nonvested  at December 31, 2008  |       | 241,363    |       | $                                      | 10.30      |   |
| Granted                               |       | 564,500    |       | 1.14                                   |       |
| Vested                                |       | (21,512    | )          | 11.84                                  |       |
| Forfeited                             |       | (30,001    | )          | 4.95                                   |       |
| Nonvested  at September 30, 2009 |       | 754,350    |       | $                                      | 3.20       |   |

 

The total grant date fair value of restricted shares vested during thenine months ended September 30, 2008 and 2009 was approximately$0.2 million and $0.3 million, respectively, and the total marketvalue of these shares on the dates vested was approximately $0.1 millionand $0.1 million, respectively.

 

A summary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three and nine months ended September 30, 2008 and 2009 follows(in thousands):

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Restricted  stock                       |       | $                                                    | 225        |                                                | $          | 154 |   | $ | 665 |   | $ | 558 |   |
| Stock  options                          |       | 329                                                  |       | 294                                                 |       | 979 |   | 909 |   |
| Total  stock-based compensation expense |       | $                                                    | 554        |                                                | $          | 448 |   | $ | 1,644 |   | $ | 1,467 |   |

 

As of September 30, 2009, the total compensation expense not yetrecognized related to nonvested stock awards under the Company’s plans isapproximately $5.3 million.  Theweighted average period over which this expense is expected to be recognized isapproximately 3.4 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 has entered into acredit services organization agreement (“CSO Agreement”) with an unaffiliatedthird-party lender.  The agreementgoverns the terms by which the Company refers customers in Texas to thatlender, on a non-exclusive basis, for a possible extension of credit. TheCompany processes loan applications and commits to reimburse the lender for anyloans or related fees that are not collected from those customers.

 

The Company has determined that the lender is a variable interestentity (“VIE”) but that the Company is not the primary beneficiary of thisVIE.  Therefore, the Company has notconsolidated the lender as of and for the three and nine months ended September 30,2008 and 2009.

 

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 loans and certain interest and related fees that are notcollected from the customers.  As of September 30,2008 and 2009, the third-party lender’s outstanding advances and interestreceivable (which were not recorded on the 

 

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Company’sbalance sheet) totaled approximately $17.3 million and $19.1 million,respectively, which is the amount the Company would be obligated to pay thethird-party lender if these amounts were to become uncollectible.  Additionally, if these advances were tobecome uncollectible, the Company would also be required to pay the third-partylender all related NSF fees and late fees on these advances.

 

Because of the Company’s economic exposure for losses related to thethird-party lender’s advances, fees, and interest receivable, the Company hasestablished an accrual for third-party lender losses to reflect the Company’sestimated probable losses related to the estimated uncollectible third-partylender advances and related fees and interest. The accrual for third-party lender losses that was reported in theCompany’s balance sheet at September 30, 2008 and 2009 was approximately$3.8 million and $4.3 million, respectively, and was established on abasis similar 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 nine months ended September 30,2009, are payments of approximately $58,000 and $179,000 respectively, relatedto this consulting arrangement.  Inaddition, in connection with his appointment to the Board of Directors in February 2009,Mr. Colletti was granted 15,000 shares of restricted stock with a fairmarket value of $16,650 and a three-year vesting period.  During the three and nine months ended September 30,2009, approximately $1,000 and $3,000, respectively, was included in generaland administrative expense related to the amortization of this restricted stockgrant.

 

Included in center expenses are expenses for center leases with relatedparties of approximately $5,000 for the nine months ended September 30,2008. Included in general and administrative expenses are expenses with relatedparties, relating primarily to aircraft operating expenses, and legal fees, ofapproximately $70,000 and $69,000 for the three months ended September 30,2008 and 2009, respectively, and approximately $243,000 and $193,000 for thenine months ended September 30, 2008 and 2009, respectively.

 

In addition, under a time-share arrangement, the Company’s currentChairman and former Chairman have used the Company’s aircraft for privatepurposes in exchange for the Company’s use of an identical aircraft owned bythe Company’s former Chairman and formerly owned, in part, by the Company’scurrent Chairman. Included in accounts receivable at September 30, 2009 isapproximately $4,000 net receivable related 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. A copy of the Aircraft Dry Lease between the Company and Carabo Capital,LLC is attached hereto as Exhibit 10.1.  For the three and nine months ended September 30,2009, the Company paid Carabo Capital, LLC approximately $20,000 in operatingexpenses in connection with the use of this aircraft by the Company’s Chairmanfor Company business.

 

The Company incurred costs and expenses of approximately $483,000 and$641,000 for the three and nine months ended September 30, 2009,respectively, for the advancement of the expenses incurred by certain of theCompany’s officers and directors in connection with their responses to requestsfor information and subpoenas as part of an investigation by the United StatesSecurities and Exchange Commission (“SEC”) into alleged insider trading bythird parties in the Company’s securities. These costs were incurred by the Company pursuant to indemnificationagreements between the Company and certain officers and directors, whichagreements require the Company to advance expenses, and may require the Companyto indemnify those persons for damages, incurred by them in responding to thepending SEC investigation or defending against any related enforcementproceedings, including the “Wells Notice” issued by the SEC to the Company’sChief Executive Officer on July 22, 2009.

 

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

 

In March 2008, the Company amended and restated its priorrevolving credit facility with a syndicate of banks. This credit facility nowprovides the Company with a $270.0 million revolving line of credit, whichincludes the ability to issue up to $25.0 million in letters of credit.This revolving credit facility matures on March 24, 2013. The Company hasthe option to increase the revolving credit facility by an additional $95.0 million,subject to compliance with the credit agreement’s covenants and conditions andupon receipt of sufficient commitments from lenders in the lending syndicate.In connection with this amended and restated credit facility, the Companyincurred approximately $1.6 million in loan origination costs during theyear ended December 31, 2008 that were capitalized in other assets and arebeing amortized over the remaining term of the credit facility.

 

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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, certain leverage andfixed charge coverage ratios, and charge-off ratios and also restricts theencumbrance of assets and the creation of indebtedness. A breach of a covenantor an event of default could prohibit the Company from accessing otherwiseavailable borrowings, or could cause all amounts outstanding under therevolving credit facility to become immediately due and payable. The Companywas in compliance with all financial covenants at September 30, 2009.

 

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 September 30, 2009,the applicable margin for the prime-based rate was 1.75% and the applicablemargin for the LIBOR-based rate was 2.75%.

 

Asof September 30, 2009, the Company had $149.0 million outstanding onthe revolving portion of the credit facility and $1.4 million ofcommitments under outstanding letters of credit.  Borrowings under the revolving creditfacility are subject to compliance with certain covenants and conditions.

 

The carrying value of the credit facility approximated its fair valueat December 31, 2008 and September 30, 2009.

 

In October 2008, our United Kingdom operations entered into anoverdraft facility. The maximum borrowings under this facility are GBP 400,000,which is equivalent to approximately $637,000 at September 30, 2009. Theinterest rate on any borrowings under this overdraft facility is the Bank ofEngland base rate plus 1.75%. This facility is repayable upon demand by thelender. The Company did not have an outstanding balance on this facility at September 30,2009.  The carrying value of thisoverdraft facility approximates its fair value at September 30, 2009.

 

The Company owns its headquarters building and related land subject toa mortgage loan, the principal amount of which was approximately$5.0 million and $4.7 million at December 31, 2008 and September 30,2009, 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 $4.7 million and $4.6 million at December 31,2008 and September 30, 2009, respectively.

 

The fair market value of our long-term debt is estimated using adiscounted cash flow analysis and was approximately $5.8 million and $5.5million at December 31, 2008 and September 30, 2009, respectively.

 

**11. Income Taxes**

 

Theeffective income tax rate as a percentage of income before income taxes was44.2% and 39.3% for the three months ended September 30, 2008 and 2009,respectively. The effective income tax rate as a percentage of income beforeincome taxes was 43.2% and 37.7% for the nine months ended September 30,2008 and 2009, respectively. The decrease in the effective tax rate in thecurrent year is primarily due to claims filed for recovery of taxes recognizedin prior years in the amount of $3.5 million and a reduction in other discreteitems for the nine months ended September 30, 2009.

 

**12. Loss on Impairment of Assets**

 

During the first quarter of 2009, the Company identified approximately170 centers to be closed, in addition to all of its 24 centers in New Hampshire.  The impairment charge related to these 170centers was approximately $2.2 million, which represents the write-down of theundepreciated costs of the fixed assets. The estimated cost to close thesecenters, including the impairment charge, is approximately $5.5 million, ofwhich approximately $0.2 million and $5.3 million were recognized during thethree and nine months ended September 30, 2009, respectively.  For the three months ended September 30,2009, these amounts are included in the income statement as a $0.2 millionincrease in other center expenses.  Forthe nine months ended September 30, 2009, these amounts are included inthe income statement as a $2.8 million increase in other center expenses, $2.2million in loss on impairment of assets, and $0.3 million increase in centersalaries and related payroll costs.

 

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The Company has approximately $4.4 million of goodwill in its UnitedKingdom operations.  As of September 30,2009, these operations have cumulatively generated negative cash flow and havenot reached break-even at the center gross profit level.  The Company’s expansion efforts in the UnitedKingdom began during the third quarter of 2007. The goodwill impairment model projects future positive cash flowssufficient to support the goodwill and long-lived asset base.

 

**13. Subsequent Events**

 

On October 28, 2009, the Company’s Board of Directors declared acash dividend of $0.0625 per share of common stock, payable on December 4,2009 to shareholders of record on November 24, 2009.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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.Financial Statements.” This discussion contains forward-looking statements thatinvolve risks and uncertainties such as our plans, objectives, expectations andintentions. Our actual results could differ materially from those anticipatedby these forward-looking statements. Please see “Part II. Item 1A.Risk Factors” of this Quarterly Report and “Forward-Looking Statements” at theend of this section for further discussion of the uncertainties, risks andassumptions associated with these statements.*

 

**Overview**

 

Headquartered in Spartanburg, South Carolina, we are the largestprovider of cash advance services in the United States as measured by thenumber of centers operated. Our centers provide short-term, cash advances thatare typically unsecured and due on the customers’ next payday. As of September 30,2009, we operated 2,580 centers in 33 states in the United States, 21 centersin the United Kingdom, and 13 centers in Canada, and had 75 limited licenseesin the United Kingdom.

 

***Cash AdvanceServices***

 

In most states where we operate, we originate cash advance servicesunder the authority of different state-governed enabling statutes that allowfor cash advances ranging from single and multiple installment closed-end termsto revolving lines of credit with open-ended terms.  We refer to these products and servicescollectively as cash advance services. The particular cash advance services offered in any given location maychange from time to time depending upon changes in state and federal law.  Additionally, where permitted by applicablelaw, we may assume the responsibility of serving as an agent to a regulatedlender.  In Texas, where we operate as acredit services organization (“CSO”), we offer a fee-based credit servicespackage to assist customers in trying to improve their credit and in obtainingan extension of consumer credit through a third-party lender. Under the termsof our agreement with this lender, we process customer applications and arecontractually obligated for all losses.

 

We provide cash advance services as specified by the laws of thejurisdictions where we operate. Loans made by the third-party lender in Texasare governed by Texas law.  Online cashadvances made by a third-party lender are governed by the laws of the statewhere the customer resides.  Thepermitted size of an advance varies by jurisdiction and ranges from $50 to$5,000. However, our typical cash advance will range from $50 to $1,000.  The finance charges on cash advance servicescurrently offered by us also vary by jurisdiction.

 

Additional fees that we may collect include origination fees, annualparticipation fees, fees for returned checks or electronic debits, late fees,and other fees as permitted by applicable law. Presently, none of the cashadvance services we offer include annual participation fees.  Origination fees on services currentlyoffered by us range from $15 to $30, but future cash advance services may havehigher or lower origination fees depending on applicable state law.  Fees for returned checks or electronic debitsthat are declined for non-sufficient funds (“NSF”) vary by state but aregenerally in amounts up to $30.  InTexas, the third-party lender charges an NSF fee and a late fee on its loans inaccordance with Texas law.

