**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(**Mark One)

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

**Forthe quarterly period ended June 30, 2006**

**OR**

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

**Forthe transition period from                 to                **

**COMMISSIONFILE NUMBER 001-32363**

**ADVANCE AMERICA, CASHADVANCE CENTERS, INC.**

(Exact name of registrantas specified in its charter)

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

 

**135 North Church Street**

**Spartanburg, SouthCarolina  29306**

(Address of principal executive offices)

(Zip Code)

**864-342-5600**

(Registrant’s telephonenumber, including area code)

**None**

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

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

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

 

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

Indicate the numberof shares outstanding of each of the issuer’s classes of common stock, as ofthe latest practicable date.

| Class                                  | ** ** | **Outstanding as of August 7, 2006** |
|----------------------------------------|------------|-------------------------------------------|
| Common Stock, par value $.01 per share |       | 82,004,489 shares                         |

 

 

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**ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.Form 10-QFor the three months and six months ended June 30, 2006**
|                                         |                                                                                                                | **Page** |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING  STATEMENTS**         |                                                                                                                | 3        |
| **PART I.  FINANCIAL INFORMATION** |                                                                                                                | 4        |
| Item  1.                                | Financial Statements                                                                                                |     | 4 |
|                                    | Unaudited  Consolidated Balance Sheets December 31, 2005 and June 30, 2006                                |     | 4 |
|                                    | Interim  Unaudited Consolidated Statements of Income Three Months and Six Months Ended  June 30, 2005 and 2006 |     | 5 |
|                                    | Interim  Unaudited Consolidated Statement of Stockholders’ Equity Six Months Ended  June 30, 2006    |     | 6 |
|                                    | Interim  Unaudited Consolidated Statements of Cash Flows Six Months Ended  June 30, 2005 and 2006              |     | 7 |
|                                    | Notes  to Interim Unaudited Consolidated Financial Statements                                                       |     | 8 |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |     | 20 |
| Item  3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                                         |     | 40 |
| Item  4.                                | Controls  and Procedures                                                                                            |     | 41 |
| **PART II.  OTHER INFORMATION**    |                                                                                                                | 42       |
| Item  1.                                | Legal  Proceedings                                                                                                  |     | 42 |
| Item  1A.                               | Risk  Factors                                                                                                       |     | 42 |
| Item  2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        |     | 53 |
| Item  4.                                | Submission  of Matters to a Vote of Security Holders                                                                |     | 54 |
| Item  6.                                | Exhibits                                                                                                            |     | 55 |
| **SIGNATURES**                          |                                                                                                                | 56       |
| **INDEX TO EXHIBITS**                   |                                                                                                                | 57       |

 

2

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**FORWARD-LOOKINGSTATEMENTS**

The matters discussed in this Quarterly Report on Form10-Q that are forward-looking statements are based on current managementexpectations that involve substantial risks and uncertainties, which couldcause actual results to differ materially from the results expressed in, orimplied by, these forward-looking statements. These statements can beidentified by the fact that they do not relate strictly to historical orcurrent facts. They use words such as “expect,” “intend,” “plan,” “believe,”“project,” “anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,”“continue” and other words and terms of similar meaning in conjunction with adiscussion of future operating or financial performance. You should readstatements that contain these words carefully because they discuss our futureexpectations, contain projections of our future results of operations or of ourfinancial position or state other “forward-looking” information.

The factors listed in “Part II. Item 1A. RiskFactors,” as well as any cautionary language in this Quarterly Report, provideexamples of risks, uncertainties and events that may cause our actual resultsto differ materially from the expectations we describe in our forward-lookingstatements. Although we believe that our expectations are based on reasonableassumptions, actual results may differ materially from those in theforward-looking statements as a result of various factors, including, but notlimited to, those described in “Part II. Item 1A. Risk Factors.” 

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

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**PART I.   FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS.

**Advance America, Cash Advance Centers, Inc.Unaudited Consolidated Balance SheetsDecember 31, 2005 and June 30, 2006(in thousands, except per share data)**

| ** **                                                                                                                                                                                    | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2005**              | ** ** | **2006**          | ** ** |
| **Assets**                                                                                                                                                                                    | ** ** |                  | ** ** | ** **        |       | ** ** | ** ** |
| Current assets                                                                                                                                                                                |       |                  |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                                                     |       |                  | $          | 27,259            |       |   | $ | 34,342 |   |
| Advances and fees receivable, net                                                                                                                                                             |       |                  | 193,468    |              |       | 202,002 |   |
| Deferred income taxes                                                                                                                                                                         |       |                  | 6,367      |              |       | 6,437 |   |
| Other current assets                                                                                                                                                                          |       |                  | 5,033      |              |       | 14,111 |   |
| Total current assets                                                                                                                                                                          |       |                  | 232,127    |              |       | 256,892 |   |
| Restricted cash                                                                                                                                                                               |       |                  | 10,034     |              |       | 10,552 |   |
| Property and equipment, net                                                                                                                                                                   |       |                  | 64,990     |              |       | 61,768 |   |
| Goodwill                                                                                                                                                                                      |       |                  | 122,586    |              |       | 122,627 |   |
| Other assets                                                                                                                                                                                  |       |                  | 6,651      |              |       | 6,029 |   |
| Total assets                                                                                                                                                                                  |       |                  | $          | 436,388           |       |   | $ | 457,868 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                | ** ** |                  | ** ** | ** **        |       | ** ** | ** ** |
| Current liabilities                                                                                                                                                                           |       |                  |       |              |       |   |   |
| Accounts payable                                                                                                                                                                              |       |                  | $          | 9,306             |       |   | $ | 10,658 |   |
| Accrued liabilities                                                                                                                                                                           |       |                  | 29,895     |              |       | 31,443 |   |
| Income taxes payable                                                                                                                                                                          |       |                  | 11,349     |              |       | 2,665 |   |
| Accrual for excess bank losses                                                                                                                                                                |       |                  | 1,373      |              |       | 1,014 |   |
| Current portion of long-term debt                                                                                                                                                             |       |                  | 503        |              |       | 490 |   |
| Total current liabilities                                                                                                                                                                     |       |                  | 52,426     |              |       | 46,270 |   |
| Revolving credit facility                                                                                                                                                                     |       |                  | 37,933     |              |       | 34,213 |   |
| Long-term debt                                                                                                                                                                                |       |                  | 6,185      |              |       | 5,935 |   |
| Deferred income taxes                                                                                                                                                                         |       |                  | 15,706     |              |       | 16,031 |   |
| Other liabilities                                                                                                                                                                             |       |                  | 44         |              |       | 134 |   |
| Total liabilities                                                                                                                                                                             |       |                  | 112,294    |              |       | 102,583 |   |
| Non-controlling interest in variable interest entity                                                                                                                                          |       |                  | 21,069     |              |       | 35,810 |   |
| Commitments and  contingencies (Note 7)                                                                                                                                                       |       |                  |       |              |       |   |   |
| Stockholders’ equity                                                                                                                                                                     |       |                  |       |              |       |   |   |
| Preferred stock, par value $.01 per share, 25,000  shares authorized; no shares issued and outstanding                                                                                        |       |                  | —     |              |       | — |   |
| Common stock, par value $.01 per share, 250,000  shares authorized; 96,821 shares issued and 82,219 and 82,353 outstanding as  of December 31, 2005 and June 30, 2006, respectively |       |                  | 968        |              |       | 968 |   |
| Paid in capital                                                                                                                                                                               |       |                  | 282,840    |              |       | 284,066 |   |
| Retained earnings                                                                                                                                                                             |       |                  | 83,842     |              |       | 99,048 |   |
| Common stock in treasury (14,602 and 14,468 shares at  cost at December 31, 2005 and June 30, 2006, respectively)                                                                   |       |                  | (64,625    | )                 |       | (64,607 | ) |
| Total stockholders’ equity                                                                                                                                                               |       |                  | 303,025    |              |       | 319,475 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                              |       |                  | $          | 436,388           |       |   | $ | 457,868 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statements of IncomeThree Months and Six Months Ended June 30, 2005 and 2006(in thousands, except per share data)**

| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                          | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Revenues:**                                                       |       |                             |       |                           |       |   |   |   |   |
| Fees and interest  charged to customers                             |       | $                                | 114,693    |                           | $          | 152,611 |   | $ | 219,849 |   | $ | 295,703 |   |
| Marketing,  processing and servicing fees                           |       | 35,624                           |       | 3,310                          |       | 68,851 |   | 12,387 |   |
| Total revenues                                                      |       | 150,317                          |       | 155,921                        |       | 288,700 |   | 308,090 |   |
| Provision for  doubtful accounts and agency bank losses             |       | (30,567                          | )          | (27,435                        | )          | (40,658 | ) | (39,311 | ) |
| Net revenues                                                        |       | 119,750                          |       | 128,486                        |       | 248,042 |   | 268,779 |   |
| **Center Expenses:**                                                |       |                             |       |                           |       |   |   |   |   |
| Salaries and related payroll costs                                  |       | 42,541                           |       | 46,171                         |       | 84,589 |   | 92,718 |   |
| Occupancy costs                                                     |       | 19,153                           |       | 21,081                         |       | 38,280 |   | 42,129 |   |
| Center depreciation expense                                         |       | 3,595                            |       | 4,000                          |       | 7,132 |   | 7,953 |   |
| Advertising expense                                                 |       | 7,611                            |       | 6,111                          |       | 12,856 |   | 9,430 |   |
| Other center expenses                                               |       | 12,612                           |       | 12,635                         |       | 25,049 |   | 27,925 |   |
| Total center expenses                                               |       | 85,512                           |       | 89,998                         |       | 167,906 |   | 180,155 |   |
| Center gross profit                                                 |       | 34,238                           |       | 38,488                         |       | 80,136 |   | 88,624 |   |
| **Corporate and Other Expenses  (Income):**                         |       |                             |       |                           |       |   |   |   |   |
| General and  administrative expenses                                |       | 13,244                           |       | 13,605                         |       | 24,982 |   | 26,453 |   |
| General and  administrative expenses with related  parties          |       | 101                              |       | 161                            |       | 164 |   | 324 |   |
| Corporate depreciation expense                                      |       | 1,072                            |       | 935                            |       | 2,149 |   | 1,896 |   |
| Interest expense                                                    |       | 732                              |       | 919                            |       | 1,558 |   | 1,826 |   |
| Interest income                                                     |       | (67                              | )          | (123                           | )          | (158 | ) | (299 | ) |
| Loss on disposal  of property and equipment                         |       | 27                               |       | 283                            |       | 123 |   | 491 |   |
| Income before income taxes                                          |       | 19,129                           |       | 22,708                         |       | 51,318 |   | 57,933 |   |
| Income tax  expense                                                 |       | 8,384                            |       | 8,924                          |       | 20,835 |   | 23,237 |   |
| Income before income of consolidated variable interest  entity |       | 10,745                           |       | 13,784                         |       | 30,483 |   | 34,696 |   |
| Income of  consolidated variable interest entity                    |       | —                           |       | (888                           | )          | — |   | (1,373 | ) |
| Net income                                                          |       | $                                | 10,745     |                           | $          | 12,896 |   | $ | 30,483 |   | $ | 33,323 |   |
| Net income per  common share:                                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                               |       | $                                | 0.13       |                           | $          | 0.16 |   | $ | 0.36 |   | $ | 0.41 |   |
| Diluted                                                             |       | $                                | 0.13       |                           | $          | 0.16 |   | $ | 0.36 |   | $ | 0.41 |   |
| Dividends declared per common share                                 |       | $                                | 0.09       |                           | $          | 0.11 |   | $ | 0.18 |   | $ | 0.22 |   |
| Weighted average  number of shares outstanding:                     |       |                             |       |                           |       |   |   |   |   |
| Basic                                                               |       | 83,878                           |       | 81,829                         |       | 83,918 |   | 81,828 |   |
| Diluted                                                             |       | 83,878                           |       | 81,921                         |       | 83,918 |   | 81,893 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statement of Stockholders’ EquitySix Months Ended June 30, 2006(in thousands, except per share data)**

| ** **                                            | ** ** | **Common Stock** | ** ** | **Paid-In**        | ** ** | **Retained** | ** ** | **Common Stock  In Treasury** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|--------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                            | ** ** | **Shares**            | ** ** | **Par Value** | ** ** | **Capital**  | ** ** | **Earnings**                            | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Balances,  December 31, 2005                     |       | 96,821                |       |               | $          | 968          |       |                                    | $          | 282,840    |       |   | $ | 83,842 |   |   | (14,602 | ) | $ | (64,625 | ) | $ | 303,025 |   |
| Net income                                            |       | —                |       |               | —     |         |       | —                                  |       |       | 33,323     |   |   | — |   | — |   | 33,323 |   |
| Dividends paid  ($0.22 per share)                     |       | —                |       |               | —     |         |       | —                                  |       |       | (18,001    | ) |   | — |   | — |   | (18,001 | ) |
| Dividends payable                                     |       | —                |       |               | —     |         |       | —                                  |       |       | (116       | ) |   | — |   | — |   | (116 | ) |
| Issuance of  restricted stock                         |       | —                |       |               | —     |         |       | —                                  |       |       | —     |   |   | 133 |   | — |   | — |   |
| Amortization of  restricted stock                     |       | —                |       |               | —     |         |       | 759                                     |       |       | —     |   |   | — |   | — |   | 759 |   |
| Stock option  expense                                 |       | —                |       |               | —     |         |       | 467                                     |       |       | —     |   |   | — |   | — |   | 467 |   |
| Issuance of  common stock to director in lieu of cash |       | —                |       |               | —     |         |       | —                                  |       |       | —     |   |   | 1 |   | 18 |   | 18 |   |
| Balances, June 30,  2006                         |       | 96,821                |       |               | $          | 968          |       |                                    | $          | 284,066    |       |   | $ | 99,048 |   |   | (14,468 | ) | $ | (64,607 | ) | $ | 319,475 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statements of Cash FlowsSix Months Ended June 30, 2005 and 2006(in thousands)**