 

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) byvisiting our website, beginning the application process online, then visitingone of our centers in-person to complete the application and receive funding;or (3) by visiting our website, completing an application online andreceiving a cash advance from a third-party lender that is directly depositedin the customer’s bank account. Each new customer must provide us with certainpersonal information such as his or her name, address, phone number, employmentinformation or source of income, and references. This information is enteredinto our information system and that of the applicable lender. In order for anew customer to be approved for a cash advance from us, we must be able toverify his or her identification and he or she is required to have a bankaccount and a regular source of income, such as a job.

 

Except for cash advances completed by a third-party lender, wedetermine whether to approve a cash advance to our customers in everyjurisdiction. Where cash advances are made by a third-party lender, thethird-party lender decides whether to approve the cash advance and establishesall of the underwriting criteria and terms, conditions, and features of thecustomer agreement. We require proof of identification, bank account, andincome source, as described above, and we primarily consider the customer’sincome in determining the amount of the cash advance. In some cases, we obtaina security interest in the customer’s motor vehicle.  We do not perform credit checks throughconsumer reporting agencies.

 

After the documents presented by the customer have been reviewed for completenessand accuracy, copied for record-keeping purposes, and the cash advance has beenapproved, the customer enters into an agreement governing the terms of the cashadvance. The customer then provides a personal check or an Automated ClearingHouse (“ACH”) authorization, which enables electronic payment from the customer’saccount, to cover the amount of the cash advance plus charges for applicablefees and/or interest and/or the balance due under the agreement, and makes anappointment to return on a specified due date, typically his or her 

 

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nextpayday, to repay the advance plus the applicable charges. However, in somestates, customers are not required to provide us with a personal check or ACHauthorization, and payment cycles may vary depending upon state law and producttype. At the specified due date, the customer is required to make theapplicable payment, usually payment in full of the cash advance plus fees andinterest, if applicable. Payment is usually made in person in cash at thecenter where the cash advance was initiated or issued unless the cash advancewas completed on the internet, in which case the customer makes payment by ACHauthorization.

 

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 example, wecurrently offer pre-paid debit cards, money orders, and money transmission andbill payment services.  During the taxreturn season, we also offer tax preparation services by a third party.

 

Our Advance America branded pre-paid Visa debit card is issued by afederally chartered bank and regulated by the Office of Thrift Supervision. Thecard allows a cardholder to load cash onto the card and use the card whereverVISA debit cards are accepted. We are compensated under an agreement with thebank based on a number of factors related to the bank’s revenue from purchasesand subsequent cardholder activity, such as charges for loads, ATM withdrawals,account maintenance/plan charges and purchases. In the third and fourthquarters of 2007, we began selling money orders and providing money transferservices and bill payment services as an agent of a licensed third-party moneytransmitter. We are compensated by the money transmitter based on the numberand value of money transfers, money orders and bill payments made by ourcenters. Finally, in 2008, we began facilitating the offering of taxpreparation services by a third-party tax preparation provider. We receive apercentage of the tax preparation provider’s fees from customers related solelyto tax preparation services.

 

Our industry has been significantly affected by increasing regulatorychallenges. Legislation that negatively impacts cash advance services andsimilar services, whether through preclusions, interest rate ceilings, feereductions, mandatory extensions of term length, limits on the amount or termof our products and services, or limits on consumers’ use of our products andservices could materially and adversely affect our business. We are very activein monitoring and evaluating regulatory initiatives in all of the states andare closely involved with the efforts of the Community Financial ServicesAssociation of America (“CFSA”).

 

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 andservices generally are substantially similar in most jurisdictions.

 

***Approval Process***

 

To obtain a cash advance, acustomer typically:

 

·                  completes an application and presents therequired documentation: usually proof of identification, a pay stub or otherevidence of income, and a bank statement;

 

·                  enters into an agreement governing the termsof the cash advance, including the customer’s agreement to repay the amountadvanced in full on or before a specified due date (usually the customer’s nextpayday), and our agreement to defer the presentment or deposit of the customer’scheck or ACH authorization until the due date;

 

·                  writes a personal check or provides an ACHauthorization to cover the amount advanced plus charges for applicable feesand/or interest; and

 

·                  makes an appointment to return on thespecified due date to repay the amount advanced plus the applicable charges andto reclaim his or her check.

 

We determine whether to approve a cash advance to our customers exceptthat the third-party lenders make this determination in Texas and for cashadvances directly deposited to bank accounts of online customers. We requireproof of identification, bank account, and income source, as described above,and we primarily consider the customer’s income in determining 

 

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theamount of the cash advance. Starting in April 2009 in Virginia, we requirethe customer to grant us a security interest in a motor vehicle to qualify foran open-ended line of credit.

 

***Repayment and Collection Process***

 

Repayment terms vary depending upon state law, the type of cash advanceservices offered, and whether the cash advance was completed online or in oneof our centers.  Generally, as part ofthe closing process, we explain the customer’s repayment obligations andestablish the expectation that the customer will pay us in cash on or beforethe due date in accordance with their agreement with us.  The day before the due date, we generallycall the customer to confirm their payment.

 

If a customer does not pay the amount due, our management has thediscretion to either: (1) commence past-due collection efforts, whichtypically may proceed for up to 14 days in most states, or (2) depositthe customer’s personal check or debit their bank account in accordance withtheir ACH authorization. If 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 unable to meet his or her payment obligations, the customer mayqualify for an extended payment plan (“Payment Plan”). In most states, theterms of our Payment Plan conform to the CFSA Best Practices for extendedpayment plans. Certain states have specified their own terms and eligibilityrequirements for Payment Plans. Generally, a customer may enter into a PaymentPlan for no additional fee once every twelve months.  The Payment Plan will call for scheduledpayments that coincide with the customer’s next four paydays. In some states, acustomer may enter into a Payment Plan more frequently. We do not engage incollection efforts while a customer is enrolled in a Payment Plan, however, ifa customer misses a scheduled payment under a Payment Plan we may resume normalcollection procedures. We do not offer a Payment Plan for installment loans orlines of credit, nor does the third-party lender in Texas offer a Payment Planfor advances to its customers.  Thethird-party internet lender offers Payment Plans as required by state law.

 

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 is thendeposited or their ACH authorization is processed. Additional collectionefforts are not required if the customer’s deposited check or our ACH debitclears. For the year ended December 31, 2008 and the nine months ended September 30,2009, we deposited or presented for debit approximately 5.9% of all customerchecks or ACH authorizations we received, and approximately 25% and 30% ofdeposited customer checks or ACH debits cleared, respectively, excluding ourinstallment loan and line of credit products. If the customer’s check or the ACH debit does not clear and is returnedbecause of non-sufficient funds in the customer’s account or because of aclosed account or a stop-payment order, additional collection efforts begin.These additional collection efforts are carried out by center employees andtypically include contacting the customer by telephone or in person to obtainpayment or a promise to pay and, in cases where we hold a check, attempting toexchange the customer’s check for a cashier’s check, if funds become available.We also send out a series of collection letters, which are automaticallydistributed from a central location based on a set of pre-determined criteria.

 

In the case of cash advances in the form of lines of credit, if acustomer fails to make two consecutive payments when due in accordance with theterms of their agreement, we may close the line of credit and accelerate thematurity date or work with the customer to bring his or her paymentscurrent.  If we close the line of creditand accelerate 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:

 

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| ** **                                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Number  of centers open at end of period                                                                      |       | 2,840                                                |       | 2,614                                               |       | 2,840 |   | 2,614 |   |
| Number  of customers served—all credit products (thousands)                                              |       | 865                                                  |       | 816                                                 |       | 1,245 |   | 1,147 |   |
| Number  of payday cash advances originated (thousands)                                                        |       | 3,047                                                |       | 2,862                                               |       | 8,692 |   | 7,836 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)                                    |       | $                                                    | 1,114,016  |                                                | $          | 1,034,647 |   | $ | 3,179,976 |   | $ | 2,824,109 |   |
| Average  amount of each payday cash advance originated                                                        |       | $                                                    | 366        |                                                | $          | 362 |   | $ | 366 |   | $ | 360 |   |
| Average  charge to customers for providing and processing a payday cash advance                               |       | $                                                    | 55         |                                                | $          | 53 |   | $ | 56 |   | $ | 53 |   |
| Average  duration of a payday cash advance (days)                                                             |       | 16.8                                                 |       | 17.6                                                |       | 16.7 |   | 17.5 |   |
| Average  number of lines of credit outstanding during the period (thousands) (1)                         |       | —                                               |       | 20                                                  |       | — |   | 27 |   |
| Average  amount of aggregate principal on lines of credit outstanding during the  period (thousands) (1) |       | $                                                    | —     |                                                | $          | 7,410 |   | $ | — |   | $ | 12,625 |   |
| Average  principal amount on each line of credit outstanding during the  period (1)                      |       | $                                                    | —     |                                                | $          | 354 |   | $ | — |   | $ | 446 |   |
| Number  of installment loans originated (thousands) (2)                                                       |       | 9                                                    |       | 10                                                  |       | 23 |   | 25 |   |
| Aggregate  principal amount of installment loans originated (thousands) (2)                                   |       | $                                                    | 4,534      |                                                | $          | 4,479 |   | $ | 10,908 |   | $ | 11,202 |   |
| Average  principal amount of each installment loan originated (2)                                             |       | $                                                    | 480        |                                                | $          | 461 |   | $ | 468 |   | $ | 443 |   |

 

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(1)                                  We beganoffering lines of credit in Virginia in November 2008.

 

(2)                                  The installmentloan activity reflects loans we originated as the lender in Illinois.

 

***Revenues and Expenses***

 

Our revenues consist of fees and/or interest paid to us directly by ourcustomers. Our expenses relate primarily to the operation of our centers. Theseexpenses include salaries and related payroll costs, occupancy expense relatedto our leased centers, center depreciation expense, advertising expense, andother center expenses that consist principally of costs related to centerclosings, communications, delivery, supplies, travel, bank charges, variouscompliance and collection costs, and costs associated with theft.

 

***Provision for Doubtful Accounts, Allowance forDoubtful Accounts and Accrual 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.  Theanalytical models take into account several factors including the number oftransactions customers complete, and charge-off and recovery rates.  Additional factors, such as changes in statelaws, center closings, length of time centers have been open in a state,relative mix of new centers within a state, and other relevant factors are alsoevaluated to determine whether the results from the analytical models should berevised.

 

Theprovision for doubtful accounts decreased from 24.2% of revenues for the threemonths ended September 30, 2008 to 23.1% of revenues for the same periodin 2009.  This decrease was mainly due tothe fact that in the third quarter of 2008, the provision included a chargerelated to the suspension of operations in Arkansas of approximately $1.1million.  Offsetting this are higherlosses in Virginia related to the introduction of the open-ended line of creditproduct  during thefourth quarter of 2008, which has experienced a higher loss rate than our cashadvance and installment loan products.  Excluding thecharge related to the suspension of operations in Arkansas in the prior yearand the applicable revenue and loss rates for the Virginia line of creditproduct, the provision for doubtful accounts for the three months ended September 30,2008 and 2009 would have been 23.7% and 21.5%, respectively.

 

Theprovision for doubtful accounts increased from 18.6% of revenues for the nine monthsended September 30, 2008 to 19.6% of revenues for the same period in2009.  This increase was due primarily tohigher losses in Virginia related to the introduction of the open-ended line ofcredit product duringthe fourth quarter of 2008, which has experienced a higher loss rate than ourcash advance and installment loan products. During the nine months ended September 30, 2008 and 2009, wereceived proceeds from the sale of receivables in the amount of $0.6 millionand $2.2 million, respectively.  In thethird quarter of 2008, the provision included a charge related to thesuspension of operations in Arkansas of approximately $1.1 million.  Excluding the sale of receivables, theapplicable revenue, and loss rates for the Virginia line of credit product, andthe charge related to the suspension of operations in Arkansas in the prioryear, the provision for doubtful accounts for the nine months ended September 30,2008 and 2009 would have been 18.5% and 17.4%, respectively.