| ** **                                                                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating  activities**                                                             |       |     |       |     |       |
| Net income                                                                                            |       | $        | 30,483     |     | $          | 33,323 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities, net of acquisition |       |     |       |     |       |
| Income of consolidated variable interest entity                                                       |       | —   |       | 1,373    |       |
| Depreciation                                                                                          |       | 9,281    |       | 9,849    |       |
| Non-cash interest expense                                                                             |       | 490      |       | 493      |       |
| Provisions for doubtful accounts and agency bank  losses                                              |       | 40,658   |       | 39,311   |       |
| Agency bank charge-offs, net of recoveries                                                            |       | (8,674   | )          | (1,783   | )          |
| Deferred income taxes                                                                                 |       | 2,149    |       | 255      |       |
| Loss on disposal of property and equipment                                                            |       | 123      |       | 491      |       |
| Amortization of restricted stock                                                                      |       | 574      |       | 759      |       |
| Stock option expense                                                                                  |       | —   |       | 467      |       |
| Common stock issued to director in lieu of cash                                                       |       | —   |       | 18       |       |
| Changes  in operating assets and liabilities                                                          |       |     |       |     |       |
| Other current assets                                                                                  |       | 4,968    |       | (9,078   | )          |
| Other assets                                                                                          |       | (50      | )          | 134      |       |
| Accounts payable                                                                                      |       | (3,189   | )          | (1,667   | )          |
| Accrued liabilities                                                                                   |       | 3,215    |       | 607      |       |
| Income taxes payable                                                                                  |       | (762     | )          | (8,684   | )          |
| Net cash provided by operating activities                                                             |       | 79,266   |       | 65,868   |       |
| **Cash  flows from investing activities**                                                             |       |     |       |     |       |
| Changes in advances and fees receivable, net                                                          |       | (47,984  | )          | (46,421  | )          |
| Changes in restricted cash                                                                            |       | (175     | )          | (518     | )          |
| Acquisition of business, net of cash acquired                                                         |       | —   |       | (41      | )          |
| Proceeds from sale of property and equipment                                                          |       | 184      |       | 32       |       |
| Purchases of property and equipment                                                                   |       | (7,078   | )          | (6,266   | )          |
| Net cash used in investing activities                                                                 |       | (55,053  | )          | (53,214  | )          |
| **Cash flows  from financing activities**                                                             |       |     |       |     |       |
| Payments on revolving credit facility, net                                                            |       | (11,995  | )          | (3,721   | )          |
| Increase in non-controlling interest of variable  interest entity                                     |       | —   |       | 13,397   |       |
| Common stock issuance costs                                                                           |       | (169     | )          | —   |       |
| Payments on mortgage payable                                                                          |       | (164     | )          | (175     | )          |
| Payments on note payable                                                                              |       | (82      | )          | (86      | )          |
| Payments of financing costs                                                                           |       | (10      | )          | (4       | )          |
| Purchases of treasury stock                                                                           |       | (4,454   | )          | —   |       |
| Payments of dividends                                                                                 |       | (15,070  | )          | (18,001  | )          |
| Changes in book overdrafts                                                                            |       | (1,306   | )          | 3,019    |       |
| Net cash used in financing activities                                                                 |       | (33,250  | )          | (5,571   | )          |
| Net (decrease)/increase in cash and cash equivalents                                                  |       | (9,037   | )          | 7,083    |       |
| Cash and cash equivalents, beginning of period                                                        |       | 18,224   |       | 27,259   |       |
| Cash and cash equivalents, end of period                                                              |       | $        | 9,187      |     | $          | 34,342 |   |
| Supplemental disclosures  of cash flow information:                                                   |       |     |       |     |       |
| Cash  paid during the period for:                                                                     |       |     |       |     |       |
| Interest, net of amounts capitalized                                                                  |       | $        | 1,070      |     | $          | 1,439 |   |
| Income taxes                                                                                          |       | 19,448   |       | 31,666   |       |
| Supplemental schedule of  non-cash investing and financing activity:                                  |       |     |       |     |       |
| Property and equipment purchases included in accounts  payable and accrued expenses                   |       | 1,477    |       | 885      |       |
| Restricted stock dividends payable                                                                    |       | 41       |       | 116      |       |
| Issuance of  restricted common stock                                                                  |       | —   |       | 1,918    |       |

 

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

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**Advance America, Cash Advance Centers, Inc.Notes to Interim Unaudited Consolidated Financial Statements**

**1.   Summary ofSignificant Accounting Policies**

**Basis ofPresentation**

The accompanying interim unaudited consolidatedfinancial statements of Advance America, Cash Advance Centers, Inc. (“AACACI”)and its wholly owned subsidiaries (collectively, the “Company”) have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and the rules andregulations of the U.S. Securities and Exchange Commission (the “SEC”). They donot include all information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.Although management believes that the disclosures are adequate to prevent theinformation from being misleading, the interim unaudited consolidated financialstatements should be read in conjunction with the Company’s audited financialstatements in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005 filed with the SEC. In the opinion of the Company’smanagement, all adjustments, consisting of normal recurring accruals considerednecessary for a fair statement, have been included. The results of operationsfor the three and six months ended June 30, 2006 are not necessarilyindicative of the results that may be expected for future interim periods orthe entire year ended December 31, 2006.

Certain prior periodbalances have been reclassified to conform to the current period’spresentation.

**Description ofBusiness**

Historically, the Companyhas conducted business in most states under the authority of a variety ofenabling state statutes including payday advance, deferred presentment,check-cashing, small loan, credit service organization and other state lawswhereby advances are made directly to customers (which is referred to as thestandard business model). In certain states the Company has previouslyconducted business as a marketing, processing and servicing agent for FederalDeposit Insurance Corporation (“FDIC”) supervised, state-chartered banks thatmade payday cash advances and installment loans to their customers pursuant tothe authority of the laws of the states in which they were located and theauthority of federal interstate banking laws, regulations and guidelines (whichis referred to as the agency business model). The banks for which the Companyhas acted as an agent are referred to as the lending banks. The Company nolonger operates under the agency business model, except for the collection ofadvances and installment loans that remain outstanding.

**Revenue Recognition**

Revenues can becharacterized as fees and/or interest depending upon various state laws. Revenueis recognized under the standard business model on a constant-yield basisratably over the term of each advance. Under the agency business model, theCompany’s revenues consist of the marketing, processing and servicing feespayable to the Company by the lending banks. Prior to July 2005, thesefees included the losses for which the lending banks were contractuallyobligated in each of the states where the Company operated the agency businessmodel. After July 2005, these fees include only the losses for which thelending bank operating in Pennsylvania is contractually obligated. The Companyrecognizes revenue under the agency business model on a constant-yieldbasis ratably over the term of each advance and installment loan.

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**Concentration ofRisk**

During the three and sixmonths ended June 30, 2005 and 2006, the Company marketed, processed andserviced payday cash advances and, beginning in July 2005, installmentloans under the agency business model, and originated advances under thestandard business model, to a broad base of individuals in up to 36 states inthe United States. For the three months ended June 30, 2005 and 2006,total revenues within the Company’s five largest states accounted forapproximately 41% and 48%, respectively, of the Company’s total revenues. Forthe six months ended June 30, 2005 and 2006, total revenues within theCompany’s five largest states accounted for approximately 41% and 47%,respectively, of the Company’s total revenues.

**Income Taxes**

Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying value of existing assets andliabilities and their respective tax bases and for operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in which therelated temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in the period that includes the enactment date.

**Earnings Per Share**

Basic earnings per share are computed by dividing netincome by the weighted average number of common shares outstanding for theperiod excluding unvested restricted stock. Diluted earnings per share arecomputed by dividing net income by the weighted average number of common sharesoutstanding for the period, after adjusting for the dilutive effect of unvestedrestricted stock and stock options. Options to purchase 1,280,000 shares ofcommon stock that were outstanding at June 30, 2006 were not included inthe computation of diluted earnings per share since the effect of includingthese stock options would be anti-dilutive.

Thefollowing table presents the reconciliation of the denominator used in thecalculation of basic and diluted earnings per share for the three and sixmonths ended June 30, 2005 and 2006 (in thousands):

| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                         | ** ** | **   2005   **    | ** ** | **   2006   **  | ** ** | **2005** | ** ** | **2006** | ** ** |
| Reconciliation of  denominator:                                    |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Weighted average number of common shares outstanding—basic    |       |                                            | 83,878     |                                          |       |   | 81,829 |   |   | 83,918 |   | 81,828 |   |
| Effect of dilutive unvested restricted stock                       |       |                                            | —     |                                          |       |   | 92 |   |   | — |   | 65 |   |
| Weighted average  number of common shares outstanding—diluted |       |                                            | 83,878     |                                          |       |   | 81,921 |   |   | 83,918 |   | 81,893 |   |

 

**Recently IssuedAccounting Pronouncement**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure and 

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transition.FIN 48 is effective for fiscal years beginning after December 15, 2006.The Company has not determined the impact, if any, that the adoption of FIN 48in January 2007 will have on its financial condition or results ofoperations.

**2.   Marketing,Processing and Servicing Arrangements**

As part of the agency business model, the Companyentered into marketing, processing and servicing agreements (“MP&SAgreements”) with lending banks that offered payday cash advances and, beginningin July 2005, installment loans.

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

During the three and six months ended June 30,2005, the Company was compensated under MP&S Agreements with the lendingbanks for marketing, processing and servicing the payday cash advances made bythe lending banks to their customers in five states: Arkansas, Michigan, NorthCarolina, Pennsylvania and Texas. During the three and six months ended June 30,2006, the Company was compensated under MP&S Agreements relating to onlytwo states: Pennsylvania and Arkansas.

In response to instructions from the FDIC, the lendingbank for Pennsylvania ceased its payday cash advance and installment loanoriginations as of the close of business on March 27, 2006. The Companyexpects to continue, through August 2006, to service all payday cashadvances and installment loans that were outstanding in Pennsylvania as of March 27,2006. Additionally, the lending bank forArkansas discontinued offering installment loans on April 8,2006 and discontinued offering payday cash advances on June 24,2006. The Company expects to continue, through September 8, 2006, toservice all payday cash advances and installment loans that areoutstanding in Arkansas as of those dates. During June 2006, the Companybegan operating in Pennsylvania and Arkansas pursuant to existing state-basedlegislation under the standard business model.

Prior to July 2005,under each MP&S Agreement, the applicable lending bank was contractuallyobligated for the losses on payday cash advances in an amount established as apercentage of the interest and/or fees charged by the banks to their customers.The Company’s marketing, processing and servicing fee increased by the lendingbank’s contractual obligation for losses. If the amount of the lending bank’suncollected payday cash advances and installment loans exceeded the lendingbank’s contractual obligations, the Company was potentially obligated to paythe lending bank the outstanding amount of the advances and loans plus thelending bank’s fees and/or interest receivable on the advances, less thelending bank’s contractually obligated portion of the losses. The outstandingbalances of the lending banks’ advances, installment loans and fees receivableserviced by the Company were approximately $21.9 million and $2.1 million at December 31,2005 and June 30, 2006, respectively. Beginning in July 2005, thelending bank offering payday cash advances and installment loans in NorthCarolina and Arkansas became responsible for any and all losses associated withits payday cash advances and installment loans, while the lending bank offeringpayday cash advances and installment loans in Pennsylvania continued to becontractually obligated only for losses in an amount established as apercentage of the interest and/or fees charged by the lending bank to itscustomers.

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**3.   Advancesand Fees Receivable, Net**

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

| ** **                                                          | ** ** | **December 31,  2005** | ** ** | **June 30,  2006** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Advances  receivable.                                               |       |                        | $          | 165,212                 |       |   | $ | 160,681 |   |
| Fees and interest  receivable                                       |       |                        | 25,945     |                    |       | 25,043 |   |
| Returned items  receivable                                          |       |                        | 35,244     |                    |       | 37,027 |   |
| Loans and fees  receivable of consolidated variable interest entity |       |                        | 24,905     |                    |       | 37,852 |   |
| Lending bank  receivable                                            |       |                        | 2,342      |                    |       | 2,082 |   |
| Other                                                               |       |                        | 3,350      |                    |       | 3,506 |   |
| Allowance for  doubtful accounts                                    |       |                        | (45,585    | )                       |       | (46,196 | ) |
| Unearned revenues                                                   |       |                        | (17,945    | )                       |       | (17,993 | ) |
| Advances and fees  receivable, net                                  |       |                        | $          | 193,468                 |       |   | $ | 202,002 |   |

 

**4.   Allowancefor Doubtful Accounts and Accrual for Excess Bank Losses**

Changesin the allowance for doubtful accounts for the three and six months ended June 30,2005 and 2006 were as follows (in thousands):

| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Beginning balance               |       | $                                               | 23,598     |                                          | $          | 35,558 |   | $ | 29,221 |   | $ | 45,585 |   |
| Provision for doubtful accounts |       | 23,260                                          |       | 28,421                                        |       | 29,866 |   | 37,887 |   |
| Charge-offs                     |       | (16,035                                         | )          | (23,731                                       | )          | (35,521 | ) | (54,362 | ) |
| Recoveries                      |       | 3,052                                           |       | 5,948                                         |       | 10,309 |   | 17,086 |   |
| Ending balance                  |       | $                                               | 33,875     |                                          | $          | 46,196 |   | $ | 33,875 |   | $ | 46,196 |   |

 

Changesin the accrual for excess bank losses for the three and six months ended June 30,2005 and 2006 were as follows (in thousands):

| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Beginning balance                 |       | $                                               | 2,330      |                                          | $          | 2,920 |   | $ |    3,219 |   | $ | 1,373 |   |
| Provision for  agency bank losses |       |  7,307                                     |       |   (986                              | )          | 10,792 |   |  1,424 |   |
| Charge-offs                       |       |  (5,570                                    | )          |  (1,353                                  | )          | (13,373 | ) |  (3,517 | ) |
| Recoveries                        |       | 1,270                                           |       | 433                                           |       | 4,699 |   |  1,734 |   |
| Ending balance                    |       | $                                               | 5,337      |                                          | $          | 1,014 |   | $ |    5,337 |   | $ | 1,014 |   |

 

The provision for agency bank losses consists of thoselosses for which the lending banks are contractually obligated and an estimateby which actual losses will differ from the lending banks’ contractualobligation.