 

***Income Taxes***

 

The effective income tax rate as a percentage of income before incometaxes was 44.2% and 39.3% for the three months ended September 30, 2008and 2009, respectively. The effective income tax rate as a percentage of incomebefore income taxes was 43.2% and 37.7% for the nine months ended September 30,2008 and 2009, respectively. The decrease in the effective tax rate in thecurrent period is primarily due to claims filed for recovery of taxesrecognized in prior years in the amount of $3.5 million and a 

 

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reductionin other discrete items for the nine months ended September 30, 2009.  We anticipate our effective tax rate for thecurrent year will be in the range of 40% to 42%.

 

***Changes in Legislation***

 

Duringthe last few years, legislation that prohibits or severely restricts ourproducts and services has been introduced or adopted in a number of states andat the federal level, and we expect that trend to continue in other states forthe foreseeable future. Legislation was adopted in New Hampshire in 2008 thateffectively prohibits us from offering cash advances to consumers in thatstate. As a result, in February 2009, we decided to close all of ourcenters in New Hampshire.  In April 2009, the Governor of Virginiasigned a bill into law that restricts us from offering both our cash advanceproduct and our open-ended line of credit product at the same center unless theline of credit is secured by a motor vehicle. This limitation could reduce our customer base and lower our revenuesand profits in Virginia.  In May 2009, a bill was signed into law inthe State of Washington that places a number of restrictions on our cashadvance product including limiting the number of cash advances a customer maytake to eight advances in any one year.  Once the law becomes effective on January 1,2010, we expect that our revenues and profits in Washington will besignificantly reduced.  If we are unable to operate profitably inWashington, we may cease operating in that state.  New laws in each of South Carolina and Kentucky willbecome effective during the first half of 2010 that will, among other things, implement in each state a statewide databaseto monitor the number of loans made to customers within that state.  Further,legislation permitting cash advances in Arizona and Mississippi is scheduled toexpire in 2010 and 2012, respectively. This legislation may not be renewed orcould be modified in a manner that affects our operations negatively. We areregularly refining our cash advance services and developing new products andservices or operations to address recent or anticipated legislative andregulatory changes. Some of these legislative and regulatory changes may resultin our discontinuing operations in a state, while other changes may result inless significant short-term or long-term changes, interruptions in revenues,and lower operating margins. We generally cannot estimate what effect, if any,operational changes we make in response to legislative and regulatory changesmay have on our financial results until we are able to develop legal andfinancially-viable alternative products and services.

 

***Operations in Ohio***

 

On November 24, 2008, the State of Ohio capped interest rates oncash advance loans and limited the number of cash advances a customer may takein any 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, the Company began offering cash advances pursuantto the Ohio Second Mortgage Act.

 

During the nine months ended September 30, 2009, we closed 63centers in Ohio.  The estimated cost toclose these centers, including an impairment charge of approximately $0.9million, is approximately $2.2 million, of which $0.1 and $2.2 million wasrecognized in the three and nine months ended September 30, 2009,respectively.  For the three months endedSeptember 30, 2009 these amounts are included in the income statement asan increase in other center.  For thenine months ended September 30, 2009, these amounts are included in theincome statement as an increase in other center expenses of $1.2 million, aloss on impairment of fixed assets of $0.9 million, and an increase in centersalaries and related payroll costs of $0.1 million.

 

If it is not economically viable to continue operations in Ohio and wedecide to close our remaining Ohio centers, our estimated range of closingcosts, including severance, center tear-down costs, lease termination costs,and the write-down of fixed assets would be approximately $5.0 million to $13.5million, and the collectability of advances and fees receivable in Ohio mostlikely would be impaired. As of September 30, 2009, the net advances andfees receivable balance in Ohio was approximately $20.6 million. At this timewe are not able to determine the amount of goodwill impairment, if any, thatwould result from the cessation of operations in Ohio.

 

Forthe three months ended September 30, 2008 and 2009, 7.9% and 5.9%,respectively, of our total revenues were generated from our operations in Ohio.For the nine months ended September 30, 2008 and 2009, 8.5% and 5.5%,respectively, of our total revenues were generated from our operations inOhio.  The following is a summary offinancial information for our operations in Ohio for the three and nine monthsended September 30, 2008 and 2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | 13,767     |                                                | $          | 9,869 |   | $ | 42,734 |   | $ | 26,164 |   |
| Total  center expenses      |       | 11,926                                               |       | 8,709                                               |       | 33,551 |   | 27,274 |   |
| Center  gross profit (loss) |       | $                                                    | 1,841      |                                                | $          | 1,160 |   | $ | 9,183 |   | $ | (1,110 | ) |

 

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***Operations in Arizona***

 

Legislation permitting cash advances in Arizona is scheduled to expirein 2010.  If it is not economicallyviable to continue operations in Arizona and we decide to close our remainingArizona centers, our estimated range of closing costs, including severance,center tear-down costs, lease termination costs and the write-down of fixedassets would be approximately $1.4 million to $4.5 million, and thecollectibility of advances and fees receivable in Arizona most likely would beimpaired. As of September 30, 2009, the net advances and fees receivablebalance in Arizona was approximately $4.3 million. At this time we are not ableto determine the amount of goodwill impairment, if any, that would result fromthe cessation of operations in Arizona.

 

Forthe three months ended September 30, 2008 and 2009, 2.3% and 2.5%,respectively, of our total revenues were generated from our operations in Arizona.For the nine months ended September 30, 2008 and 2009, 2.4%, of our totalrevenues were generated from our operations in Arizona.  The following is a summary of financialinformation for our operations in Arizona for the three and nine months ended September 30,2008 and 2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | 4,078      |                                                | $          | 4,153 |   | $ | 12,172 |   | $ | 11,393 |   |
| Total  center expenses      |       | 3,128                                                |       | 2,888                                               |       | 8,842 |   | 7,790 |   |
| Center  gross profit (loss) |       | $                                                    | 950        |                                                | $          | 1,265 |   | $ | 3,330 |   | $ | 3,603 |   |

 

***Operations in Washington***

 

In the state of Washington a law will become effective on January 1, 2010, thatwill limit the number of cash advances a customer may take in any one year,limit the advance amount that can be taken out at any one time, and implement a statewide database tomonitor the number of loans.  We believethis law will negatively impact our revenue and profitability in thatstate.  We may close or consolidate someor all of our centers in Washington.

 

If we decide to close our Washington centers, ourestimated range of closing costs, including severance, center tear-down costs,lease termination costs, and the write-down of fixed assets would beapproximately $2.7 million to $9.5 million, and the collectibility of advances and fees receivablein Washington most likely would be impaired. As of September 30, 2009, the net advances and fees receivablebalance in Washington was approximately $9.2 million.  At this time we are not able to determine theamount of goodwill impairment, if any, that would result from cessation ofoperations in Washington.

 

Forthe three months ended September 30, 2008 and 2009, 4.1% and 4.2%,respectively, of our total revenues were generated from our operations inWashington. For the nine months ended September 30, 2008 and 2009, 4.0%and 4.2%, respectively, of our total revenues were generated from ouroperations in Washington.  The followingis a summary of financial information for our operations in Washington for thethree and nine months ended September 30, 2008 and 2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | 7,160      |                                                | $          | 6,998 |   | $ | 20,086 |   | $ | 19,805 |   |
| Total  center expenses      |       | 6,181                                                |       | 5,178                                               |       | 17,280 |   | 14,848 |   |
| Center  gross profit (loss) |       | $                                                    | 979        |                                                | $          | 1,820 |   | $ | 2,806 |   | $ | 4,957 |   |

 

***Changes in Other States***

 

New laws ineach of South Carolina and Kentucky will become effective during the first halfof 2010 that will, among other things, implement a statewide database to monitor thenumber of loans made to customers within that state.  The Company believes these laws willnegatively impact its revenue and profitability in South Carolina and Kentucky.  The Company intends to comply with the newlaws when they become effective. Although we expect these laws to have a negative impact on ouroperations in those states, we expect our South Carolina and Kentuckyoperations to remain economically viable.

 

Forthe three months ended September 30, 2008 and 2009, 5.1% and 5.4%,respectively, of our total revenues were generated from our operations in SouthCarolina. For the nine months ended September 30, 2008 and 2009, 5.1% and5.2%, respectively, of our 

 

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total revenues weregenerated from our operations in South Carolina.  As of September 30,2009, the net advances and fees receivable balance in South Carolina wasapproximately $12.4 million.The following is a summary of financial information for our operationsin South Carolina for the three and nine months ended September 30, 2008and 2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | 8,938      |                                                | $          | 9,013 |   | $ | 25,547 |   | $ | 24,896 |   |
| Total  center expenses      |       | 6,908                                                |       | 6,400                                               |       | 19,019 |   | 17,176 |   |
| Center  gross profit (loss) |       | $                                                    | 2,030      |                                                | $          | 2,613 |   | $ | 6,528 |   | $ | 7,720 |   |

 

Forthe three months ended September 30, 2008 and 2009, 1.2% and 1.3%,respectively, of our total revenues were generated from our operations inKentucky. For the nine months ended September 30, 2008 and 2009, 1.2% ofour total revenues were generated from our operations in Kentucky.  As of September 30,2009, the net advances and fees receivable balance in Kentucky wasapproximately $2.6 million.  The following is a summary of financialinformation for our operations in Kentucky for the three and nine months ended September 30,2008 and 2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | 2,077      |                                                | $          | 2,114 |   | $ | 6,113 |   | $ | 5,861 |   |
| Total  center expenses      |       | 1,609                                                |       | 1,604                                               |       | 4,559 |   | 4,535 |   |
| Center  gross profit (loss) |       | $                                                    | 468        |                                                | $          | 510 |   | $ | 1,554 |   | $ | 1,326 |   |

 

***Closings***

 

During the first quarter of 2009, we identified approximately 170centers to be closed, in addition to all of our 24 centers in NewHampshire.  The impairment charge relatedto these 170 centers was approximately $2.2 million, which represents thewrite-down of the undepreciated costs of the fixed assets. The estimated costto close these centers, including the impairment charge, is approximately $5.5million, of which approximately $0.2 million and $5.3 million were recognizedduring the three and nine months ended September 30, 2009,respectively.  For the three months endedSeptember 30, 2009, these amounts are included in the income statement asa $0.2 million increase in other center expenses.  For the nine months ended September 30,2009, these amounts are included in the income statement as a $2.8 millionincrease in other center expenses, $2.2 million in loss on impairment ofassets, and $0.3 million increase in center salaries and related payroll costs.

 

*Closing of Operations in New Mexico.*  Legislation in New Mexico became effective in2007 that limits fees and interest on all consumer loans and gives borrowers a130 day interest-free and fee-free extension. As a result of thislegislation, we determined that it was not economically viable to continueoperating in New Mexico. As a result, we closed our remaining nine centers inNew Mexico in August 2008. The closing costs associated with closing ouroperations in New Mexico were approximately $0.1 million.  These costs are included in the incomestatement as an increase in other center expenses of $0.1 million.  The cessation of our New Mexico operationsdid not result in any impairment of goodwill.