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Thetotal changes in the allowance for doubtful accounts and the accrual for excessbank losses for the three and six months ended June 30, 2005 and 2006 wereas follows (in thousands):

| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Beginning balance                                       |       | $                                               | 25,928     |                                          | $          | 38,478 |   | $ | 32,440 |   | $ | 46,958 |   |
| Provision for  doubtful accounts and agency bank losses |       | 30,567                                          |       | 27,435                                        |       | 40,658 |   | 39,311 |   |
| Charge-offs                                             |       | (21,605                                         | )          | (25,084                                       | )          | (48,894 | ) | (57,879 | ) |
| Recoveries                                              |       | 4,322                                           |       | 6,381                                         |       | 15,008 |   | 18,820 |   |
| Ending balance                                          |       | $                                               | 39,212     |                                          | $          | 47,210 |   | $ | 39,212 |   | $ | 47,210 |   |

 

**5.   AccruedLiabilities**

Accruedliabilities were as follows (in thousands):

| ** **                            | ** ** | **December 31,  2005** | ** ** | **June 30,  2006** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Employee  compensation                |       |                        | $          | 8,819                   |       |   | $ | 10,966 |   |
| Workers’  compensation.          |       |                        | 4,120      |                    |       | 4,526 |   |
| Health and dental  insurance          |       |                        | 3,352      |                    |       | 3,193 |   |
| Lease smoothing.                      |       |                        | 2,357      |                    |       | 2,655 |   |
| Advertising.                          |       |                        | 271        |                    |       | 2,566 |   |
| Construction in  progress             |       |                        | 3,071      |                    |       | 885 |   |
| Branch closing  costs                 |       |                        | 2,235      |                    |       | 1,159 |   |
| Accounting and  tax                   |       |                        | 1,362      |                    |       | 989 |   |
| Property, sales  and franchise taxes. |       |                        | 676        |                    |       | 738 |   |
| Legal.                                |       |                        | 583        |                    |       | 1,353 |   |
| Other.                                |       |                        | 3,049      |                    |       | 2,413 |   |
| Total                                 |       |                        | $          | 29,895                  |       |   | $ | 31,443 |   |

 

**6.**   IncomeTaxes

Incometax expense for the three and six months ended June 30, 2005 and 2006consisted of the following (in thousands):

| ** ** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** ** | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| Current    |       |                             |       |                           |       |   |   |   |   |
| Federal    |       | $                                | 6,277      |                           | $          | 8,589 |   | $ | 15,589 |   | $ | 19,173 |   |
| State      |       | 1,247                            |       | 1,707                          |       | 3,097 |   | 3,809 |   |
|       |       | 7,524                            |       | 10,296                         |       | 18,686 |   | 22,982 |   |
| Deferred   |       | 860                              |       | (1,372                         | )          | 2,149 |   | 255 |   |
| Total      |       | $                                | 8,384      |                           | $          | 8,924 |   | $ | 20,835 |   | $ | 23,237 |   |

 

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Areconciliation of the statutory federal income tax rate and the Company’seffective income tax rate for the three and six months ended June 30, 2005and 2006 follows:

| ** **                               | ** ** | **Three Months Ended**             | ** ** | **Six Months Ended**               | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                               | ** ** | **June 30,**                            | ** ** | **June 30,**                            | ** ** |
| ** **                               | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** |
| Statutory income  tax rate               |       |                                         | 35.0       | %                                            |       |   | 35.0 | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| S corporation  income not subject to tax |       |                                         | 2.0        |                                         |       |   | — |   |   |   | (0.3 | ) |   |   | — |   |   |
| State income  taxes, net                 |       |                                         | 4.6        |                                         |       |   | 4.1 |   |   |   | 4.4 |   |   |   | 4.3 |   |   |
| Other                                    |       |                                         | 2.2        |                                         |       |   | 0.2 |   |   |   | 1.5 |   |   |   | 0.8 |   |   |
| Effective income  tax rate               |       |                                         | 43.8       | %                                            |       |   | 39.3 | % |   |   | 40.6 | % |   |   | 40.1 | % |   |

 

Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and deferred tax liabilities are (in thousands):

| ** **                                    | ** ** | **December 31,  2005** | ** ** | **June 30,  2006** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Deferred tax assets                           |       |                        |       |                    |       |   |   |
| Accrued expenses                              |       |                        | $          | 4,113                   |       |   | $ | 4,391 |   |
| Bad debts                                     |       |                        | 2,491      |                    |       | 3,392 |   |
| Net operating loss carryforwards              |       |                        | 631        |                    |       | 631 |   |
| Other                                         |       |                        | 46         |                    |       | 344 |   |
| Total deferred tax assets                     |       |                        | 7,281      |                    |       | 8,758 |   |
| Deferred tax liabilities                      |       |                        |       |                    |       |   |   |
| Goodwill                                      |       |                        | (10,743    | )                       |       | (12,176 | ) |
| Depreciation                                  |       |                        | (3,731     | )                       |       | (3,143 | ) |
| Prepaid expenses                              |       |                        | (1,477     | )                       |       | (2,364 | ) |
| Book versus tax basis difference for aircraft |       |                        | (669       | )                       |       | (669 | ) |
| Total deferred tax liabilities                |       |                        | (16,620    | )                       |       | (18,352 | ) |
| Net deferred tax  liability                   |       |                        | $          | (9,339                  | )          |   | $ | (9,594 | ) |

 

Prior to the Company’s initial public offering in December 2004,the Company and substantially all of its subsidiaries (the “Subchapter SCompanies”) were taxed as an S corporation for federal and most state incometax purposes. On December 21, 2004, the Subchapter S Companies terminatedtheir status as an S corporation and are now taxed as Subchapter Ccorporations. As a result of the termination of the Subchapter S Companies’ Scorporation status, AACACI recorded a net deferred tax liability andcorresponding income tax expense on the revocation date of $8.4 million.

Until the final income tax returns of the Subchapter S Companies as an S corporationare filed, the amount of deferred income tax liability recorded as a result of the Subchapter S Companies’ conversion fromS status to C status remains an estimate. Any change in this deferred incometax liability will result in a change in income tax expense when the final Scorporation income tax returns are filed. The Company expects this to occur inthe third quarter of 2006.

As of both December 31,2005 and June 30, 2006, the Company had net operating loss carryforwardsfor federal and state income tax purposes totaling approximately $0.8 million,which will begin to expire in 2014. A valuation allowance has not been recordedbecause management believes it is more likely than not that the entire deferredtax asset will be realized. As of both December 31, 2005 and June 30,2006, the Company had credit carryforwards for federal and state income taxpurposes totaling approximately $0.4 million, which will begin to expire in2010.

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**7.   Commitmentsand Contingencies**

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

*BankWest, Inc.et al. vs. Baker et al.*

A Georgia statute,effective May 2004, essentially prohibits payday cash advance services inthe state and effectively restricts the Company’s ability to act as amarketing, processing and servicing agent for a lending bank in the state. Inresponse to the adoption of that statute, the Company, along with a lendingbank, BankWest, Inc. (“BankWest”), and other banks and agents previouslyinvolved in providing payday cash advances in Georgia, filed an action in theU.S. District Court for the Northern District of Georgia against the AttorneyGeneral of Georgia and the Georgia Secretary of State (“*BankWest vs.Baker*”), seeking a declaration that the Georgia anti-payday cashadvance law is unconstitutional, is preempted by federal law and should not beenforced. The District Court denied the request. As a result, BankWest and theCompany’s Georgia subsidiary suspended operations in Georgia in 2004 andappealed the District Court’s order to the U.S. Court of Appeals for theEleventh Circuit. Because the lending banks have since discontinued offeringpayday cash advances in response to various FDIC’s actions, the lawsuit wasdetermined to be moot and dismissed without prejudice on June 13, 2006.

*Kucan et al. vs.Advance America, Cash Advance Centers of North Carolina, Inc. et al.*

On July 27, 2004,John Kucan, Welsie Torrence and Terry Coates, each of whom was a customer ofRepublic Bank & Trust Company (“Republic”), the lending bank for whomthe Company marketed, processed and serviced payday cash advances in NorthCarolina, filed a putative class action lawsuit in the General Court of Justicefor the Superior Court Division for New Hanover County, North Carolina againstthe Company and William M. Webster, IV, the Company’s Vice Chairman, alleging,among other things, that the relationship between the Company’s North Carolinasubsidiary and Republic was a “rent a charter” relationship and thereforeRepublic was not the “true lender” on the payday cash advances it offered. Thelawsuit also claims that the payday cash advances were made, administered andcollected in violation of numerous North Carolina consumer protection laws. Thelawsuit seeks an injunction barring the subsidiary from continuing to dobusiness in North Carolina, the return of the principal amount of the paydaycash advances made to the plaintiff class since August 2001, the return ofany interest or fees associated with those advances, treble damages, attorneys’fees and other unspecified costs. On December 30, 2005, the court issuedan Order granting defendants’ motion for arbitration, staying the proceedingsand denying class certification. The plaintiffs have appealed this Order to theNorth Carolina Court of Appeals and the appeal is pending.

*King and Strong vs.Advance America, Cash Advance Centers of Georgia, Inc. et al.*

On August 6, 2004,Tahisha King and James E. Strong, who were customers of BankWest, the lendingbank for whom the Company marketed, processed and serviced payday cash advancesin Georgia, filed a putative class action lawsuit in the State Court of CobbCounty, Georgia against the Company, Mr. Webster and other unnamedofficers, directors, owners and “stakeholders,” alleging various causes ofaction including that the Georgia subsidiary made illegal payday loans inGeorgia in violation of Georgia’s usury law, the Georgia Industrial Loan Actand Georgia’s Racketeer Influenced and Corrupt Organizations Act. The complaintalleges that BankWest was not the “true lender” on the advances that weremarketed, processed and serviced for BankWest in Georgia and the Company wasthe “de facto” lender. The complaint seeks compensatory damages, attorneys’fees, punitive damages and the trebling of any compensatory damages. TheCompany and the other defendants denied the plaintiffs’ claims and assertedthat all of the claims are subject to mandatory and binding individualarbitration pursuant to 

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arbitrationagreements signed by each plaintiff. In April 2006, the State Court ofCobb County entered a consent order, which was jointly submitted by theparties, whereby the parties agreed and consented to arbitration of all claimsraised by plaintiffs in this action and to stay all proceedings pending theoutcome of arbitration on plaintiffs’ claims. The plaintiffs have filed ademand for arbitration seeking to arbitrate their claims in a class action orrepresentative status. The Company intends to continue to deny plaintiffs’claims and resist plaintiffs’ efforts to conduct class arbitration.

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

The Company’s Georgiasubsidiary is involved in another case in Georgia that, although not a classaction lawsuit, contains essentially the same allegations as the King andStrong case. On March 10, 2003, Angela Glasscock, a customer of BankWest,filed an adversary proceeding in the U.S. Bankruptcy Court for the SouthernDistrict of Georgia alleging that the Georgia subsidiary was making payday cashadvances in Georgia in violation of the Georgia Industrial Loan Act. BankWestintervened into the case and subsequently both the subsidiary and BankWestfiled a motion for summary judgment which was granted in September 2005.In its holding, the court ruled that BankWest was the “true lender.” Plaintiffshave appealed this ruling to the United States District Court where it is nowpending. Although the amount in controversy in the case is only $350, theunderlying claims of Ms. Glasscock, if validated by the appellate court,could serve as a basis for future claims against the Company.

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

The Company, the Company’s subsidiary, McKenzie CheckAdvance of Florida, LLC (“McKenzie”) and certain officers, directors andemployees are defendants in a putative class-action lawsuit commenced byformer customers, Wendy Betts and Donna Reuter, in Florida. This putative classaction was filed by Ms. Betts and Ms. Reuter in February 2001 inthe Circuit Court of Palm Beach County and alleges that McKenzie, by andthrough the actions of certain officers, directors and employees, engaged inunfair and deceptive trade practices and violated Florida’s criminal usurystatute, Consumer Finance Act and Racketeer Influenced and CorruptOrganizations Act. The suit seeks unspecified damages, and McKenzie or theother defendants could be required to refund fees and/or interest collected,refund the principal amount of payday cash advances, pay multiple damages andpay other monetary penalties.