 

The following is a summary of financial information for our operationsin New Mexico for the three and nine months ended September 30, 2008 and2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | —     |                                                | $          | — |   | $ | 224 |   | $ | — |   |
| Total  center expenses      |       | 251                                                  |       | 1                                                   |       | 900 |   | 6 |   |
| Center  gross profit (loss) |       | $                                                    | (251       | )                                                   | $          | (1 | ) | $ | (676 | ) | $ | (6 | ) |

 

*Closing of Operations in Arkansas.*  In March 2008, we received a letter fromthe Arkansas Attorney General demanding that we stop offering deferredpresentment transactions under the Arkansas Check Cashers Act. In response, wecomplied with the Attorney General’s demands and began offering consumer loansat interest rates below the applicable Arkansas usury cap. In September 2008,we received a notice from the Arkansas State Board of Collections that theBoard had determined that consumer 

 

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lenderswho accept account withdrawal authorizations would be deemed by the Board to beengaged in the business of making deferred presentment transactions. Duringthis same time, we were in discussions with the Arkansas Attorney General toaddress certain items regarding our operations in Arkansas.  The Attorney General agreed that if wediscontinued our operations in Arkansas, he would not bring suit against us.Although we believe we have always operated in compliance with Arkansas law, weconcluded that avoiding potentially costly litigation in this circumstance wasin the best interest of our stockholders. As a result, we closed all 30 centersin Arkansas on or before October 31, 2008. The costs associated withclosing our Arkansas operations were approximately $1.8 million, including$1.1 million due to the write-down of receivables.  These costs are included in the incomestatement as increases of $1.1 million in the provision for doubtful accounts,$0.4 million in other center expenses, $0.2 million in center salaries andrelated payroll costs, and $0.1 million in loss on disposal of property andequipment.  The cessation of our Arkansasoperations did not result in any impairment of goodwill.

 

The following is a summary of financial information for our operationsin Arkansas for the three and nine months ended September 30, 2008 and2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | 1,528      |                                      | $          | 2 |   | $ | 3,879 |   | $ | 7 |   |
| Total  center expenses      |       | 2,945                                                |       | 1                                         |       | 5,694 |   | 133 |   |
| Center  gross profit (loss) |       | $                                                    | (1,417     | )                                         | $          | 1 |   | $ | (1,815 | ) | $ | (126 | ) |

 

*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 noteconomically viable to continue operating in New Hampshire. As a result, weclosed 23 centers in New Hampshire in the first half of 2009 and will close theremaining center during the second half of 2009.  The costs associated with closing our NewHampshire operations are estimated to be approximately $1.4 million,including $0.5 million due to the write-down of receivables. Approximately$0.7 million of these expenses were recognized during 2008, including a$0.5 million increase in the provision for doubtful accounts and $0.2 millionin the loss on impairment of assets. During the three and nine months ended September 30, 2009, zero and$0.6 million of these expenses were recognized, respectively.  The $0.6 million included in the incomestatement for the nine months ended September 30, 2009 is included as anincrease in other center expenses of $0.5 million and an increase in centersalaries and related payroll costs of $0.1 million.  The cessation of our New Hampshire operationsdid not result in any impairment of goodwill.

 

The following is a summary of financial information for our operationsin New Hampshire for the three and nine months ended September 30, 2008and 2009 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total  revenues             |       | $                                                    | 2,125      |                                      | $          | 11 |   | $ | 6,012 |   | $ | 145 |   |
| Total  center expenses      |       | 1,161                                                |       | —                                    |       | 3,200 |   | 1,190 |   |
| Center  gross profit (loss) |       | $                                                    | 964        |                                      | $          | 11 |   | $ | 2,812 |   | $ | (1,045 | ) |

 

***Acquisitionin the United Kingdom***

 

During the ninemonths ended September 30, 2008, we acquired two centers in the UnitedKingdom for an aggregate purchase price, including transaction-related costs,of approximately $0.8 million in cash and an increase in goodwill ofapproximately $0.7 million.

 

***Centers***

 

The followingtable illustrates the composition of our center network at December 31,2008 and September 30, 2009:

 

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| **State**            | ** ** | **December 31,  2008** | ** ** | **September 30,  2009** | ** ** |
|----------------------|------------|-----------------------------|------------|------------------------------|------------|
| Alabama              |       | 144                         |       | 142                          |       |
| Arizona              |       | 53                          |       | 49                           |       |
| California           |       | 290                         |       | 284                          |       |
| Colorado             |       | 68                          |       | 63                           |       |
| Delaware             |       | 16                          |       | 16                           |       |
| Florida              |       | 257                         |       | 245                          |       |
| Idaho                |       | 10                          |       | 7                            |       |
| Illinois             |       | 80                          |       | 65                           |       |
| Indiana              |       | 113                         |       | 100                          |       |
| Iowa                 |       | 35                          |       | 34                           |       |
| Kansas               |       | 59                          |       | 56                           |       |
| Kentucky             |       | 44                          |       | 44                           |       |
| Louisiana            |       | 85                          |       | 84                           |       |
| Michigan             |       | 152                         |       | 151                          |       |
| Mississippi          |       | 61                          |       | 61                           |       |
| Missouri             |       | 91                          |       | 87                           |       |
| Montana              |       | 5                           |       | 3                            |       |
| Nebraska             |       | 24                          |       | 22                           |       |
| Nevada               |       | 14                          |       | 13                           |       |
| New  Hampshire (1)   |       | 24                          |       | 1                            |       |
| North  Dakota        |       | 8                           |       | 7                            |       |
| Ohio                 |       | 244                         |       | 181                          |       |
| Oklahoma             |       | 68                          |       | 67                           |       |
| Rhode  Island        |       | 21                          |       | 21                           |       |
| South  Carolina      |       | 138                         |       | 137                          |       |
| South  Dakota        |       | 12                          |       | 12                           |       |
| Tennessee            |       | 63                          |       | 62                           |       |
| Texas                |       | 252                         |       | 247                          |       |
| Utah                 |       | 6                           |       | 6                            |       |
| Virginia             |       | 151                         |       | 147                          |       |
| Washington           |       | 102                         |       | 94                           |       |
| Wisconsin            |       | 67                          |       | 62                           |       |
| Wyoming              |       | 10                          |       | 10                           |       |
| Total  United States |       | 2,767                       |       | 2,580                        |       |
| Canada               |       | 10                          |       | 13                           |       |
| United  Kingdom      |       | 20                          |       | 21                           |       |
| Total                |       | 2,797                       |       | 2,614                        |       |

 

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(1) Westopped offering cash advances in New Hampshire during the first quarter of2009.

 

***New centers***

 

We opened six and three new centers during the three months ended September 30,2008 and 2009, respectively. We opened 42 and seven new centers during the ninemonths ended September 30, 2008 and 2009, respectively.

 

***Closed centers***

 

We closed 22 and 24 centers during the three months ended September 30,2008 and 2009, respectively. We closed 36 and 190 centers during the ninemonths ended September 30, 2008 and 2009, respectively. The expensesrelated to closing centers typically include the undepreciated costs offixtures and signage that cannot be moved and reused at another center, movingcosts, severance payments, and any lease cancellation costs. We recordedexpenses related to center closures of approximately $2.0 million and$0.2 million in the three months ended September 30, 2008 and 2009,respectively. We recorded expenses related to center closures of approximately$3.1 million and $5.3 million in the nine months ended September 30,2008 and 2009, respectively.  For thethree months ended September 30, 2008, these amounts are included in theincome statement as a $1.1 million increase in the provision for doubtfulaccounts, $0.5 million increase in other center expenses, $0.3 million increasein center salaries and related payroll costs, and $0.1million loss on disposalof property and equipment.   For thethree months ended September 30, 2009, these amounts are included in theincome statement as a $0.2 million increase in other center expenses.  For the nine months ended September 30,2008, these amounts are included in the income statement as a $1.2 million inincrease in other center expenses, a $0.5 million increase in center salariesand related payroll costs, a $1.1 million increase in the provision fordoubtful accounts, a $0.1 million loss on disposal of property and equipment,and $0.2 million in loss on impairment of assets.  For the nine months ended September 30,2009, these amounts are included in the income statement as a $2.8 millionincrease in other center expenses, $2.2 million in loss on impairment ofassets, and $0.3 million increase in center salaries and related payroll costs.

 

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**Critical Accounting Policies and Use of Estimates**

 

The preparation of our financial statements, in conformity withgenerally accepted accounting principles in the United States (“GAAP”),requires us to make estimates and assumptions that affect the reported amountsof assets, liabilities, and disclosure of contingent assets and liabilities atthe date 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,Allowance for 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 advanceswe make directly to customers and an accrual for third-party lender losses forestimated probable losses on loans and certain related fees for loans that weprocess for the third-party lender in Texas. See “Off-Balance Sheet Arrangementwith Third-Party Lender” in this section. Our advances and fees receivable, neton our balance sheet do not include the advances and interest receivable forloans processed by us for the third-party lender in Texas because these loansare owned by the third-party lender.

 

Theprovision for doubtful accounts decreased from 24.2% of revenues for the threemonths ended September 30, 2008 to 23.1% of revenues for the same periodin 2009.  This decrease was mainly due tothe fact that in the third quarter of 2008, the provision included a chargerelated to the suspension of operations in Arkansas of approximately $1.1million.  Offsetting this are higherlosses in Virginia related to the introduction of the open-ended line of creditproductduring the fourth quarter of 2008, which has experienced a higher loss ratethan our cash advance and installment loan products.  Excluding the charge relatedto the suspension of operations in Arkansas in the prior year and theapplicable revenue and loss rates for the Virginia line of credit product, theprovision for doubtful accounts for the three months ended September 30,2008 and 2009 would have been 23.7% and 21.5%, respectively.

 

Theprovision for doubtful accounts increased from 18.6% of revenues for the ninemonths ended September 30, 2008 to 19.6% of revenues for the same periodin 2009.   This increase was dueprimarily to higher losses in Virginia related to the introduction of theopen-ended line of credit product, which has experienced a higher loss rate than our cashadvance and installment loan products.  During the ninemonths ended September 30, 2008 and 2009, we received proceeds from thesale of receivables in the amount of $0.6 million and $2.2 million,respectively.  In the third quarter of2008, the provision includes a charge related to the suspension of operationsin Arkansas of approximately $1.1 million. Excluding the sale of receivables and the applicable revenue and lossrates for the Virginia line of credit product, and the charge related to thesuspension of operations in Arkansas in the prior year, the provision for doubtfulaccounts for the nine months ended September 30, 2008 and 2009 would havebeen 18.5% and 17.4%, 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, relative mix of new centers within a state, and other relevant factorsare also evaluated to determine whether the results from the analytical modelsshould 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.

 

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Unpaid advances and the related fees and/or interest are generallycharged off 60 days after the date the check was returned by the customer’sbank for non-sufficient funds, or the ACH debit was not cleared, or otherreasons, unless the customer has paid at least 15% of the total of his or herloan plus the original fee, or 60 days from the default date for our line ofcredit and installment loan products. Unpaid advances of customers who file forbankruptcy are charged off upon receipt of the bankruptcy notice. Althoughmanagement uses the best information available to make evaluations, futureadjustments to the allowance for doubtful accounts and accrual for third-partylender losses may be necessary if conditions differ substantially from ourassumptions used in assessing 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.

 

Inaddition to the seasonal fluctuations, the receivable balances can fluctuatethroughout a week, generally being at their highest levels on a Wednesday orThursday and at their lowest levels on a Friday. In general, receivablebalances decrease approximately 4% to 7% from a typical Thursday to a typicalFriday. The third quarter of 2008 began and ended on a Tuesday.  The third quarter of 2009 began and ended ona Wednesday.

 

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 September 30, 2009, if the estimated rates used incalculating our allowance for doubtful accounts and third-party lender losseswere 5% higher or lower, it would have increased or decreased our provision fordoubtful accounts by approximately $3.1 million.