Defendants’ motion for summary judgment was originallygranted as to Ms. Betts’ claims but later reversed by a Florida appellatecourt. On appeal, the Florida Supreme Court issued an opinion on April 27,2006, holding that the deferred presentment transactions between Betts and theCompany were governed by Florida’s usury laws and not governed by the FloridaMoney Transmitters’ Code as the Company asserted. The case has been remanded tothe Circuit Court by the Fourth District Court of Appeals where the Companyanticipates the parties will proceed with litigating the case. The Companyintends to file an answer in which it asserts its affirmative defenses.Although this ruling by the Florida Supreme Court was adverse to the Company,it is too early in this proceeding to identify the amount of potential lossesto the Company, if any, since the case is still in its early stages and severalmaterial issues have yet to be addressed by the courts.

Ms. Reuters’ claimswere subject to an arbitration agreement contained in the contract; defendants’motion to compel arbitration was granted by the state trial court, upheld bythe state appeals court and affirmed by the Florida Supreme Court declining toaccept certiorari. Thus, the order to compel arbitration is final as to Ms. Reuter.The arbitration and litigation will likely proceed in parallel.

*Reuter and Bettsvs. Advance America, Cash Advance Centers of Florida, Inc. et al.*

A second Florida lawsuitwas filed in August 2004 in the Circuit Court of Palm Beach County byformer customers Gerald Betts and Ms. Reuter against the Company, theCompany’s subsidiary, Advance 

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America,Cash Advance Centers of Florida, Inc., and certain officers and directors.The allegations are nearly identical to those alleged in the first Betts andReuter lawsuit. The Company filed motions to dismiss, to stay the proceedingspending determination of dispositive actions by the Florida Supreme Court inthe original Betts and Reuter case and to compel arbitration. Proceedings inthis case were stayed pending the disposition of the appeals in the originalBetts and Reuter case. Now that those appeals have been resolved, the stay ofproceedings has been lifted and the Company will proceed with defending thissecond lawsuit.

*Raymond King vs.Advance America, Cash Advance Centers of Pennsylvania, Inc.*

On April 13, 2006,Raymond King, who was a customer of the lending bank in Pennsylvania, filed adeclaratory judgment action in the Court of Common Pleas in Philadelphia Countyagainst the Company’s Pennsylvania subsidiary. The plaintiff is seeking to voidhis Consumer Loan Agreements with the lending bank and obtain a declarationthat the arbitration clause that prohibits a class action lawsuit isunenforceable and that he may file a class action for alleged violation ofvarious Pennsylvania statutes. The Company has filed its answer and a Motion ofDismissal for lack of subject matter jurisdiction and failure to join thelending bank as an indispensable party.

*North CarolinaCommissioner of Banks Order*

In August 2004, theNorth Carolina Attorney General’s Office in conjunction with the Commissionerof Banks for North Carolina issued a subpoena to the Company to producedocuments, respond to written questions and have a corporate representativeappear for a deposition regarding the relationship between the Company’s NorthCarolina subsidiary and the lending bank in North Carolina, Republic, todetermine whether operations in North Carolina are in compliance with NorthCarolina law. On February 1, 2005, the Commissioner of Banks initiated acontested case against the Company’s North Carolina subsidiary for allegedviolations of the North Carolina Consumer Finance Act. On December 22,2005, at the conclusion of the contested case, the Commissioner of Banksordered that the Company’s North Carolina subsidiary immediately cease anddesist operating. In accordance with the Commissioner of Banks’ Order, theCompany’s North Carolina subsidiary ceased all business operations on December 22,2005. The full North Carolina State Banking Commission has since affirmedthe Commissioner of Banks’ Order and the Company has filed an appeal with theNorth Carolina Superior Court.

*New Mexico Attorney General Proposed Rules andRegulations Governing the Extension of Credit For Small Loans*

On February 10, 2006,the Company joined four other payday lenders in a lawsuit against the New MexicoAttorney General requesting immediate injunctive relief from the enforcement ofthe Attorney General’s Proposed Rules and Regulations Governing theExtension of Credit for Small Loans. The Attorney General’s proposed rules wouldseverely limit the payday loan industry in New Mexico. The parties havemutually agreed to stay any further proceedings pending the adoption of newproposed regulations published by the Financial Institutions Division of theNew Mexico Regulation and Licensing Department (“FID”) on June 15, 2006.The Company is currently reviewing the FID proposed regulations, which arescheduled to become effective in part on August 31, 2006. If the FIDproposed regulations are adopted, the Company expects to be able to continue tooperate in New Mexico, although with a substantial reduction in revenues andprofits.

*Department of LaborInvestigations*

The United StatesDepartment of Labor initiated three investigations in 2005 and one in 2006 fromits district offices in the field regarding the payment of overtime wages tocertain employees. The Department of Labor recently concluded threeinvestigations and the Company is cooperating with the one remaining 

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ongoinginvestigation that could result in the payment of back wages, civil monetarypenalties and other enforcement action.

*Other Matters*

The Company is also involved in other litigation andadministrative proceedings. This litigation includes contractual disputes, employeeclaims for workers’ compensation, wrongful termination, harassment,discrimination, payment of wages due and customer claims relating to collectionpractices and violations of state and/or federal consumer protections laws.

The amount of loss and/orthe probability of an unfavorable outcome, if any, cannot be reasonablyestimated. Accordingly, no accrual has been recorded for any of the abovematters as of June 30, 2006.

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

On May 4, 2005, the Company announced that itsBoard of Directors had approved a program authorizing the repurchase by theCompany of up to $50.0 million of its currently outstanding common stock.During the three and six months ended June 30, 2005, the Companyrepurchased 367,200 shares of its common stock pursuant to its stock repurchaseprogram. The Company did not repurchase shares of its common stock pursuant toits stock repurchase program during the six months ended June 30, 2006.

In 2004, the Companyadopted Statement of Financial Accounting Standards No. 123 (Revised),Share-Based Payment (“SFAS 123(R)”). Accordingly, the Company measures the costof its share-based employee compensation at fair value and recognizes such costin the financial statements over the requisite service period.

The Company’s 2004 Omnibus Stock Plan provides for thegranting of restricted shares, stock options or other stock awards to certaindirectors, officers and other key employees of the Company.

During the six months ended June 30, 2006, theCompany issued to certain executives 133,334 restricted shares under the 2004Omnibus Stock Plan. These restricted shares vest in equal annual installmentsover three, five or eight years beginning on the first anniversary of thegrant.

During the six months ended June 30, 2006, theCompany granted to certain executives stock options to purchase 80,000 sharesof the Company’s common stock at an exercise price of $14.70 per share. Theseoptions vest in three equal annual installments beginning on the first anniversaryof the grant and are within the Company’s 2004 Omnibus Stock Plan.

The weighted-average fair value of the options grantedduring the six months ended June 30, 2006 was $4.85 per option. The fairvalue was estimated on the date of grant using the Black-Scholes option pricingmodel using the following assumptions: dividend yield of 3.6%, weighted averagerisk-free interest rate of 4.63%, expected volatility of 47% and aweighted average expected life of 4.41 years. These options expire ten yearsfrom the date of grant.

The grant date fair value of all shares of restrictedstock was based on the market value of the Company’s common stock on the datesof grant. These amounts are being amortized and charged to expense ratably overeach award’s respective vesting period. All stock options were granted with anexercise price equal to the market value of the Company’s common stock on thedates of grant. The weighted-average fair values of all stock options are beingcharged to expense ratably over each award’s respective vesting period.

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Asummary of the Company’s authorized and available shares, activity and theweighted average stock option exercise prices under its stock-basedcompensation plans follows:

| ** **                             | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------|------------|-------------|------------|--------------------|------------|--------------|------------|
| ** **                             | ** ** | ** **     | ** ** | **Outstanding** | ** ** | ** **  | ** ** | **Average**        | ** ** |
| ** **                             | ** ** | ** **     | ** ** | **Restricted**  | ** ** | **Stock**   | ** ** | **Available**      | ** ** | **Exercise** | ** ** |
| ** **                             | ** ** | **Authorized** | ** ** | **Stock**       | ** ** | **Options** | ** ** | **For Grant** | ** ** | **Price**    | ** ** |
| Outstanding at  December 31, 2005 |       | 5,200,000      |       |            | 457,043    |        |       | 1,200,000          |       | 3,542,957    |       |   | $ | 12.47 |   |   |
| Authorized                             |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Granted                                |       | —         |       |            | 133,334    |        |       | 80,000             |       | (213,334     | )          |   | $ | 14.70 |   |   |
| Exercised                              |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Canceled                               |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Outstanding at  June 30, 2006     |       | 5,200,000      |       |            | 590,377    |        |       | 1,280,000          |       | 3,329,623    |       |   | $ | 12.61 |   |   |

 

Exercise prices for stock options outstanding at June 30,2006 ranged from $12.11 to $14.70. There were no options exercisable as of June 30,2006.

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

| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Nonvested at  December 31, 2005 |       | 391,488    |       |                                   | $          | 12.69 |   |   |
| Granted                              |       | 133,334    |       |                                   | 14.38      |   |   |
| Vested                               |       | —     |       |                                   | —     |   |   |
| Forfeited                            |       | —     |       |                                   | —     |   |   |
| Nonvested at  June 30, 2006     |       | 524,822    |       |                                   | $          | 13.12 |   |   |

 

Asummary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three and six months ended June 30, 2005 and 2006 follows (inthousands):

| ** **                              | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                                        | ** ** | **June 30,**                                        | ** ** |
| ** **                              | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| Stock-based  compensation expense:      |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restricted stock                        |       |                                                     | $          | 283                                                      |       |   |   | $ | 396 |   |   |   | $ | 574 |   |   |   | $ | 759 |   |   |
| Stock options                           |       |                                                     | —     |                                                     |       |   | 248 |   |   |   | — |   |   |   | 467 |   |   |
| Total stock-based  compensation expense |       |                                                     | $          | 283                                                      |       |   |   | $ | 644 |   |   |   | $ | 574 |   |   |   | $ | 1,226 |   |   |

 

As of June 30, 2006,the total compensation cost not yet recognized related to nonvested stockawards under the Company’s plans is approximately $11.6 million. The weightedaverage period over which this expense is expected to be recognized isapproximately 6.1 years.

**9.   Transactionswith Variable Interest Entity**

Beginning in July 2005, the Company ceasedconducting business under the agency business model in Texas, and beganconducting business through a wholly owned subsidiary registered as a CreditServices Organization (“CSO”) under Texas law. In connection with operating asa CSO, the Company entered into a credit services organization agreement (“CSOAgreement”) with an unaffiliated third-party lender. The CSO Agreement governsthe terms by which the Company refers customers in Texas to that lender, on a 

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non-exclusive basis, for apossible extension of credit, processes loan applications and commits toreimburse the lender for any loans or related fees that are not collected fromsuch customers.

The Company has determined that the lender is avariable interest entity (“VIE”) under FIN 46(R). The Company has neither anequity interest nor voting rights in the lender and has no input into themanagement of the lender. However, the Company has determined that it is the primarybeneficiary of the VIE because the Company has committed to reimburse thelender for the full amount of the loans and all related fees that are not paidby the customers for all loans that are processed under the CSO Agreement. As aresult, the Company has consolidated the lender into the Company’s financialstatements.

The impact of theconsolidation of this VIE on the Company’s June 30, 2006 consolidatedbalance sheet was to increase cash and cash equivalents by approximately $5.3million, increase advances and fees receivable, net by approximately $30.5million and increase non-controlling interest in variable interest entity by$35.8 million. The impact of the consolidation of this VIE on the Company’sconsolidated statements of income for the three months ended June 30, 2006was to increase net revenues by approximately $1.2 million and increase othercenter expenses by approximately $0.3 million, the net effect of which was anincrease in income of the consolidated variable interest entity ofapproximately $0.9 million. The impact of the consolidation of this VIE on theCompany’s consolidated statements of income for the six months ended June 30,2006 was to increase net revenues by approximately $1.9 million and increaseother center expenses by approximately $0.5 million, the net effect of whichwas an increase in income of the consolidated variable interest entity ofapproximately $1.4 million.

**10.   SubsequentEvents**

On July 26, 2006, the Company’s Board ofDirectors declared a cash dividend of $0.11 per share of common stock, payableon September 8, 2006 to shareholders of record on August 28, 2006.

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

*The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements and the related notes in “Item 1. Financial Statements.”This discussion contains forward-looking statements that involve risks anduncertainties. Our actual results could differ materially from thoseanticipated by these forward-looking statements. Please see “Part II. Item1A. Risk Factors” and “Forward-Looking Statements” for discussions of theuncertainties, risks and assumptions associated with these statements.*

**Overview**

Headquartered in Spartanburg, South Carolina, we arethe largest provider of payday cash advance services in the United States asmeasured by the number of centers operated. Our centers provide short-term,unsecured cash advances that are typically due on the customers’ next payday.As of June 30, 2006, we operated 2,670 centers in 36 states.

Historically, we have conducted our business in moststates under the authority of a variety of enabling state statutes includingpayday advance, deferred presentment, check-cashing, small loan, credit serviceorganization and other state laws (which we refer to as the standard businessmodel). In certain states we have previously conducted business as a marketing,processing and servicing agent for FDIC supervised, state-chartered banksthat made payday cash advances and installment loans to their customers pursuantto the authority of the laws of the states in which they were located andfederal interstate banking laws, regulations and guidelines (which we refer toas the agency business model). In the agency business model, we refer to thebanks for which we act as agent as the lending banks. As of June 30, 2006,we were operating under our standard business model in all of our 2,670centers.

Wehave historically derived our revenues from (1) fees and/or interest paidto us directly by our customers under the standard business model and (2) marketing,processing and servicing fees paid to us by the lending banks under the agencybusiness model. Our total revenues for thethree and six months ended June 30, 2005 and 2006 consisted of (dollars inmillions):

| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **Dollars**                      | ** ** | **%**                          | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest  charged to customers   |       | $                                | 114.7      |                           | 76.3       |   | $ | 152.6 |   | 97.9 |   | $ | 219.8 |   | 76.2 |   | $ | 295.7 |   | 96.0 |   |
| Marketing, processing  and servicing fees |       | 35.6                             |       | 23.7                           |       | 3.3 |   | 2.1 |   | 68.9 |   | 23.8 |   | 12.4 |   | 4.0 |   |
| Total revenues                            |       | $                                | 150.3      |                           | 100.0      |   | $ | 155.9 |   | 100.0 |   | $ | 288.7 |   | 100.0 |   | $ | 308.1 |   | 100.0 |   |

 

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

***Migration Away fromAgency Business Model***

During the three and six months ended June 30,2005, we were marketing, processing and servicing payday cash advances made bylending banks to their customers in five states: Arkansas, Michigan, NorthCarolina, Pennsylvania and Texas. In March 2005, the FDIC issued revisedguidance (the “Revised 

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Guidance”) to FDICsupervised institutions that offered payday cash advances, including thelending banks for which we then acted as marketing, processing and servicingagent. The Revised Guidance materially constrained payday lending under theagency business model and, despite the introduction of installment loans by thelending banks, significantly reduced our marketing, processing and servicingfees. In response to the Revised Guidance, in June and July 2005, wemodified our MP&S Agreements in Arkansas, North Carolina and Pennsylvaniaand started operating in Texas and Michigan under existing state-basedlegislation. In response to an order from the North Carolina Commissioner ofBanks, we closed all our centers in North Carolina in December 2005.

In February 2006, theFDIC instructed the lending banks, including those for which we then continuedto market, process and service payday cash advances and installment loans inPennsylvania and Arkansas, to discontinue offering payday cash advances andinstallment loans if they could not adequately address the FDIC’s continuedconcerns. In response, the lending banks in Pennsylvania and Arkansas stoppedoriginating payday cash advances and installment loans and our marketing,processing and servicing fees during the second quarter of 2006 were furtherreduced. We expect to continue to service during the third quarter of 2006 anypayday cash advances and installment loans of the lending banks that remainoutstanding in Pennsylvania and Arkansas. In addition, we expect to enter intoan agreement with the FDIC obligating us to give the FDIC advance notice shouldwe decide in the future to act again as the marketing, processing, andservicing agent for payday cash advances on behalf of a lending bank. During June 2006,we began operating in Pennsylvania and Arkansas pursuant to existing state-basedlegislation under the standard business model. As a result, as of June 2006,we operate under the standard business model in all of our centers.

**Modified MP&SAgreements in Arkansas, Pennsylvania and North Carolina**

In response to the Revised Guidance, during the firsthalf of 2005, certain lending banks adopted new policies and procedures andbegan offering installment loans, which generally had bi-weekly paymentsamortized over a four-month period. In connection with these changes, werevised or entered into new MP&S Agreements with the lending banks inArkansas, North Carolina and Pennsylvania. Although the fees for an installment loanwere higher than for a payday cash advance, total revenues were reduced becauseof the longer duration of the installment loans.

Beginning in the secondhalf of 2005, the lending bank for Arkansas and North Carolina becamecontractually obligated for all losses on payday cash advances and installmentloans to its customers, whereas the lending bank in Pennsylvania remainedcontractually obligated for the losses on its payday cash advances andinstallment loans in an amount established as a percentage of the fees andinterest charged by the lending bank to its customers.

**Conversion ofOperations in Michigan and Texas**

Effective June 26, 2005, we terminated ourMP&S Agreement with the lending bank for Michigan. Under the prior MP&Sagreement, the lending bank recorded advances and fees receivable on itsbalance sheet and was contractually obligated for uncollectible accounts inamounts determined as a percentage of fees and interest charged by the lendingbank to its customers. Therefore, our balance sheet included, as an accrual forexcess bank losses, the amount by which estimated losses exceeded the lendingbank’s contractual obligation. In connection with terminating this MP&SAgreement, we purchased payday cash advance accounts receivable forapproximately $7.7 million. As a result, the lending bank no longer had anyobligations for losses with respect to those accounts.

After terminating our prior MP&S Agreement forMichigan, we began offering check-cashing and deferred-presentment servicesdirectly to customers in Michigan. The profitability of our check-cashing anddeferred-presentment business and average fees, check amounts and duration forwhich we held 

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checks was similar to whatwe historically experienced under the standard business model.****Because of the recent adoption of a new affirmative paydaylending law in Michigan, we began offering payday cash advances in Michigan in June 2006.Due to the limits on fees and charges included in that law, we expect that ourrevenues in Michigan will be lower, at least initially, than our historicalexperience under the standard business model.

In the beginning of July 2005, we terminated ourprior MP&S Agreement with the lending bank for Texas and began conductingbusiness in those centers through a wholly owned subsidiary that has registeredas a Credit Services Organization (“CSO”) under Texas law. As a CSO, we offer afee-based credit services package to assist customers in trying to improvetheir credit and in obtaining an extension of consumer credit through athird-party lender. A credit services organization agreement (“CSO Agreement”)that we entered into with an unaffiliated third-party lender governs the termsby which we refer customers in Texas to that lender, on a non-exclusive basis,for a possible extension of credit, process loan applications and commit toreimburse the lender for any loans or related fees that are not collected fromsuch customers.

Under our former MP&SAgreement with the lending bank in Texas, the lending bank was contractuallyobligated for uncollectible payday cash advance accounts in amounts determinedas a percentage of fees and interest charged by the lending bank to itscustomers, which historically had been sufficient to cover all losses incurred.Under the CSO Agreement, we are contractually obligated for all losses incurredby the lender with respect to loans it makes to customers referred by us.

**Suspensions andConversion of Operations in Pennsylvania and Arkansas**

In response to instructions from the FDIC, the lendingbank for Pennsylvania ceased its payday cash advance and installment loanoriginations as of the close of business on March 27, 2006. As a result,our revenues and center gross profits from Pennsylvania significantlydecreased. Through the remainder of August 2006, we expect to continue toservice all of this lending bank’s payday cash advances and installment loansthat were outstanding as of March 27, 2006**.**InJune 2006, we began offering the Advance America Choice-Line of Credit (“Choice-Line”)in Pennsylvania. The Choice-Line product allows customers access to up to $500in credit for a monthly participation fee plus interest on outstanding loanbalances. Subject to regulatory and consumer acceptance of the Choice-Lineproduct, and certain other management and implementation issues, we expect ourrevenues and profits in Pennsylvania to return to historic levels.

Thefollowing is a summary of financial information for our operations inPennsylvania for the three and six months ended June 30, 2005 and 2006 (inthousands):

| ** **                  | ** ** | **Three Months Ended**             | ** ** | **Six Months Ended**               | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                            | ** ** | **June 30,**                            | ** ** |
| ** **                  | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net revenues                |       |                                         | $          | 9,954                                        |       |   | $ | 1,770 |   | $ | 19,322 |   | $ | 8,670 |   |
| Total center  expenses      |       |                                         | 4,049      |                                         |       | 3,301 |   | 8,042 |   | 7,313 |   |
| Center gross  profit/(loss) |       |                                         | $          | 5,905                                        |       |   | $ | (1,531 | ) | $ | 11,280 |   | $ | 1,357 |   |

 

In addition, the lending bank for Arkansasdiscontinued offering installment loans on April 8, 2006 anddiscontinued offering payday cash advances on June 24, 2006. As a result,our revenues and center gross profits in Arkansas also deterioratedsignificantly. We expect to continue, through September 8, 2006, toservice all of this lending bank’s payday cash advances and installmentloans that were outstanding as of these dates. In June 2006, we beganoperating in Arkansas under existing state-based legislation and directlyproviding check-cashing services to customers in Arkansas. Provided theregulatory environment 

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remains stable, andsubject to other management and implementation issues, we expect our revenuesand profits in Arkansas to return to historic levels.

Thefollowing is a summary of financial information for our operations in Arkansasfor the three and six months ended June 30, 2005 and 2006 (in thousands):

| ** **                  | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                                        | ** ** | **June 30,**                                        | ** ** |
| ** **                  | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net revenues                |       |                                                     | $          | 1,745                                                    |       |   |   | $ | 883 |   |   | $ | 3,314 |   | $ | 2,231 |   |
| Total center  expenses      |       |                                                     | 988        |                                                     |       |   | 907 |   |   | 1,896 |   | 1,905 |   |
| Center gross  profit/(loss) |       |                                                     | $          | 757                                                      |       |   |   | $ | (24 | ) |   | $ | 1,418 |   | $ | 326 |   |

 

***Closings***

In August 2004, the North Carolina AttorneyGeneral’s office, in conjunction with the Commissioner of Banks for NorthCarolina, commanded an investigation of the agency business model operations ofour centers in North Carolina. In September 2005, the lending bank forwhich we marketed, processed and serviced payday cash advances and installmentloans in our North Carolina centers suspended its payday cash advance andinstallment loan originations. On December 22, 2005, the North CarolinaCommissioner of Banks issued an order directing us to cease operation of ourcenters in the state. As a result, we ceased all of our business activities andclosed our centers in North Carolina.

Thefollowing is a summary of financial information for our operations in NorthCarolina for the three and six months ended June 30, 2005 and 2006 (inthousands):

| ** **                  | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                                        | ** ** | **June 30,**                                        | ** ** |
| ** **                  | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net revenues                |       |                                                     | $          | 6,855                                                    |       |   |   | $ | — |   |   | $ | 13,368 |   | $ | (35 | ) |
| Total center  expenses      |       |                                                     | 4,047      |                                                     |       |   | 172 |   |   | 7,804 |   | 964 |   |
| Center gross  profit/(loss) |       |                                                     | $          | 2,808                                                    |       |   |   | $ | (172 | ) |   | $ | 5,564 |   | $ | (999 | ) |

 

***Centers***

Thefollowing table lists the number of centers by state at December 31, 2005and June 30, 2006:

| **State**  | ** ** | ** ** | ** ** | **December 31,   2005** | ** ** | **June 30,   2006** | ** ** |
|------------|------------|------------|------------|------------------------------|------------|--------------------------|------------|
| Alabama    |       |       | 140        |                         |       |                     | 140        |   |   |
| Arizona    |       |       | 53         |                         |       |                     | 55         |   |   |
| Arkansas   |       |       | 30         |                         |       |                     | 30         |   |   |
| California |       |       | 298        |                         |       |                     | 300        |   |   |
| Colorado   |       |       | 62         |                         |       |                     | 61         |   |   |
| Delaware   |       |       | 13         |                         |       |                     | 13         |   |   |
| Florida    |       |       | 211        |                         |       |                     | 224        |   |   |
| Idaho      |       |       | 13         |                         |       |                     | 14         |   |   |
| Illinois   |       |       | 60         |                         |       |                     | 60         |   |   |
| Indiana    |       |       | 116        |                         |       |                     | 119        |   |   |
| Iowa       |       |       | 35         |                         |       |                     | 36         |   |   |
| Kansas     |       |       | 42         |                         |       |                     | 46         |   |   |
| Kentucky   |       |       | 39         |                         |       |                     | 42         |   |   |
| Louisiana  |       |       | 75         |                         |       |                     | 73         |   |   |
| Michigan   |       |       | 111        |                         |       |                     | 119        |   |   |

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| Mississippi    |   |   | 53    |   |   |   | 52    |   |   |
|----------------|--------|--------|-------|--------|--------|--------|-------|--------|--------|
| Missouri       |   |   | 70    |   |   |   | 76    |   |   |
| Montana        |   |   | 9     |   |   |   | 9     |   |   |
| Nebraska       |   |   | 25    |   |   |   | 23    |   |   |
| Nevada         |   |   | 10    |   |   |   | 10    |   |   |
| New Hampshire  |   |   | 16    |   |   |   | 17    |   |   |
| New Mexico     |   |   | 12    |   |   |   | 12    |   |   |
| North Dakota   |   |   | 7     |   |   |   | 7     |   |   |
| Ohio           |   |   | 210   |   |   |   | 215   |   |   |
| Oklahoma       |   |   | 67    |   |   |   | 67    |   |   |
| Oregon         |   |   | 56    |   |   |   | 56    |   |   |
| Pennsylvania   |   |   | 101   |   |   |   | 100   |   |   |
| Rhode Island.  |   |   | 3     |   |   |   | 7     |   |   |
| South Carolina |   |   | 112   |   |   |   | 115   |   |   |
| South Dakota   |   |   | 11    |   |   |   | 12    |   |   |
| Tennessee      |   |   | 62    |   |   |   | 62    |   |   |
| Texas          |   |   | 207   |   |   |   | 210   |   |   |
| Virginia       |   |   | 120   |   |   |   | 127   |   |   |
| Washington     |   |   | 105   |   |   |   | 109   |   |   |
| Wisconsin      |   |   | 45    |   |   |   | 46    |   |   |
| Wyoming        |   |   | 5     |   |   |   | 6     |   |   |
| Total          |   |   | 2,604 |   |   |   | 2,670 |   |   |

 

***New centers***

We opened 104 and 46 newcenters during the three months ended June 30, 2005 and 2006,respectively. We opened 126 and 88 new centers during the six months ended June 30,2005 and 2006, respectively.

***Closed centers***

We closed 8 and 16 centersduring the three months ended June 30, 2005 and 2006, respectively. Weclosed 14 and 22 centers during the six months ended June 30, 2005 and2006, respectively. The expenses related to closing centers typically includethe undepreciated costs of fixtures and signage that cannot be moved and reusedat another center, moving costs, severance payments and any lease cancellationcosts. We recorded expenses related to center closures of approximately $0.2million and $0.4 million in the three months ended June 30, 2005 and 2006,respectively. We recorded expenses related to center closures of approximately$0.2 million and $1.0 million in the six months ended June 30, 2005 and2006, respectively.