 

***Intangible Assets***

 

As a result of our acquisition of the National Cash Advance group ofaffiliated companies in October 1999, we recorded approximately$143.0 million of goodwill. During 2007 and 2008, we completed nineacquisitions in the United Kingdom, resulting in additional goodwill ofapproximately $5.4 million. As of September 30, 2009, the carryingvalue of goodwill was $127.0 million due to the amortization of goodwillprior to the adoption of ASC 350-20-35, “Goodwill - Subsequent 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 therelevant reporting unit will be impaired. When estimated future cash flows areless than the carrying value of the net assets and related goodwill, animpairment test is performed to measure and recognize the amount of the impairmentloss, if any.  Impairment losses, whichare limited to the carrying value of goodwill, represent the excess of thecarrying amount of a reporting unit’s goodwill over the implied fair value ofthat goodwill.  In determining theestimated future discounted cash flows, we consider current and projectedfuture levels of income, as well as business trends, prospects, and market andeconomic conditions.  Impairment testsinvolve the use of judgments and estimates related to the fair market value ofthe business operations with which goodwill is associated, taking intoconsideration both historical operating performance and anticipated financialposition and future earnings.  We believethat the estimates of future cash flows and fair value are reasonable.  Changes in estimates of those cash flows andfair value, however, could affect the evaluation, and any impairment wouldlower our net income.

 

We have approximately $4.4 million of goodwill in our United Kingdomoperations. As of September 30, 2009, these operations have cumulativelygenerated negative cash and have not reached break-even at the center grossprofit level. Our expansion efforts in the United Kingdom began in the thirdquarter of 2007. Our goodwill impairment model projects future positive cashflows sufficient to support the goodwill and long-lived asset base in ourUnited Kingdom operations.

 

We cannot predict the occurrence of certain events that might adverselyaffect the carrying value of our goodwill. Should the operations of the businesseswith which goodwill is associated incur significant adverse changes inbusiness, 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.

 

***Accrued Workers’ Compensation Expenses***

 

Accrued liabilities in our December 31, 2008 and September 30,2009 financial statements include accruals of approximately $4.9 millionand $4.5 million, respectively, for workers’ compensation. The costs ofboth reported claims and claims incurred but not reported, up to specifieddeductible limits, are estimated based on historical data, projected payrollnumbers and other information. We review estimates and periodically update ourestimates and the resulting reserves and any necessary adjustments arereflected in 

 

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earningscurrently. To the extent historical claims are not indicative of future claims,there are changes in payroll numbers, workers’ compensation loss developmentfactors change, or other assumptions used by management do not prevail, ourexpense and related accrued liabilities could increase or decrease.

 

***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 nondeductibility 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 Employee Compensation***

 

In 2004, we adopted ASC 718, “Stock Compensation”. Accordingly, wemeasure the cost of our stock-based employee compensation at the grant datebased on fair value and recognize such cost in the financial statements overeach award’s requisite service period. As of September 30, 2009, the totalcompensation expense not yet recognized related to nonvested stock awards underour stock-based employee compensation plans is approximately $5.3 million.The weighted average period over which this expense is expected to berecognized is approximately 3.4 years. See “Item 1. FinancialStatements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 7. Capital Stock and Stock-Based Compensation Plans” for adescription of our restricted stock and stock option awards and the assumptionsused to calculate the fair value of such awards, including the expectedvolatility assumed in valuing our stock option 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 September 30, 2008 Comparedto Three Months Ended September 30, 2009***

 

The following tables set forth our results of operations for the threemonths ended September 30, 2008 compared to the three months ended September 30,2009:

 
| ** **                                         | ** ** | **Three Months Ended September 30,**             | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                              | ** ** | **2009** | ** ** | **Variance  Favorable/(Unfavorable)** | ** ** |
| ** **                                         | ** ** | **Dollars**                                           | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Total Revenues**                                 |       | $                                                     | 173,861    |   | 100.0 | % | $ | 167,920 |   | 100.0 | % | $ | (5,941 | ) | (3.4 | )% |
| **Center Expenses:**                               | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries  and related payroll costs                |       | 47,783                                                |       | 27.5 | % | 44,508 |   | 26.5 | % | 3,275 |   | 6.9 | % |
| Provision  for doubtful accounts                   |       | 42,126                                                |       | 24.2 | % | 38,783 |   | 23.1 | % | 3,343 |   | 7.9 | % |
| Occupancy  costs                                   |       | 25,204                                                |       | 14.5 | % | 23,399 |   | 13.9 | % | 1,805 |   | 7.2 | % |
| Center  depreciation expense                       |       | 4,115                                                 |       | 2.4 | % | 3,159 |   | 1.9 | % | 956 |   | 23.2 | % |
| Advertising  expense                               |       | 6,109                                                 |       | 3.5 | % | 4,235 |   | 2.5 | % | 1,874 |   | 30.7 | % |
| Other  center expenses                             |       | 11,095                                                |       | 6.4 | % | 10,558 |   | 6.3 | % | 537 |   | 4.8 | % |
| Total  center expenses                             |       | 136,432                                               |       | 78.5 | % | 124,642 |   | 74.2 | % | 11,790 |   | 8.6 | % |
| Center  gross profit                               |       | 37,429                                                |       | 21.5 | % | 43,278 |   | 25.8 | % | 5,849 |   | 15.6 | % |
| **Corporate and Other Expenses (Income):**         | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General  and administrative expenses               |       | 18,312                                                |       | 10.5 | % | 14,259 |   | 8.5 | % | 4,053 |   | 22.1 | % |
| Legal  settlements                                 |       | —                                                |       | — |   | 6,399 |   | 3.8 | % | (6,399 | ) | (100.0 | )% |
| Corporate  depreciation expense                    |       | 760                                                   |       | 0.5 | % | 671 |   | 0.4 | % | 89 |   | 11.7 | % |
| Interest  expense                                  |       | 3,029                                                 |       | 1.7 | % | 1,556 |   | 0.9 | % | 1,473 |   | 48.6 | % |
| Interest  income                                   |       | (37                                                   | )          | — |   | (126 | ) | — |   | 89 |   | 240.5 | % |
| (Gain)/loss  on disposal of property and equipment |       | 221                                                   |       | 0.1 | % | (197 | ) | (0.1 | )% | 418 |   | 189.1 | % |
| Total  corporate and other expenses                |       | 22,285                                                |       | 12.8 | % | 22,562 |   | 13.5 | % | (277 | ) | (1.2 | )% |
| Income  before income taxes                        |       | 15,144                                                |       | 8.7 | % | 20,716 |   | 12.3 | % | 5,572 |   | 36.8 | % |
| Income  tax expense                                |       | 6,689                                                 |       | 3.8 | % | 8,135 |   | 4.8 | % | (1,446 | ) | (21.6 | )% |
| Net  income                                        |       | $                                                     | 8,455      |   | 4.9 | % | $ | 12,581 |   | 7.5 | % | $ | 4,126 |   | 48.8 | % |

 

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| ** **                                                                                               | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2008**                                             | ** ** | **2009** | ** ** |
| **Center Information:**                                                                                  | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Number  of centers open at beginning of period                                                           |       | 2,856                                                |       | 2,635 |   |
| Opened                                                                                                   |       | 6                                                    |       | 3 |   |
| Closed                                                                                                   |       | (22                                                  | )          | (24 | ) |
| Number  of centers open at end of period                                                                 |       | 2,840                                                |       | 2,614 |   |
| Weighted  average number of centers open during the period                                               |       | 2,848                                                |       | 2,624 |   |
| Number  of customers served—all credit products (thousands)                                         |       | 865                                                  |       | 816 |   |
| Number  of payday cash advances originated (thousands)                                                   |       | 3,047                                                |       | 2,862 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)                               |       | $                                                    | 1,114,016  |   | $ | 1,034,647 |   |
| Average  amount of each payday cash advance originated                                                   |       | $                                                    | 366        |   | $ | 362 |   |
| Average  charge to customers for providing and processing a payday cash advance                          |       | $                                                    | 55         |   | $ | 53 |   |
| Average  duration of a payday cash advance (days)                                                        |       | 16.8                                                 |       | 17.6 |   |
| Average  number of lines of credit outstanding during the period (thousands) (1)                    |       | —                                               |       | 20 |   |
| Average  amount of aggregate principal on lines of credit outstanding during the  period (thousands) (1) |       | $                                                    | —     |   | $ | 7,410 |   |
| Average  principal amount on each line of credit outstanding during the  period (1)                 |       | $                                                    | —     |   | $ | 354 |   |
| Number  of installment loans originated (thousands) (2)                                                  |       | 9                                                    |       | 10 |   |
| Aggregate  principal amount of installment loans originated (thousands) (2)                              |       | $                                                    | 4,534      |   | $ | 4,479 |   |
| Average  principal amount of each installment loan originated (2)                                        |       | $                                                    | 480        |   | $ | 461 |   |

 

----

(1)                                  We beganoffering lines of credit in Virginia in November 2008.

 

(2)                                  The installmentloan activity reflects loans we originated as the lender in Illinois.

 
| ** **                                                                            | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                               | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                | ** ** |
| **Per Center (based on weighted average number of centers  open during the period):** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Center  revenues                                                                      |       | $                                         | 61.0       |   | 100.0 | % | $ | 64.0 |   | 100.0 | % | $ | 3.0 |   | 4.9 | % |
| Center  expenses:                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Salaries  and related payroll costs                                                   |       | 16.8                                      |       | 27.5 | % | 17.0 |   | 26.5 | % | (0.2 | ) | (1.2 | )% |
| Provision  for doubtful accounts                                                      |       | 14.8                                      |       | 24.2 | % | 14.8 |   | 23.1 | % | — |   | — |   |
| Occupancy  costs                                                                      |       | 8.8                                       |       | 14.5 | % | 8.9 |   | 13.9 | % | (0.1 | ) | (1.1 | )% |
| Center  depreciation expense                                                          |       | 1.4                                       |       | 2.4 | % | 1.2 |   | 1.9 | % | 0.2 |   | 14.3 | % |
| Advertising  expense                                                                  |       | 2.1                                       |       | 3.5 | % | 1.6 |   | 2.5 | % | 0.5 |   | 23.8 | % |
| Other  center expenses                                                                |       | 3.9                                       |       | 6.4 | % | 4.0 |   | 6.3 | % | (0.1 | ) | (2.6 | )% |
| Total  center expenses                                                                |       | 47.8                                      |       | 78.5 | % | 47.5 |   | 74.2 | % | 0.3 |   | 0.6 | % |
| Center  gross profit                                                                  |       | $                                         | 13.2       |   | 21.5 | % | $ | 16.5 |   | 25.8 | % | $ | 3.3 |   | 25.0 | % |

 

***Revenue Analysis***

 

Total revenues decreased approximately $5.9 million during the threemonths ended September 30, 2009 compared to the same period in 2008. Totalrevenues for the 2,595 centers opened prior to July 1, 2008 and still openas of September 30, 2009 increased $2.2 million, from $164.5 million forthe three months ended September 30, 2008 to $166.7 million for the sameperiod in 2009. 

 

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Centersopened prior to July 1, 2008 were at least three months and fifteen monthsold as of September 30, 2008 and 2009, respectively. Total revenues forthe 19 centers opened after July 1, 2008 and still open as of September 30,2009 increased $0.8 million, from zero for the three months ended September 30,2008 to $0.8 million for the same period in 2009. Total revenues for the276 centers that closed during that period represented a decrease ofapproximately $8.9 million for the three months ended September 30, 2009compared to the same period in 2008. Of this decrease, approximately $2.1million was due to the closure of our centers in New Hampshire.

 

Changes in legislation have had a significant impact on our revenues inOhio and Virginia.  In Ohio, our revenuehas decreased by $3.8 million or 27.9% for the three months ended September 30,2009 as compared to the same period in 2008. In Virginia, our revenue has decreased approximately $3.3 million or25.4% for the three months ended September 30, 2009 as compared to thesame period in 2008.

 

***Center Expense Analysis***

 

*Salaries and related payroll costs*.  The decrease in salaries and related payrollcosts for the three months ended September 30, 2009 was due primarily to areduction in the number of centers open during the three months ended September 30,2009 as compared to the same period in 2008. We averaged approximately 1.92 and 1.91 full-time equivalent fieldemployees, including district directors, per center during the three monthsended September 30, 2008 and 2009, respectively.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts decreased to 23.1% for the three months ended September 30,2009 from 24.2% for the same period in 2008. This decrease was mainly due to the fact that in the third quarter of2008, the provision included a charge related to the suspension of operationsin Arkansas of approximately $1.1 million. Offsetting this are higher losses in Virginia related to theintroduction of the open-ended line of credit product during the fourth quarter of 2008, whichexperienced a higher loss rate than our cash advance and installment loanproducts.  Excluding the charge relatedto the suspension of operations in Arkansas in the prior year and theapplicable revenue and loss rates for the Virginia line of credit product, theprovision for doubtful accounts for the three months ended September 30,2008 and 2009 would have been 23.7% and 21.5%, respectively.

 

*Occupancy costs.*  The decrease in occupancy costs for the threemonths ended September 30, 2009 compared to the same period in 2008 wasdue primarily to a decrease in the number of centers open during the three monthsended September 30, 2009 as compared to the same period in 2008.

 

*Advertising expense.*  Advertising expense decreased for the threemonths ended September 30, 2009 compared to the same period in 2008 dueprimarily to an a decrease in direct mailing advertising during the threemonths ended September 30, 2009 as compared to the same period in 2008.

 

*Other center expenses.*  The decrease in other center expenses for thethree months ended September 30, 2009 compared to the same period in 2008was due primarily to a decrease in the number of centers open during the threemonths ended September 30, 2009 as compared to the same period in 2008.

 

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

 

*General and administrative expenses.*  The decrease in general and administrativeexpenses for the three months ended September 30, 2009 compared to thesame period in 2008 was primarily due to:

 

·                  lower expenses ofapproximately $3.3 million in public and government relations primarily due toa reduction in trade association dues, consulting fees, and public relationexpenditures; and

 

·                  a decrease of approximately$0.3 million related to personnel, consulting, and other costs associated withnew product development and management.

 

In addition, we received approximately $0.6 million in insuranceproceeds related to the reimbursement of legal expenses recognized in priorperiods that reduced legal expenses during the nine months ended September 30,2009.  This was offset by higher legalexpenses during the period.

 

*Legal settlements.*  The amounts reflected as legal settlementsrelate to charges accrued in the third quarter of 2009 of approximately $6.0million for the settlement of the Arkansas class-action litigation andapproximately $0.4 million for the settlement of the Georgia class-actionlitigation.

 

*(Gain)/loss on disposal of property.*  The favorable change in this item for thethree months ended September 30, 2009 compared to the same period in 2008was primarily due to insurance proceeds of approximately $0.3 million beingrecognized during the period.

 

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*Interest expense.*  The decrease in interest expense for thethree months ended September 30, 2009 compared to the same period in 2008was primarily due to a decrease in the average interest rates and the averageoutstanding balance during the quarter.

 

*Interest income.*  The increase in interest income for the threemonths ended September 30, 2009 compared to the same period in 2008 wasprimarily due to the receipt of approximately $0.1 million in interest incomerelated to state income tax refunds from prior years.

 

*Income tax expense.*  The decrease in income tax expense for thethree months ended September 30, 2009 as compared to the same period in2008 was primarily due to claims filed for the recovery of income taxesrecognized in prior years and a reduction in other discrete items.

 

**Results of Operations**

 

***Nine Months Ended September 30, 2008 Comparedto Nine Months Ended September 30, 2009***

 

The following tables set forth our results of operations for the ninemonths ended September 30, 2008 compared to the nine months ended September 30,2009:

 
| ** **                                         | ** ** | **Nine  Months Ended September 30,**              | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                               | ** ** | **2009** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                         | ** ** | **Dollars**                                            | ** ** | **%  Total  Revenues** | ** ** | **Dollars** | ** ** | **%  Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                         | ** ** | **(Dollars  in thousands, except center information)** | ** ** |
| **Total Revenues**                                 |       | $                                                      | 501,459    |   | 100.0 | % | $ | 474,437 |   | 100.0 | % | $ | (27,022 | ) | (5.4 | )% |
| **Center Expenses:**                               |       |                                                   |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries  and related payroll costs                |       | 148,489                                                |       | 29.6 | % | 137,425 |   | 29.0 | % | 11,064 |   | 7.5 | % |
| Provision  for doubtful accounts                   |       | 93,132                                                 |       | 18.6 | % | 92,893 |   | 19.6 | % | 239 |   | 0.3 | % |
| Occupancy  costs                                   |       | 75,233                                                 |       | 15.0 | % | 71,419 |   | 15.1 | % | 3,814 |   | 5.1 | % |
| Center  depreciation expense                       |       | 12,638                                                 |       | 2.5 | % | 10,142 |   | 2.1 | % | 2,496 |   | 19.7 | % |
| Advertising  expense                               |       | 16,099                                                 |       | 3.2 | % | 15,351 |   | 3.2 | % | 748 |   | 4.6 | % |
| Other  center expenses                             |       | 36,730                                                 |       | 7.3 | % | 34,870 |   | 7.3 | % | 1,860 |   | 5.1 | % |
| Total  center expenses                             |       | 382,321                                                |       | 76.2 | % | 362,100 |   | 76.3 | % | 20,221 |   | 5.3 | % |
| Center  gross profit                               |       | 119,138                                                |       | 23.8 | % | 112,337 |   | 23.7 | % | (6,801 | ) | (5.7 | )% |
| **Corporate and Other Expenses (Income):**         |       |                                                   |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General  and administrative expenses               |       | 50,696                                                 |       | 10.1 | % | 42,128 |   | 8.9 | % | 8,568 |   | 16.9 | % |
| Legal  settlements                                 |       | —                                                 |       | — |   | 6,399 |   | 1.3 | % | (6,399 | ) | (100.0 | )% |
| Corporate  depreciation expense                    |       | 2,320                                                  |       | 0.5 | % | 2,038 |   | 0.4 | % | 282 |   | 12.2 | % |
| Interest  expense                                  |       | 8,246                                                  |       | 1.7 | % | 4,850 |   | 1.0 | % | 3,396 |   | 41.2 | % |
| Interest  income                                   |       | (107                                                   | )          | — |   | (160 | ) | — |   | 53 |   | 49.5 | % |
| (Gain)/loss  on disposal of property and equipment |       | 439                                                    |       | 0.1 | % | (244 | ) | — |   | 683 |   | 155.6 | % |
| Loss  on impairment of assets                      |       | 236                                                    |       | — |   | 2,209 |   | 0.5 | % | (1,973 | ) | (836.0 | )% |
| Total  corporate and other expenses                |       | 61,830                                                 |       | 12.4 | % | 57,220 |   | 12.1 | % | 4,610 |   | 7.5 | % |
| Income  before income taxes                        |       | 57,308                                                 |       | 11.4 | % | 55,117 |   | 11.6 | % | (2,191 | ) | (3.8 | )% |
| Income  tax expense                                |       | 24,775                                                 |       | 4.9 | % | 20,751 |   | 4.4 | % | 4,024 |   | 16.2 | % |
| Net  income                                        |       | $                                                      | 32,533     |   | 6.5 | % | $ | 34,366 |   | 7.2 | % | $ | 1,833 |   | 5.6 | % |

 
| ** **                                                                                              | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                                  | ** ** | **2009** | ** ** |
| **Center Information:**                                                                                 |       |                                      |       |   |   |
| Number of centers open at beginning of period                                                           |       | 2,832                                     |       | 2,797 |   |
| Opened                                                                                                  |       | 42                                        |       | 7 |   |
| Acquired                                                                                                |       | 2                                         |       | — |   |
| Closed                                                                                                  |       | (36                                       | )          | (190 | ) |
| Number of centers open at end of period                                                                 |       | 2,840                                     |       | 2,614 |   |
| Weighted average number of centers open during the  period                                              |       | 2,852                                     |       | 2,717 |   |
| Number of customers served—all credit products  (thousands)                                        |       | 1,245                                     |       | 1,147 |   |
| Number of payday cash advances originated  (thousands)                                                  |       | 8,692                                     |       | 7,836 |   |
| Aggregate principal amount of payday cash advances  originated (thousands)                              |       | $                                         | 3,179,976  |   | $ | 2,824,109 |   |
| Average amount of each payday cash advance  originated                                                  |       | $                                         | 366        |   | $ | 360 |   |
| Average charge to customers for providing and  processing a payday cash advance                         |       | $                                         | 56         |   | $ | 53 |   |
| Average duration of a payday cash advance (days)                                                        |       | 16.7                                      |       | 17.5 |   |
| Average number of lines of credit outstanding  during the period (thousands) (1)                        |       | —                                    |       | 27 | ` |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (1) |       | $                                         | —     |   | $ | 12,625 |   |
| Average principal amount on each line of credit  outstanding during the period (1)                      |       | $                                         | —     |   | $ | 446 |   |
| Number of installment loans originated (thousands)  (2)                                                 |       | 23                                        |       | 25 |   |
| Aggregate principal amount of installment loans  originated (thousands) (2)                             |       | $                                         | 10,908     |   | $ | 11,202 |   |
| Average principal amount of each installment loan  originated (2)                                       |       | $                                         | 468        |   | $ | 443 |   |

 

----

(1)                                  We beganoffering lines of credit in Virginia in November 2008.

 

(2)                                  The installmentloan activity reflects loans we originated as the lender in Illinois.

 

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| ** **                                                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                              | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**               | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Center revenues                                                                       |       | $                                        | 175.8      |   | 100.0 | % | $ | 174.6 |   | 100.0 | % | $ | (1.2 | ) | (0.7 | )% |
| Center expenses:                                                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 52.1                                     |       | 29.6 | % | 50.6 |   | 29.0 | % | 1.5 |   | 2.9 | % |
| Provision for doubtful accounts                                                       |       | 32.7                                     |       | 18.6 | % | 34.2 |   | 19.6 | % | (1.5 | ) | (4.6 | )% |
| Occupancy costs                                                                       |       | 26.4                                     |       | 15.0 | % | 26.3 |   | 15.1 | % | 0.1 |   | 0.4 | % |
| Center depreciation expense                                                           |       | 4.4                                      |       | 2.5 | % | 3.7 |   | 2.1 | % | 0.7 |   | 15.9 | % |
| Advertising expense                                                                   |       | 5.6                                      |       | 3.2 | % | 5.7 |   | 3.2 | % | (0.1 | ) | (1.8 | )% |
| Other center expenses                                                                 |       | 12.9                                     |       | 7.3 | % | 12.8 |   | 7.3 | % | 0.1 |   | 0.8 | % |
| Total center expenses                                                                 |       | 134.1                                    |       | 76.2 | % | 133.3 |   | 76.3 | % | 0.8 |   | 0.6 | % |
| Center gross profit                                                                   |       | $                                        | 41.7       |   | 23.8 | % | $ | 41.3 |   | 23.7 | % | $ | (0.4 | ) | (1.0 | )% |

 

***Revenue Analysis***

 

Total revenues decreased approximately $27.0 million during thenine months ended September 30, 2009 compared to the same period in 2008.Total revenues for the 2,558 centers opened prior to January 1, 2008 andstill open as of September 30, 2009 decreased $9.4 million, from$472.2 million for the nine months ended September 30, 2008 to$462.8 million for the same period in 2009. Centers opened prior to January 1,2008 were at least nine months and eighteen months old as of September 30,2008 and 2009, respectively. Total revenues for the 56 centers opened oracquired after January 1, 2008 and still open as of September 30,2009 increased $3.8 million, from $1.2 million for the nine monthsended September 30, 2008 to $5.0 million for the same period in 2009.Total revenues for the 276 centers that closed during that period represented adecrease of approximately $21.4 million for the nine months ended September 30,2009 compared to the same period in 2008. Of this decrease, approximately $0.2million, $3.9 million, and $5.9 million were due to the closure of ourcenters in New Mexico, Arkansas, and New Hampshire, respectively.

 

Changes in legislation have had a significant impact on our revenues inOhio and Virginia.  In Ohio, our revenuehas decreased by $16.6 million or 38.8% for the nine months ended September 30,2009 as compared to the same period in 2008. In Virginia, our revenue has increased approximately $5.1 million or13.6% for the nine months ended September 30, 2009 as compared to the sameperiod in 2008.