***Prior S CorporationStatus***

From October 1, 2001through December 20, 2004, Advance America, Cash Advance Centers, Inc.(“AACACI”) and substantially all of its subsidiaries (the “Subchapter SCompanies”) were collectively treated for federal and most state income taxpurposes as an S corporation under the Internal Revenue Code and comparablestate laws. As a result, the Subchapter S Companies’ earnings were taxed forfederal and most state income tax purposes directly to AACACI’s stockholdersrather than to the Subchapter S Companies. On December 21, 2004, theSubchapter S Companies terminated their status as an S Corporation and arenow taxed as C corporations. As a result of the termination of the Subchapter SCompanies’ S corporation status, we recorded a net deferred tax liability andcorresponding income tax expense on the termination date of $8.4 million.

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**Critical AccountingPolicies and Use of Estimates**

In the ordinary course of business, we have made anumber of estimates and assumptions relating to the reporting of our results ofoperations and financial condition in the preparation of our financialstatements in conformity with generally accepted accounting principles in theUnited States (“GAAP”). We evaluate these estimates on an ongoing basis and webase these estimates on the information currently available to us and onvarious other assumptions that we believe are reasonable under thecircumstances. Actual results could vary from these estimates under differentassumptions or conditions.

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

***Provision forDoubtful Accounts and Agency Bank Losses, Allowance for Doubtful Accounts andAccrual for Excess Bank Losses***

We believe the most significant estimates made in thepreparation of our accompanying consolidated financial statements relate to thedetermination of an allowance for doubtful accounts for estimated probablelosses under the standard business model (and the amount we historicallyaccrued for probable excess bank losses for our share of the losses on paydaycash advances and installment loans we marketed, processed and serviced for thelending banks under the agency business model).

The allowance for doubtful accounts and accrual forexcess bank losses are primarily based upon models that analyze specificportfolio statistics and also reflect, to a lesser extent, management’sjudgment regarding overall accuracy. The analytical models take into accountseveral factors including the number of transactions customers complete andcharge-off and recovery rates. Additional factors such as changes instate laws, center closings, length of time centers have been open in a state,relative mix of new centers within a state and other relevant factors are alsoevaluated to determine whether the results from the analytical models should berevised. For those states where we operate under the standard business model,we record this estimate of probable losses on receivables as a reduction ofadvances and receivables, net on our balance sheet.

Historically, the lending banks have beencontractually obligated for a portion of the payday cash advance andinstallment loan losses. Those obligations, denominated as a percent of feesand interest, have typically ranged between 8% and 20%. Subsequent to July 2005,the lending bank in Arkansas and North Carolina became contractually obligatedfor all loan losses.

For those states in which we have operated as amarketing, processing and servicing agent, the estimate of probable losses wasreduced by the lending bank’s contractual obligation, as described above, toarrive at an estimate of excess loan losses. We have recorded this as anaccrual for excess bank losses, a current liability on our balance sheet.

We have charged the portion of advances, installmentloans and fees deemed to be uncollectible against the allowance for doubtfulaccounts or the accrual for excess bank losses, as appropriate, and creditedany subsequent recoveries to the allowance for doubtful accounts or the accrualfor excess bank losses, as appropriate.

Under the standard business model, unpaid advances andthe related fees and/or interest are generally charged off if a customer doesnot make a payment of at least 15% of his or her outstanding balance within 60days of the date the check was returned by the customer’s bank fornon-sufficient funds or other reasons. Under the agency business model, unpaidpayday cash advances and the related fees and/or interest generally have beencharged off 60 days from the due date. Under the agency business model, unpaidinstallment loans and the related fees and/or interest generally have beencharged off 60 days from the deposit date if the check is returned by thecustomer’s bank for non-sufficient funds or other reasons. Unpaid advances ofcustomers who file for bankruptcy are charged off upon receipt of thebankruptcy 

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notice. Although managementuses the best information available to make evaluations, future adjustments tothe allowance for doubtful accounts may be necessary if conditions differsubstantially from our assumptions used in assessing their adequacy.

Our business experiences cyclicality in receivablesbalances from both the time of year and the day of the week. Fluctuations inreceivables balances result in a corresponding impact on the allowance fordoubtful accounts and the accrual for excess bank losses.

Our receivables are traditionally lower at the end ofthe first quarter, corresponding to tax refund season, and reach their highestlevel during the last week of December.

In addition to the seasonal fluctuations, thereceivables balances can fluctuate throughout a week, generally being at theirhighest levels on a Wednesday or Thursday and at their lowest levels on aFriday. In general, receivable balances decrease approximately 4% to 7% from atypical Thursday to a typical Friday. The second quarter of 2005 began on aFriday (a relative low point in weekly receivable balances) and ended on aThursday (a relative high point in weekly receivable balances). The secondquarter of 2006 began on a Saturday (a relative low point in weekly receivablebalances) and ended on a Friday (a relative low point in weekly receivablebalances).

To the extent historicalcredit experience is not indicative of future performance or other assumptionsused by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts. As of June 30, 2006, if average default rates were 5%higher or lower, the allowance for doubtful accounts and accrual for excessbank losses would change by approximately $2.3 million.

***Intangible Assets***

As a result of ouracquisition of the National Cash Advance group of affiliated companies in October 1999,we recorded approximately $143.0 million of goodwill. 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 or whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors consideredimportant that could trigger an impairment review include significantunderperformance relative to historical or projected future cash flows,significant changes in the manner of use of the acquired assets or the strategyof the overall business and significant negative industry trends. To identifypotential impairment, we compare the fair value of a reporting unit with itscarrying amount, including goodwill. If the fair value of a reporting unit doesnot exceed its carrying amount, we measure the amount of impairment loss bycomparing the implied fair value of the reporting unit’s goodwill with thecarrying amount of that goodwill. The amount of any impairment would lower ournet income.

***Accrued Healthcareand Workers’ Compensation Expenses***

Accrued liabilities in ourDecember 31, 2005 and June 30, 2006 financial statements includeaccruals of approximately $3.4 and $3.2 million, respectively, for theself-insured portion of our health and dental insurance and approximately$4.1 million and $4.5 million, respectively, for workers’ compensation. Werecognize our obligations associated with those benefits in the period theclaim is incurred. The costs of both reported claims and claims incurred butnot reported, up to specified deductible limits, are estimated based onhistorical data, current enrollment, employee statistics and other information.We review and periodically update our estimates and the resulting reserves andany necessary adjustments are reflected in earnings currently. To the extenthistorical claims are not indicative of future claims, there are changes inenrollment or employee history, workers’ compensation loss development factorschange or other assumptions used by management do not prevail, our expense andrelated accrued liabilities could increase or decrease.

26

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***Consolidation ofVariable Interest Entity***

In connection with our CSOoperations in Texas, we entered into an agreement with an unaffiliatedthird-party lender. We have determined that the third-party lender is avariable interest entity (“VIE”) under Financial Accounting Standards BoardInterpretation No. 46 (Revised) (“FIN 46(R)”). We have neither an equityinterest nor voting rights in the lender and have no input into the managementof the lender. However, we determined that we are the primary beneficiary ofthe VIE because we have committed to reimburse the lender for the full amountsof the loans and all related fees that are not paid by the customers****with respect to all loans that are processed under the CSOAgreement between us and the lender. As a result, we have consolidated thelender as of June 30, 2006. See “Item 1. Financial Statements—Notes toInterim Unaudited Consolidated Financial Statements—Note 9. Transactions withVariable Interest Entity” for the impact of adopting FIN 46(R) on ourresults of operations and financial condition.

***Accounting forShare-Based Employee Compensation***

In 2004, we adoptedStatement of Financial Accounting Standards No. 123 (Revised), Share-BasedPayment (“SFAS 123(R)”). Accordingly, we measure the cost of our share-basedemployee compensation at the grant date based on fair value and recognize suchcost in the financial statements over each award’s requisite service period. Asof June 30, 2006, the total compensation cost not yet recognized relatedto nonvested stock awards under our share-based employee compensation plans isapproximately $11.6 million. The weighted average period over which thisexpense is expected to be recognized is approximately 6.1 years. See “Item 1.Financial Statements—Notes to Interim Unaudited Financial Statements—Note 8.Capital Stock and Stock-Based Compensation Plans” for a description of ourrestricted stock and stock option awards and the assumptions used to calculatethe fair value of such awards including the expected volatility assumed in valuingour stock option grants.

***Recently IssuedAccounting Pronouncement***

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Financial InterpretationNo. 48, Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with FASB Statement No. 109, Accounting for Income Taxes. FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. We have not determined the impact, ifany, that the adoption of FIN 48 in January 2007 will have on ourfinancial condition or results of operations.

27

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**Results ofOperations**

***Three Months Ended June 30,2005 Compared to Three Months Ended June 30, 2006***

Thefollowing tables set forth our results of operations for the three months endedJune 30, 2005 compared to the three months ended June 30, 2006(dollars in thousands, except Center Information):

| ** **                                                     | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                         | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to  customers                       |       | $                                                   | 114,693    |   |   | 95.8 | % |   | $ | 152,611 |   |   | 118.8 | % |   | $ | 37,918 |   | 33.1 | % |
| Marketing,  processing and servicing fees                 |       | 35,624                                              |       |   | 29.7 | % |   | 3,310 |   |   | 2.6 | % |   | (32,314 | ) | (90.7 | )% |
| Total revenues                                                 |       | 150,317                                             |       |   | 125.5 | % |   | 155,921 |   |   | 121.4 | % |   | 5,604 |   | 3.7 | % |
| Provision for  doubtful accounts and agency bank losses   |       | (30,567                                             | )          |   | (25.5 | )% |   | (27,435 | ) |   | (21.4 | )% |   | (3,132 | ) | (10.2 | )% |
| Net revenues                                                   |       | 119,750                                             |       |   | 100.0 | % |   | 128,486 |   |   | 100.0 | % |   | 8,736 |   | 7.3 | % |
| **Center Expenses:**                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                             |       | 42,541                                              |       |   | 35.5 | % |   | 46,171 |   |   | 35.9 | % |   | 3,630 |   | 8.5 | % |
| Occupancy costs                                                |       | 19,153                                              |       |   | 16.0 | % |   | 21,081 |   |   | 16.4 | % |   | 1,928 |   | 10.1 | % |
| Center depreciation expense                                    |       | 3,595                                               |       |   | 3.0 | % |   | 4,000 |   |   | 3.1 | % |   | 405 |   | 11.3 | % |
| Advertising expense                                            |       | 7,611                                               |       |   | 6.4 | % |   | 6,111 |   |   | 4.8 | % |   | (1,500 | ) | (19.7 | )% |
| Other center expenses                                          |       | 12,612                                              |       |   | 10.5 | % |   | 12,635 |   |   | 9.8 | % |   | 23 |   | 0.2 | % |
| Total center expenses                                          |       | 85,512                                              |       |   | 71.4 | % |   | 89,998 |   |   | 70.0 | % |   | 4,486 |   | 5.2 | % |
| Center gross profit                                            |       | 34,238                                              |       |   | 28.6 | % |   | 38,488 |   |   | 30.0 | % |   | 4,250 |   | 12.4 | % |
| **Corporate and Other Expenses  (Income):**                    | ** ** | ** **                                          | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expenses                           |       | 13,345                                              |       |   | 11.2 | % |   | 13,766 |   |   | 10.8 | % |   | 421 |   | 3.2 | % |
| Corporate  depreciation expense                                |       | 1,072                                               |       |   | 0.9 | % |   | 935 |   |   | 0.7 | % |   | (137 | ) | (12.8 | )% |
| Interest expense                                               |       | 732                                                 |       |   | 0.6 | % |   | 919 |   |   | 0.7 | % |   | 187 |   | 25.5 | % |
| Interest income                                                |       | (67                                                 | )          |   | (0.1 | )% |   | (123 | ) |   | (0.1 | )% |   | (56 | ) | (83.6 | )% |
| Loss on disposal  of property and equipment                    |       | 27                                                  |       |   | — |   |   | 283 |   |   | 0.2 | % |   | 256 |   | 948.1 | % |
| Total corporate and other expenses                             |       | 15,109                                              |       |   | 12.6 | % |   | 15,780 |   |   | 12.3 | % |   | 671 |   | 4.4 | % |
| Income before  income taxes                                    |       | 19,129                                              |       |   | 16.0 | % |   | 22,708 |   |   | 17.7 | % |   | 3,579 |   | 18.7 | % |
| Income tax  expense                                            |       | 8,384                                               |       |   | 7.0 | % |   | 8,924 |   |   | 7.0 | % |   | 540 |   | 6.4 | % |
| Income before  income of consolidated variable interest entity |       | 10,745                                              |       |   | 9.0 | % |   | 13,784 |   |   | 10.7 | % |   | 3,039 |   | 28.3 | % |
| Income of  consolidated variable interest entity               |       | —                                              |       |   | — |   |   | (888 | ) |   | (0.7 | )% |   | (888 | ) | (100.0 | )% |
| Net income                                                     |       | $                                                   | 10,745     |   |   | 9.0 | % |   | $ | 12,896 |   |   | 10.0 | % |   | $ | 2,151 |   | 20.0 | % |

 