 

***Center Expense Analysis***

 

*Salaries and related payroll costs.*  The decrease in salaries and related payrollcosts for the nine months ended September 30, 2009 was due primarily to areduction in the number of centers open during the nine months ended September 30,2009 as compared to the same period in 2008, as well as a decrease in salariesand bonus cost per center.  We averagedapproximately 2.01 and 1.95 full-time equivalent field employees, includingdistrict directors, per center during the nine months ended September 30,2008 and 2009, respectively.

 

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*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts increased to 19.6% for the nine months ended September 30,2009 from 18.6% for the same period in 2008. This increase was due primarily to higher losses in Virginia related tothe introduction of the open-ended line of credit product during the fourth quarter of 2008, which hasexperienced a higher loss rate than our cash advance and installment loanproducts.  During the nine months endedSeptember 30, 2009 and 2008, we received proceeds from the sale ofreceivables in the amount of $2.2 million and $0.6 million, respectively.  In the third quarter of 2008, the provisionincludes a charge related to the suspension of operations in Arkansas ofapproximately $1.1 million.  Excludingthe sale of receivables, the applicable revenue, and loss rates for theVirginia line of credit product, and the charge related to the suspension ofoperations in Arkansas in the prior year, the provision for doubtful accountsfor the nine months ended September 30, 2008 and 2009 would have been 18.5%and 17.4%, respectively.

 

*Occupancy costs.*  The decrease in occupancy costs for the ninemonths ended September 30, 2009 compared to the same period in 2008 wasprimarily due to a decrease in the number of centers open during the ninemonths ended September 30, 2009 as compared to the same period in 2008.

 

*Advertising expense.*  Advertising expense decreased for the ninemonths ended September 30, 2009 compared to the same period in 2008primarily due to a decrease in industry group related advertising during thenine months ended September 30, 2009 as compared to the same period in2008.

 

*Other center expenses.*  The decrease in other center expenses for thenine months ended September 30, 2009 compared to the same period in 2008was due primarily to a decrease in the number of centers open during the ninemonths ended September 30, 2009 as compared to the same period in 2008.

 

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

 

*General and administrative expenses.*  The decrease in general and administrativeexpenses for the nine months ended September 30, 2009 compared to the sameperiod in 2008 was due primarily to:

 

·                  lower expenses ofapproximately $6.3 million in public and government relations primarily due toa reduction in trade association dues, consulting fees, and public relationexpenditures;

 

·                  lower expenses ofapproximately $1.0 million related to personnel, consulting, and other costsassociated with new product development and management;

 

·              lower expenses ofapproximately $0.6 million related to our field operations; and

 

·                  lower expenses ofapproximately $0.6 million related to our personnel, accounting fees, and otherexpenses associated with our operations in the United Kingdom;

 

The decrease was partially offset by:

 

·                  an increase ininformation technology expenses of approximately $0.5 million related toconsulting fees; and

 

·                  an increase inprofessional fees of approximately $0.4 million incurred in connection with therecovery of income taxes recognized in prior periods.

 

In addition, we received approximately $1.4 million in insuranceproceeds related to the reimbursement of legal expenses recognized in priorperiods that reduced legal expenses during the nine months ended September 30,2009.  This was offset by higher legalexpenses during the period.

 

*Legal settlements.*  The amounts reflected as legal settlementsrelate to charges accrued during the nine months ended September 30, 2009of approximately $6.0 million for the settlement of the Arkansas class-actionlitigation and approximately $0.4 million for the settlement of the Georgiaclass-action litigation.

 

*(Gain)/loss on disposal of property.* The favorable change in this item for the ninemonths ended September 30, 2009 compared to the same period in 2008 wasprimarily due to insurance proceeds of approximately $0.5 million beingrecognized during the period.

 

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*Interest expense.*  The decrease in interest expense for the ninemonths ended September 30, 2009 compared to the same period in 2008 wasprimarily due to a decrease in the average interest rates and the averageoutstanding balance during the nine months.

 

*Income tax expense.*  The decrease in income tax expense for thenine months ended September 30, 2009 as compared to the same period in2008 was primarily due to a reduction in state taxes as a result of claimsfiled for recovery of income taxes recognized in prior years of $3.5 millionand a reduction in other discrete items.

 

**Liquidity and Capital Resources**

 

The following table presents a summary of cash flows for the ninemonths ended September 30, 2008 and 2009 (dollars in thousands):

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance**                  | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Favorable/  (Unfavorable)** | ** ** |
| ** **                                                    | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Dollars**                   | ** ** | **%** | ** ** |
| Cash flows provided by (used in):                             |       |       |       |       |       |                          |       |   |   |
| Operating activities                                          |       | $          | 123,869    |       | $          | 121,006                       |       | $ | (2,863 | ) | (2.3 | )% |
| Investing activities                                          |       | (78,403    | )          | (69,011    | )          | 9,392                         |       | 12.0 | % |
| Financing activities                                          |       | (57,525    | )          | (55,108    | )          | 2,417                         |       | 4.2 | % |
| Effect of exchange rate changes on cash and cash  equivalents |       | (191       | )          | 6          |       | 197                           |       | 103.1 | % |
| Net decrease in cash and cash equivalents                     |       | (12,250    | )          | (3,107     | )          | 9,143                         |       | 74.6 | % |
| Cash and cash equivalents, beginning of period                |       | 28,251     |       | 16,017     |       | (12,234                       | )          | (43.3 | )% |
| Cash and cash equivalents, end of period                      |       | $          | 16,001     |       | $          | 12,910                        |       | $ | (3,091 | ) | (19.3 | )% |

 

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 openings, fundacquisitions, and pay dividends on our common stock.

 

We borrow under our $270.0 million revolving credit facility tofund our advances and to meet our other liquidity needs. Our day-to-daybalances under our revolving credit facility, as well as our cash balances,vary because of seasonal and day-to-day requirements resulting from making andcollecting advances. For example, if a month ends on a Friday (a typicalpayday), our borrowings and our cash balances will be high compared to a monththat does not end on a Friday. This is because a substantial portion of theadvances will be repaid in cash on that day but sufficient time will not yethave passed for the cash to reduce the outstanding borrowings under ourrevolving credit facility. Our borrowings under our revolving credit facilitywill also increase as the demand for advances increases during our peak periodssuch as the back-to-school and holiday seasons. Conversely, our borrowingstypically decrease during the tax refund season when cash receipts fromcustomers peak or the customer demand for new advances decreases. Advances andfees receivable, net increased approximately $1.0 million, or 0.5%, to$212.2 million at September 30, 2009 compared to $211.2 million at September 30,2008. Advances and fees receivable, net decreased approximately$7.9 million, or 3.6%, to $212.2 million at September 30, 2009compared to $220.1 million at December 31, 2008.  As of September 30, 2008 and 2009, thesenior leverage covenant restricted our additional availability under ourcredit facility to approximately $14.3 million and $37.6 million, respectively.

 

In July 2008, we completed our stock repurchase program that ourBoard of Directors approved on May 4, 2005, and twice extended, once on August 16,2006 and again on February 13, 2008, for a total of $225.0 million inauthorized repurchases.

 

During the nine months ended September 30, 2008 and 2009, werepurchased 11,916,798 and 4,387 shares of our common stock, respectively, at acost of approximately $89.0 million and $11,500 respectively.  For the nine months ended September 30,2008 and 2009, these amounts include 5,536 and 4,387 shares of common stock,respectively, that were surrendered by employees to satisfy their taxobligations with respect to the vesting of shares of restricted stock awardedpursuant to our 2004 Omnibus Stock Plan.

 

Although our revolving credit facility places restrictions on ourcapital expenditures and acquisitions, we believe that these restrictions donot currently prohibit us from pursuing our strategy or limit our current levelof operations. Cash that is restricted due to certain states’ regulatoryliquidity requirements is not included in cash and cash equivalents. Instead,the restricted cash is shown on our consolidated balance sheet as a non-currentasset under the line item “Restricted cash.” Historically, these restrictions have not 

 

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hadan impact on our ability to meet our liquidity needs for operations.  However, our ability to make dividends to ourstockholders and repurchases of our common stock has been, and in the futuremay be, restricted under our revolving credit facility.

 

***Cash Flows from Operating Activities***

 

Net cash provided by operating activities decreased approximately 2.3%to $121.0 million for the nine months ended September 30, 2009 compared tothe same period ended September 30, 2008. The decrease in operating cashflow was attributable to an a decrease in non-cash expense items of $4.4million and a decrease in operating asstes and liabilities of $0.3million.  This was partially offset by aincrease in net income of approximately $1.8 million.

 

***Cash Flows from Investing Activities***

 

Net cash used in investing activities increased approximately 12.0% to$69.0 million for the nine months ended September 30, 2009 comparedto the same period ended September 30, 2008. The increase was primarilyrelated to an decrease in the purchases of property and equipment of $4.7million and a decrease in advances receivable of $3.8 million.

 

***Cash Flows from Financing Activities***

 

Net cash used in financing activities decreased approximately 4.2% to$55.1 million for the nine months ended September 30, 2009 comparedto the same period ended September 30, 2008. During the nine months ended September 30,2009, we repaid $40.8 million under the revolving credit facility and paid$11.4 million in dividends. During the nine months ended September 30, 2008, weincreased our borrowings under the revolving credit facility by approximately$60.7 million, purchased $89.0 million of treasury stock, and paid $24.4million in dividends.

 

**Capital Expenditures**

 

For the nine months ended September 30, 2008 and 2009, we spent$7.7 million and $3.0 million, respectively, on capital expenditures.Capital expenditures included expenditures for: (1) new centers opened; (2) centerremodels; and (3) computer equipment replacements in our centers and atour 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 loans and certain related fees that are not collected from the customers.As of September 30, 2008 and 2009, the third-party lender’s outstandingadvances and interest receivable (which were not recorded on our balance sheet)totaled approximately $17.3 million and $19.1 million, respectively. Weare obligated to pay the third-party lender to the extent these amounts becomeuncollectible. Additionally, if these advances become uncollectible, we arealso required to pay the third-party lender all related NSF fees and late feeson 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 September 30, 2008 and2009 was approximately $3.8 million and $4.3 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.”

 

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**Certain Contractual Cash Commitments**

 

Our principal future contractual obligations and commitments as of September 30,2009, including periodic interest payments, included the following (dollars inthousands):

 
| ** **                                     | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| **Contractual Cash Obligations**               | ** ** | **Total**  | ** ** | **2009**                             | ** ** | **2010 and  2011** | ** ** | **2012 and  2013** | ** ** | **2014 and  thereafter** | ** ** |
| Long-term debt obligations:                    |       |       |       |                                 |       |   |   |   |   |   |   |
| Revolving credit facility                      |       | $          | 149,039    |                                 | $          | — |   | $ | — |   | $ | 149,039 |   | $ | — |   |
| Mortgage payable                               |       | 4,705      |       | 114                                  |       | 991 |   | 1,146 |   | 2,454 |   |
| Interest payable on long-term debt obligations |       | 1,470      |       | 85                                   |       | 603 |   | 447 |   | 335 |   |
| Operating lease obligations (1)           |       | 137,614    |       | 16,239                               |       | 92,115 |   | 26,708 |   | 2,552 |   |
| Purchase obligations                           |       | 968        |       | 961                                  |       | 7 |   | — |   | — |   |
| Total                                          |       | $          | 293,796    |                                 | $          | 17,399 |   | $ | 93,716 |   | $ | 177,340 |   | $ | 5,341 |   |

 

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

 

***Long-Term Debt Obligations***

 

*Revolving Credit Facility.*  In March 2008, we entered into anamendment and restatement of our prior credit facility with a syndicate ofbanks. As amended and restated, our revolving credit facility now provides uswith a $270.0 million revolving line of credit, including the ability toissue up to $25.0 million in letters of credit. Our revolving creditfacility matures on March 24, 2013. We have the option to increase therevolving credit facility by an additional $95.0 million upon receipt ofsufficient commitments from lenders in the lending syndicate and other eligiblelenders as defined in the credit agreement. Any portion of our revolving creditfacility that is repaid may be borrowed again subject to any limitations basedon financial covenants. In July 2008, we amended our credit facility tomodify the consolidated net worth test to reduce the requirement by the cost ofrepurchases of common stock made after January 1, 2008.