28

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| ** **                                                            | ** ** | **Three Months Ended**                                     | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                                                    | ** ** |
| ** **                                                            | ** ** | **     2005     ** | ** ** | **     2006     ** | ** ** |
| **Center Information:**                                               |       |                                                                 |       |   |   |   |   |   |   |
| Number of centers  open at beginning of period                        |       |                                                                 | 2,424      |   |   |   | 2,640 |   |   |
| Opened                                                                |       |                                                                 | 104        |   |   |   | 46 |   |   |
| Closed                                                                |       |                                                                 | (8         | ) |   |   | (16 | ) |   |
| Number of centers  open at end of period                              |       |                                                                 | 2,520      |   |   |   | 2,670 |   |   |
| Weighted average  number of centers open during the period            |       |                                                                 | 2,485      |   |   |   | 2,649 |   |   |
| Number of payday  cash advances provided and processed (in thousands) |       |                                                                 | 2,977      |   |   |   | 2,841 |   |   |
| Amount of average  payday cash advance provided and processed         |       |                                                                 | $          | 334 |   |   |   | $ | 351 |   |   |
| Number of  installment loans provided and processed (in thousands)    |       |                                                                 | —     |   |   |   | — |   |   |
| Amount of average  installment loan provided and processed            |       |                                                                 | —     |   |   |   | $ | 487 |   |   |
|                                                                       |            |                                                                      |            |  |  |  |  |  |  |  |  |

 

| ** **                                                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                         | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       |                                                | $          | 48.2 |   |   |   | 100.0 | % |   |   | $ | 48.5 |   |   |   | 100.0 | % |   |   | $ | 0.3 |   |   | (0.6 | )% |
| Center expenses:                                                                      |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       |                                                | 17.1       |   |   |   | 35.5 | % |   |   | 17.4 |   |   |   | 35.9 | % |   |   | 0.3 |   |   | 1.8 | % |
| Occupancy costs                                                                       |       |                                                | 7.7        |   |   |   | 16.0 | % |   |   | 8.0 |   |   |   | 16.4 | % |   |   | 0.3 |   |   | 3.9 | % |
| Center depreciation expense                                                           |       |                                                | 1.4        |   |   |   | 3.0 | % |   |   | 1.5 |   |   |   | 3.1 | % |   |   | 0.1 |   |   | 7.1 | % |
| Advertising expense                                                                   |       |                                                | 3.1        |   |   |   | 6.4 | % |   |   | 2.3 |   |   |   | 4.8 | % |   |   | (0.8 | ) |   | (25.8 | )% |
| Other center expenses                                                                 |       |                                                | 5.1        |   |   |   | 10.5 | % |   |   | 4.8 |   |   |   | 9.8 | % |   |   | (0.3 | ) |   | (5.9 | )% |
| Total center expenses                                                                 |       |                                                | 34.4       |   |   |   | 71.4 | % |   |   | 34.0 |   |   |   | 70.0 | % |   |   | (0.4 | ) |   | (1.2 | )% |
| Center gross profit                                                                   |       |                                                | $          | 13.8 |   |   |   | 28.6 | % |   |   | $ | 14.5 |   |   |   | 30.0 | % |   |   | $ | 0.7 |   |   | 5.1 | % |

 

***Revenue Analysis***

Total revenues increased approximately $5.6 millionduring the three months ended June 30, 2006 compared to the same period in2005. The increase was primarily due to theopening of new centers and growth in existing centers. Total revenuesfor the 2,244 centers opened prior to April 1, 2005 and still open as of June 30,2006 increased $6.5 million from $139.8 million for the three months ended June 30,2005 to $146.3 million for the same period in 2006. Centers opened prior to April 1,2005 were at least three months and fifteen months old at the end of thethree-month periods ended June 30, 2005 and 2006, respectively. Totalrevenues for the 426 centers opened after April 1, 2005 and still open asof June 30, 2006 increased $9.1 million from $0.3 million for the threemonths ended June 30, 2005 to $9.4 million for the same period in 2006.Total revenues for the remaining 267 centers closed represented a decrease ofapproximately $10.0 million for the three months ended June 30, 2006compared to the same period in 2005. This decrease is primarily due to thesuspension and subsequent closure of operations in North Carolina during thefourth quarter of 2005.

In addition to theclosed centers mentioned in the preceding paragraph, the increase in totalrevenues during the three months ended June 30, 2006 was partially offsetby:

·       theimplementation of the FDIC Revised Guidance in Pennsylvania and Arkansas,beginning during the third quarter of 2005 and the lending banks’ suspension oforiginations in the first half of 2006. Total revenues for the second quarterof 2006 in Pennsylvania and Arkansas were approximately $9.6 million less thanthe second quarter of 2005;

29

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·       theimplementation of material changes in enabling legislation in Illinois andIndiana. Total revenues for the second quarter of 2006 in Illinois and Indianawere approximately $4.3 million less than the second quarter of 2005; and

·       thecontinued impact of Hurricanes Katrina and Rita in Louisiana and Mississippi. Totalrevenues for the second quarter of 2006 in Louisiana and Mississippi wereapproximately $1.7 million less than the second quarter of 2005.

As a percentage of total revenues,the provision for doubtful accounts and agency bank losses decreased to 17.6%for the three months ended June 30, 2006 from 20.3% for the same period in2005. The decrease in the provision is due primarily to the inclusion in the2005 provision of an approximate $4.2 million net expense related to thecontractual changes in Arkansas, Michigan, North Carolina and Texas. Inaddition, during the second quarter of 2006, we sold certain customer accountsreceivable to a collection agency, which generated proceeds of approximately$1.2 million which were recorded as a reduction in the 2006 provision. Thesedecreases were partially offset by increased loss rates.

***Center ExpenseAnalysis***

*Salaries and related payroll costs.**  *The increase in salaries andrelated payroll costs for the three months ended June 30, 2006 was dueprimarily to the new centers opened in 2005 and 2006. We averaged approximately2.12 and 2.23 full-time equivalent field employees, including districtdirectors, per center during the three months ended June 30, 2005 and2006, respectively.

*Occupancy costs and center depreciation expense.**  *The increases in occupancy costsand center depreciation expense for the three months ended June 30, 2006were due primarily to the new centers opened in 2005 and 2006.

*Advertisingexpense.**  *Advertisingexpense decreased for the three months ended June 30, 2006 compared to thesame period in 2005 due primarily to a decision to conduct less advertisingactivities during the second quarter of 2006.

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

*Generaland administrative expenses.**  *The increase in general and administrative expensesfor the three months ended June 30, 2006 was due primarily to:

·       approximately$0.4 million related to consultant costs for new product development; and

·       an increase in stock-basedcompensation expense of approximately $0.4 million, offset by a decrease inairplane operating expenses of $0.5 million.

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***Six Months Ended June 30,2005 Compared to Six Months Ended June 30, 2006***

Thefollowing tables set forth our results of operations for the six months ended June 30,2005 compared to the six months ended June 30, 2006 (dollars in thousands,except Center Information):

| ** **                                                          | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                          | ** ** | **Dollars**                                       | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to  customers                            |       | $                                                 | 219,849    |   |   | 88.6 | % |   | $ | 295,703 |   |   | 110.0 | % |   | $ | 75,854 |   | 34.5 | % |
| Marketing,  processing and servicing  fees                          |       | 68,851                                            |       |   | 27.8 | % |   | 12,387 |   |   | 4.6 | % |   | (56,464 | ) | (82.0 | )% |
| Total revenues                                                      |       | 288,700                                           |       |   | 116.4 | % |   | 308,090 |   |   | 114.6 | % |   | 19,390 |   | 6.7 | % |
| Provision for  doubtful accounts and agency bank losses   |       | (40,658                                           | )          |   | (16.4 | )% |   | (39,311 | ) |   | (14.6 | )% |   | (1,347 | ) | (3.3 | )% |
| Net revenues                                                        |       | 248,042                                           |       |   | 100.0 | % |   | 268,779 |   |   | 100.0 | % |   | 20,737 |   | 8.4 | % |
| **Center  Expenses:**                                               |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                  |       | 84,589                                            |       |   | 34.1 | % |   | 92,718 |   |   | 34.5 | % |   | 8,129 |   | 9.6 | % |
| Occupancy costs                                                     |       | 38,280                                            |       |   | 15.4 | % |   | 42,129 |   |   | 15.7 | % |   | 3,849 |   | 10.1 | % |
| Center depreciation expense                                         |       | 7,132                                             |       |   | 2.9 | % |   | 7,953 |   |   | 2.9 | % |   | 821 |   | 11.5 | % |
| Advertising expense                                                 |       | 12,856                                            |       |   | 5.2 | % |   | 9,430 |   |   | 3.5 | % |   | (3,426 | ) | (26.6 | )% |
| Other center expenses                                               |       | 25,049                                            |       |   | 10.1 | % |   | 27,925 |   |   | 10.4 | % |   | 2,876 |   | 11.5 | % |
| Total center expenses                                               |       | 167,906                                           |       |   | 67.7 | % |   | 180,155 |   |   | 67.0 | % |   | 12,249 |   | 7.3 | % |
| Center gross profit                                                 |       | 80,136                                            |       |   | 32.3 | % |   | 88,624 |   |   | 33.0 | % |   | 8,488 |   | 10.6 | % |
| **Corporate  and Other Expenses (Income):**                    | ** ** | ** **                                        | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expenses.                               |       | 25,146                                            |       |   | 10.2 | % |   | 26,777 |   |   | 9.9 | % |   | 1,631 |   | 6.5 | % |
| Corporate  depreciation expense                                     |       | 2,149                                             |       |   | 0.9 | % |   | 1,896 |   |   | 0.7 | % |   | (253 | ) | (11.8 | )% |
| Interest expense                                                    |       | 1,558                                             |       |   | 0.6 | % |   | 1,826 |   |   | 0.7 | % |   | 268 |   | 17.2 | % |
| Interest income                                                     |       | (158                                              | )          |   | (0.1 | )% |   | (299 | ) |   | (0.1 | )% |   | (141 | ) | (89.2 | )% |
| Loss on disposal  of property and equipment                         |       | 123                                               |       |   | — |   |   | 491 |   |   | 0.2 | % |   | 368 |   | 299.2 | % |
| Total corporate and other expenses                                  |       | 28,818                                            |       |   | 11.6 | % |   | 30,691 |   |   | 11.4 | % |   | 1,873 |   | 6.5 | % |
| Income before  income taxes                                         |       | 51,318                                            |       |   | 20.7 | % |   | 57,933 |   |   | 21.6 | % |   | 6,615 |   | 12.9 | % |
| Income tax expense                                                  |       | 20,835                                            |       |   | 8.4 | % |   | 23,237 |   |   | 8.7 | % |   | 2,402 |   | 11.5 | % |
| Income before  income of consolidated variable interest entity |       | 30,483                                            |       |   | 12.3 | % |   | 34,696 |   |   | 12.9 | % |   | 4,213 |   | 13.8 | % |
| Income of  consolidated variable interest entity               |       | —                                            |       |   | — |   |   | (1,373 | ) |   | (0.5 | )% |   | (1,373 | ) | (100.0 | )% |
| Net income                                                          |       | $                                                 | 30,483     |   |   | 12.3 | % |   | $ | 33,323 |   |   | 12.4 | % |   | $ | 2,840 |   | 9.3 | % |

 

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| ** **                                                            | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**              | ** ** |
| ** **                                                            | ** ** | **2005**                       | ** ** | **2006** | ** ** |
| **Center Information:**                                               |       |                           |       |   |   |
| Number of centers  open at beginning of period                        |       | 2,408                          |       | 2,604 |   |
| Opened                                                                |       | 126                            |       | 88 |   |
| Closed                                                                |       | (14                            | )          | (22 | ) |
| Number of centers  open at end of period                              |       | 2,520                          |       | 2,670 |   |
| Weighted average  number of centers open during the period            |       | 2,436                          |       | 2,628 |   |
| Number of payday  cash advances provided and processed (in thousands) |       | 5,600                          |       | 5,406 |   |
| Amount of average  payday cash advance provided and processed         |       | $                              | 333        |   | $ | 351 |   |
| Number of  installment loans provided and processed (in thousands)    |       | —                         |       | 17 |   |
| Amount of average  installment loan provided and processed            |       | —                         |       | $ | 518 |   |
|                                                                       |            |                                |            |  |  |  |  |

 

| ** **                                                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                       | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       | $                                                 | 101.8      |   |   | 100.0 | % |   | $ | 102.3 |   |   | 100.0 | % |   |   | $ | 0.5 |   |   | 0.5 | % |
| Center expenses:                                                                      |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 34.7                                              |       |   | 34.1 | % |   | 35.3 |   |   | 34.5 | % |   |   | 0.6 |   |   | 1.7 | % |
| Occupancy costs                                                                       |       | 15.7                                              |       |   | 15.4 | % |   | 16.0 |   |   | 15.7 | % |   |   | 0.3 |   |   | 1.9 | % |
| Center depreciation expense                                                           |       | 2.9                                               |       |   | 2.9 | % |   | 3.0 |   |   | 2.9 | % |   |   | 0.1 |   |   | 3.4 | % |
| Advertising expense                                                                   |       | 5.3                                               |       |   | 5.2 | % |   | 3.6 |   |   | 3.5 | % |   |   | (1.7 | ) |   | (32.1 | )% |
| Other center expenses                                                                 |       | 10.3                                              |       |   | 10.1 | % |   | 10.6 |   |   | 10.4 | % |   |   | 0.3 |   |   | 2.9 | % |
| Total center expenses                                                                 |       | 68.9                                              |       |   | 67.7 | % |   | 68.5 |   |   | 67.0 | % |   |   | (0.4 | ) |   | (0.6 | )% |
| Center gross profit                                                                   |       | $                                                 | 32.9       |   |   | 32.3 | % |   | $ | 33.8 |   |   | 33.0 | % |   |   | $ | 0.9 |   |   | 2.7 | % |

 

***Revenue Analysis***

Total revenues increased approximately $19.4 millionduring the six months ended June 30, 2006 compared to the same period in2005. The increase was primarily due to theopening of new centers and growth in existing centers. Total revenuesfor the 2,222 centers opened prior to January 1, 2005 and still open as ofJune 30, 2006 increased $22.3 million from $268.2 million for the sixmonths ended June 30, 2005 to $290.5 million for the same period in 2006.Centers opened prior to January 1, 2005 were at least six months andeighteen months old at the end of the six-month periods ended June 30,2005 and 2006, respectively. Total revenues for the 448 centers opened after January 1,2005 and still open as of June 30, 2006 increased $16.5 million from $0.4million for the six months ended June 30, 2005 to $16.9 million for thesame period in 2006. Total revenues for the remaining 273 centers closedrepresented a decrease of approximately $19.4 million for the six months ended June 30,2006 compared to the same period in 2005. This decrease is primarily due to thesuspension and subsequent closure of operations in North Carolina during thefourth quarter of 2005.