 

As of September 30, 2009, we had $149.0 million outstandingon the revolving portion of our credit facility and approximately$1.4 million of commitments under outstanding letters of credit, leavingapproximately $119.6 million available for future borrowings under thiscredit facility, subject to additional limitations based on certain financialcovenants. As of September 30, 2008 and 2009, the senior leverage covenantrestricted that additional availability to approximately $14.3 million and$37.6 million, respectively.

 

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 pricinggrid based on our total leverage ratio of consolidated debt to consolidatedearnings before interest, taxes, depreciation, and amortization (“EBITDA”) asdefined in the credit agreement. The base rate applicable margin ranges from1.50% to 2.25% based upon our total leverage ratio. The LIBOR-based applicablemargin ranges from 2.50% to 3.25% based upon our total leverage ratio. As of September 30,2009, the applicable margin for the prime-based rate was 1.75% and the applicablemargin for the LIBOR-based rate was 2.75%.

 

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 nine-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 

 

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therevolving credit facility is three and one half times trailing twelve monthEBITDA, as defined in the credit agreement. The maximum senior leverage allowedunder the revolving credit facility is two times trailing twelve month EBITDAas defined in the credit agreement. Our trailing twelve month EBITDA, as definedin the credit agreement, as of September 30, 2009 was approximately $96.4million. The charge-off ratio, as defined in the revolving credit facility,limits the average of actual charge-offs incurred during each fiscal month to amaximum of 4.50% of the average amount of adjusted transaction receivablesoutstanding at the end of each fiscal month ending during the prior twelveconsecutive months.  At September 30,2009, our charge off ratio was 4.0% and was calculated based on averagemonthly charge-offs of $11.3 million and average transaction receivables of$282.5 million, and we had charge-offs of $36.9 million during the three monthsended September 30, 2009. We could have charged off an additional $14.9million for the three months ended September 30, 2009 within the limits ofthis covenant. The revolving credit facility contains customary covenants,including covenants that restrict our ability to, among other things (i) incurliens, (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 investments, (vi) make dividends and otherdistributions to, and redemptions and repurchases from, equity holders, (vii) prepay,redeem, or repurchase certain debt, (viii) make changes in the nature ofour business, (ix) amend our organizational documents, or amend or otherwisemodify certain of our debt documents, (x) change our fiscal quarter andfiscal year 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) ourmaterial breach of any representation or warranty, (iv) cross defaults toany other indebtedness in excess of $1.0 million in the aggregate, (v) bankruptcy,insolvency, or other similar proceedings, (vi) our inability to pay debts,(vii) monetary judgment defaults in excess of $1.0 million in theaggregate, (viii) customary ERISA defaults, (ix) actual or assertedinvalidity of any material provision of the loan documentation or impairment ofa material portion of the collateral, and (x) a change of control. Abreach of a covenant or an event of default could cause all amounts outstandingunder the revolving credit facility to become immediately due and payable. Wewere in compliance with all financial covenants at September 30, 2009. See“Liquidity and Capital Resources” in this section for a description of how weutilize 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 Kingdom operations entered into an overdraft facility. The maximumavailable borrowings under the facility are GBP 400,000, which is equivalent toapproximately $637,000 at September 30, 2009. The interest rate on anyborrowings under this facility is the Bank of England base rate plus 1.75%. Thefacility is repayable upon demand by the lender. We had no outstandingborrowings on this facility at September 30, 2009.

 

*Mortgage Payable.*  Our corporate headquarters building andrelated land are subject to a mortgage loan, the principal amount of which wasapproximately $5.0 million and $4.7 million at December 31, 2008 and September 30,2009, 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 $4.7 million and $4.6 million at December 31,2008 and September 30, 2009, 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, and certain security and office equipment. Thelessor under the aircraft hangar space lease is a company controlled by oraffiliated with Mr. George D. Johnson, Jr., our former Chairman and asignificant stockholder. In addition, on July 13, 2009, the Companyentered into a one-year Aircraft Dry Lease Agreement with Carabo Capital, LLC,an entity of which the Company’s current Chairman is a member.  Under the Aircraft Dry Lease, the Company mayuse Carabo’s aircraft from time to time in exchange for one dollar and theCompany’s fulfillment of its obligations under the Aircraft Dry Lease.  See “Item 1. Financial Statements—Notesto Interim Unaudited Consolidated Financial Statements—Note 9. RelatedParty Transactions.”

 

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***Purchase Obligations***

 

We enter into agreements with vendors to purchase furniture, fixtures,and other items used to open new centers. These purchase commitments typicallyextend for a period of two to three months after the opening of a new center.As of September 30, 2009, our purchase obligations totaled approximately$1.0 million.

 

**Impact of Inflation**

 

We believe inflationary factors do not have a material effect on ourresults of operations.

 

**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 thisAnnual Report, including statements regarding our future financial performance,our business strategy and expected developments in our industry, areforward-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-looking statements.

 

We have based these forward-looking statements on management’s currentviews and expectations.  Although webelieve that the current views and expectations reflected in theseforward-looking statements are reasonable, those views and expectations, andthe related statements, are inherently subject to risks, uncertainties andother factors, many of which are not under our control and may not even bepredictable.  These risks, uncertaintiesand other factors could cause 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 which federal,state, local and foreign governmental regulation of cash advance services,consumer lending, and related financial products and services limits orprohibits the operation of our business;

 

·                  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 anddirectors;

 

·                  our ability to findadditional growth opportunities and to identify and successfully implement newproduct and service offerings;

 

·                  the possible impairment ofgoodwill;

 

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

 

·                  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 “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2008, under “Part II. Item 1A. RiskFactors” in our Quarterly Report on Form 10-Q for the quarter ended June 30,2009, and under “Part II. Item 1A. Risk Factors” 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.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT 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.Our variable 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, 2008 or September 30, 2009. The weighted averageinterest rate on our $189.8 million of variable interest debt as of December 31,2008 was approximately 4.17%. The weighted average interest rate on our$149.0 million of variable interest debt as of September 30, 2009 wasapproximately 3.0%.

 

We had total interest expense of $3.0 million and$1.6 million for the three months ended September 30, 2008 and 2009,respectively. We had total interest expense of $8.2 million and$4.9 million for the nine months ended September 30, 2008 and 2009,respectively. The estimated increase in interest expense from a hypothetical200 basis-point increase in applicable variable interest rates would have beenapproximately $1.0 million and $0.8 million for the three months ended September 30,2008 and 2009, respectively. The estimated increase in interest expense from ahypothetical 200 basis-point increase in applicable variable interest rateswould have been approximately $2.4 million and $2.3 million for thenine months ended September 30, 2008 and 2009, 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, 2008 or September 30,2009.

 

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 $2.6 million and$1.8 million as of December 31, 2008 and September 30, 2009,respectively. These cumulative translation adjustments are included inaccumulated other comprehensive loss as a separate component of stockholders’equity. Due to the immateriality of our current operations in the UnitedKingdom and Canada, a change in foreign currency exchange rates is not expectedto have a significant impact on our consolidated financial position, results ofoperations or cash flows.

 

**ITEM4.  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) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, and our internal control overfinancial reporting, as of the end of the period covered by this Report. Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that those disclosure controls and procedures are effective. Therewere no changes in our internal control over financial reporting during thequarter ended September 30, 2009, that have materially affected, or arereasonably 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—Legal Proceedings,” 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 in “Part I. Item 1A. RiskFactors” of our Annual Report on Form 10-K for the year ended December 31,2008, in “Part II. Item 1A. Risk Factors” of our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2009, and in “Part II. Item 1A. RiskFactors” of this Quarterly Report, which could materially affect our business,results of operations, financial condition, future results, and the tradingprice of our common stock. The following items are changes and additions to therisks and uncertainties previously disclosed.

 

***Our inability to effectively, efficiently, and profitably introduce ormanage new products or alternative methods for conducting business could have amaterial adverse effect on our business, prospects, results of operations andfinancial condition.***

 

In 2007, we began sellingmoney orders and providing money transfer services. We also began offeringprepaid debit cards in 2007 as an agent of an OTS-regulated bank. In 2008, webegan facilitating the offering of tax preparation services provided by a thirdparty and cash advances from a third-party lender to customers on our website.In addition, in 2008, we began offering open-ended lines of credit to customersin Virginia and small loans to customers in Ohio. In 2009, we began offeringcash advances pursuant to the Ohio Second Mortgage Act. We also intend tointroduce additional products and services in the future.  For example, we anticipate modifying ourproduct in the State of Washington in response to new legislation in 2010.

 

In order to offer new ormodified products and services, we need to comply with additional regulatoryand licensing requirements. Each modification, new product or service, and alternativemethod of conducting business is subject to risk and uncertainty and requiressignificant investment in time and capital, including additional marketingexpenses, legal costs, and other incremental start-up costs. Due to our lack ofexperience in offering alternative products and services, we cannot assure youthat we will be able to successfully introduce any new products or services ordo so in a timely or profitable manner. We also may fail to modify or testadequately our point-of-sale system, collection procedures, customer contracts,monitoring, and other operations prior to offering a new product, nor can weensure compliance with applicable regulations. Any such noncompliance could result in fines, suspensions, or legalactions against us and could have a material adverse effect on our business,prospects, results of operations, and financial condition.

 

Finally, we cannot predict thedemand or loss experience for new products or services, nor do we know if wewill be able to offer new products or services in an efficient manner or on aprofitable basis.  Our failure to do so,or low customer demand or high loss experience, could have a material adverseeffect on our business, prospects, results of operations, and financialcondition.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

 

The followingtable sets forth information about our stock repurchases for the three monthsended September 30, 2009:

 
| **Period (1)**                         | ** ** | **Total Number of   Shares Purchased  (2)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Approximate Dollar Value  of   Shares that May Yet Be  Purchased Under the Plans  or Programs (3)** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| July 1  to July 31           |       | —                                      |       | $                                  | —     |                                                                                          | —     |                                                                                                       | $          | — |   |
| August 1  to August 31       |       | —                                      |       | —                             |       | —                                                                                        |       | —                                                                                                     |       |
| September 1  to September 30 |       | 1,115                                       |       | 5.62                               |       | —                                                                                        |       | —                                                                                                     |       |
| Total                                  |       | 1,115                                       |       | $                                  | 5.62       |                                                                                          | —     |                                                                                                       | $          | — |   |

 

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(1)           Based on trade date.

 

(2)           This column includes 1,115 sharessurrendered by employees to satisfy their tax obligations with respect to thevesting of shares of restricted stock awarded pursuant to the Company’s 2004Omnibus Stock Plan.

 

(3)           In July 2008, we completed our stockrepurchase program, which was initially adopted on May 4, 2005 andsubsequently extended on August 16, 2006 and on February 13, 2008.Except as noted above, we did not repurchase any stock during the three monthsended September 30, 2009.

 

**ITEM6.  EXHIBITS.**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                              |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Aircraft  Dry Lease by and between Advance America, Cash Advance Centers, Inc. and  Carabo Capital, LLC dated as of July 13, 2009.                                                                 |
|        |       |                                                                                                                                                                                                         |
| 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. |
|------------------------|---------------------------------------------------|
|                   |                                              |   |
|                   |                                              |   |
| November 9,  2009 | 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                |       | Aircraft  Dry Lease by and between Advance America, Cash Advance Centers, Inc. and  Carabo Capital, LLC dated as of July 13, 2009.                                                                 |
|                |       |                                                                                                                                                                                                         |
| 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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