In addition to theclosed centers mentioned in the preceding paragraph, the increase in totalrevenues during the six months ended June 30, 2006 was partially offsetby:

·       theimplementation of the FDIC Revised Guidance in Pennsylvania and Arkansas,beginning during the third quarter of 2005 and the lending banks’ suspension oforiginations in the first half of 2006. Total revenues for the first six monthsof 2006 in Pennsylvania and Arkansas were approximately $12.9 million less thanthe same period in 2005;

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·       theimplementation of material changes in enabling legislation in Illinois andIndiana. Total revenues for the first six months of 2006 in Illinois andIndiana were approximately $7.8 million less than the same period in 2005; and

·       thecontinued impact of Hurricanes Katrina and Rita in Louisiana and Mississippi. Totalrevenues for the first six months of 2006 in Louisiana and Mississippi wereapproximately $3.7 million less than the same period in 2005.

As a percentage of totalrevenues, the provision for doubtful accounts and agency bank losses decreasedto 12.8% for the six months ended June 30, 2006 from 14.1% for the sameperiod in 2005. The decrease in the provision is due primarily to the inclusionin the 2005 provision of an approximate $4.2 million net expense related to thecontractual changes in Arkansas, Michigan, North Carolina and Texas. Inaddition, during the second quarter of 2006, we sold certain customer accountsreceivable to a collection agency, which generated proceeds of approximately$1.2 million which were recorded as a reduction in the 2006 provision. Thisdecrease was partially offset by increased loss rates.

***Center ExpenseAnalysis***

*Salaries and related payroll costs.**  *The increase in salaries andrelated payroll costs for the six months ended June 30, 2006 was dueprimarily to the new centers opened in 2005 and 2006. We averaged approximately2.13 and 2.17 full-time equivalent field employees, including district directors,per center during the six months ended June 30, 2005 and 2006,respectively.

*Occupancy costs, center depreciation expense andother center expenses.**  *Theincreases in occupancy costs, center depreciation expense and other centerexpenses in the six months ended June 30, 2006 were due primarily to thenew centers opened in 2005 and 2006.

*Advertisingexpense.**  *Advertisingexpense decreased for the six months ended June 30, 2006 compared to thesame period in 2005 due primarily to a decision to conduct less advertisingactivities during the first half of 2006.

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

*Generaland administrative expenses.**  *The increase in general and administrative expensesfor the six months ended June 30, 2006 was due primarily to:

·       approximately$1.4 million related to consultant costs for new product development; and

·       an increase in stock-basedcompensation expense of approximately $0.7 million, offset by a decrease inairplane operating expenses of $0.6 million.

**Liquidity andCapital Resources**

Thefollowing table presents a summary of cash flows for the six months ended June 30,2005 and 2006 (dollars in thousands):

| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                            | ** ** | **2005**   | ** ** | **2006**   | ** ** | **Dollars**  | ** ** | **%** | ** ** |
| Cash flows provided by  (used in):                    |       |       |       |       |       |         |       |   |   |
| Operating activities                                  |       | $          | 79,266     |       | $          | 65,868       |       | $ | (13,398 | ) | (16.9 | )% |
| Investing activities                                  |       | (55,053    | )          | (53,214    | )          | 1,839        |       | 3.3 | % |
| Financing activities                                  |       | (33,250    | )          | (5,571     | )          | 27,679       |       | 83.2 | % |
| Net  (decrease)/increase in cash and cash equivalents |       | (9,037     | )          | 7,083      |       | 16,120       |       | 178.4 | % |
| Cash and cash  equivalents, beginning of period       |       | 18,224     |       | 27,259     |       | 9,035        |       | 49.6 | % |
| Cash and cash  equivalents, end of period             |       | $          | 9,187      |       | $          | 34,342       |       | $ | 25,155 |   | 273.8 | % |

 

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Our principal sources of cash are from operations andfrom borrowings under our revolving credit facility. We anticipate that ourprimary uses of cash will be to provide working capital, finance capitalexpenditures, meet debt service requirements, fund advances under the standardbusiness model, finance center growth, pay dividends on our common stock andrepurchase shares of our outstanding common stock.

We borrow under our $265.0 million revolvingcredit facility to fund our advances and our other liquidity needs. Ourday-to-day balances under our revolving credit facility, as well as our cashbalances, vary because of seasonal and day-to-day requirements resulting frommaking and collecting advances. For example, if a month ends on a Friday (atypical payday)**,** our borrowings and our cashbalances will be high compared to a month that does not end on a Friday. This isbecause a substantial portion of the advances will be repaid in cash on thatday but sufficient time will not yet have passed for the cash to reduce theoutstanding borrowings under our revolving credit facility. Our borrowingsunder our revolving credit facility will also increase as the demand foradvances increases during our peak periods such as the back-to-school andholiday seasons. Conversely, our borrowings typically decrease during the taxrefund season when cash receipts from customers peak or the customer demand fornew advances decreases. Advances and fees receivable, net increasedapproximately $28.9 million, or 16.7%, to $202.0 million at June 30, 2006compared to $173.1 million at June 30, 2005, due primarily to an increasein the number of new centers. Advances and fees receivable, net increasedapproximately $8.5 million, or 4.4%, to $202.0 million at June 30, 2006compared to $193.5 million at December 31, 2005.

On May 4, 2005, we announced that our Board ofDirectors had approved a program authorizing the repurchase of up to $50.0million of our currently outstanding common stock. Our Board of Directorsdetermined that the stock repurchase program served the best interest of us andour stockholders by returning capital to our stockholders, by providing anattractive investment opportunity for our funds and by reducing the dilutiveimpact of employee stock incentive programs and potential acquisitions.

Share repurchases will continue to be made from timeto time and will be effected on the open market, in block trades, or inprivately negotiated transactions, and in compliance with applicable laws,including Securities and Exchange Commission Rule 10b-18 andRegulation M. The program does not generally require us to purchase anyspecific number of shares, and any purchases under the program depend on marketand other conditions. Our Board of Directors may suspend or cancel the stockrepurchase program at any time. During the six months ended June 30, 2006,we did not repurchase any shares of our outstanding common stock.

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

***Cash Flows fromOperating Activities***

The decrease in net cashprovided by operating activities for the six months ended June 30, 2006compared to the same period in 2005 was due primarily to a net decrease inchanges in operating assets and liabilities of $22.9 million, partially offsetby a net increase in non-cash adjustments of $6.6 million. The $22.9 millionnet decrease in changes in operating assets and liabilities is due primarily toa decrease in the change in income taxes payable of $7.9 million and a decreasein the change in other current assets of $14.0 million (due primarily to thetiming of insurance and center rent payments as well as the refund in thesecond quarter of 2005 of funds deposited with the IRS relating to the periodwe were an S Corporation).

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***Cash Flows fromInvesting Activities***

The decrease in net cashused in investing activities for the six months ended June 30, 2006compared to the same period in 2005 was primarily due to a $1.6 milliondecrease in cash invested in advances and fees receivable, net.

***Cash Flows fromFinancing Activities***

The decrease in net cashused in financing activities for the six months ended June 30, 2006compared to the same period in 2005 was primarily due to a $13.4 millionincrease in the non-controlling interest of the variable interest entity, an$8.3 million reduction in payments on our revolving credit facility and a$4.3 million increase in book overdrafts.

**CapitalExpenditures**

For the six months ended June 30,2005 and 2006, we spent $7.1 million and $6.3 million, respectively, on capitalexpenditures. Capital expenditures included expenditures for (1) newcenters opened, (2) center remodels and (3) computer equipmentreplacements in our centers and at our corporate headquarters.

**Off-Balance SheetArrangements with the Lending Banks**

During the six months ended June 30, 2006, weoperated as marketing, processing and servicing agent for payday cash advancesand installment loans offered, made and funded by FDIC supervised,state-chartered banks through our centers located in Arkansas and Pennsylvania.Prior to July 2005, we operated as an agent for lending banks in Arkansas,Michigan, North Carolina, Pennsylvania and Texas. Under the prior MP&SAgreements with these lending banks, the lending banks were contractuallyobligated for the losses on their payday cash advances in an amount establishedas a percentage of the fees and interest charged by the lending banks to theircustomers. Therefore, under the prior MP&S Agreements, our marketing,processing and servicing fee increased by the lending bank’s contractualobligation for losses. If actual payday cash advance losses by the lending bankexceeded the percentage specified in its MP&S Agreement with us, we werepotentially obligated to pay the lending bank the outstanding amount of theadvances and loans plus the lending bank’s fees and/or interest receivable onthe advances, less the lending bank’s contractually obligated portion of thelosses.

Effective June 26, 2005, however, we terminatedour MP&S Agreement with the lending bank for Michigan and began to operateunder the standard business model in Michigan. As a result, we no longer accrueany amounts for excess bank losses relating to our operations in Michigan,however, we still accrue amounts for doubtful accounts for these operations.

On June 30, 2005, we terminated our old MP&SAgreement and entered into a new MP&S Agreement with a new lending bank forArkansas, pursuant to which we are no longer contractually obligated for anylosses on payday cash advances and installment loans made in Arkansas. As aresult, we stopped accruing any amounts for excess bank losses relating to ouroperations in Arkansas. Effective July 6, 2005, we terminated our oldMP&S Agreement and entered into a new MP&S Agreement with a new lendingbank for North Carolina. Pursuant to this replacement MP&S Agreement, wewere no longer contractually obligated for any losses on payday cash advancesand installment loans made in North Carolina, and as a result we stopped accruingany amounts for excess bank losses relating to our operations in NorthCarolina.

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Beginning in July 2005, we ceased conductingbusiness under the agency business model in Texas and began conducting businessin those centers as a CSO. Under the prior MP&S Agreement with the lendingbank for Texas, the lending bank was contractually obligated for uncollectiblepayday cash advance accounts in amounts determined as a percentage of fees andinterest charged by the lending bank to its customers, which historically wassufficient to cover all losses incurred in Texas. Under the CSO Agreement with anunaffiliated third-party lender in Texas, we are contractually obligated forall losses incurred by the lender with respect to loans it makes to itscustomers that are referred by us. We therefore still accrue amounts fordoubtful accounts for these operations.

Approximately 30.8% and (0.7%) of our total centergross profit, in the three months ended June 30, 2005 and 2006,respectively, was derived from the agency business model. Approximately 26.6%and 0.9% of our total center gross profit, in the six months ended June 30,2005 and 2006, respectively, was derived from the agency business model.

Each lending bank for whom we have historicallymarketed, processed and serviced payday cash advances and, as of July 2005,installment loans offered under the agency business model was responsible forevaluating each of its customers’ applications and determining whether thepayday cash advance and/or installment loan was approved. The lending banksutilized an automated third-party credit scoring system to evaluate andapprove each customer application. We were not involved in the lending banks’ approvalprocess, we were not involved in determining the approval procedures orcriteria of the lending banks and, in the normal course of business, wegenerally did not fund or acquire any payday cash advances or installment loansfrom the lending banks. The payday cash advances and installment loans wererepayable solely to the lending banks and were assets of the lending banks.Consequently, the lending banks’ payday cash advances and installment loanshave never been included in our payday cash advance and installment loanportfolios nor have they been reflected on our balance sheet within our advancesand fees receivable, net.

Prior to July 2005, each lending bank wasobligated under its MP&S Agreement for the losses on payday cash advancesin an amount established as a percentage of the fees and/or interest charged bythe lending bank to its customers. If the amount of uncollected payday cashadvances and installment loans exceeded the lending bank’s contractualobligation, we could have been obligated to pay to the lending bank theoutstanding amount of the advances or installment loan plus its fees and/orinterest receivable, less its contractually obligated portion of the losses. Asof June 30, 2006, our remaining aggregate contingent liability to thelending bank for Pennsylvania amounted to approximately $1.0 million, whichwas not included on our balance sheet. We could also be obligated to pay thisamount to the lending bank if, as a result of a change in law, regulation orotherwise, the lending bank’s payday cash advances and installment loans wereto become uncollectible.

Because our economicexposure for excess bank losses relates to the lending banks’ payday cashadvances and installment loans, we have accrued for excess bank losses, toreflect our probable losses related to uncollected lending bank payday cashadvances and installment loans. The accrual for excess bank losses has beenestablished on a basis similar to the allowance for doubtful accounts under thestandard business model. The accrual for excess bank losses that was reportedin our balance sheet was $1.4 million and $1.0 million as of December 31,2005 and June 30, 2006, respectively.

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**Certain ContractualCash Commitments**

Ourprincipal future contractual obligations and commitments as of June 30,2006, including periodic interest payments, included the following (dollars inthousands):

| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** | ** **              | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**  | ** ** | **2006**                                            | ** ** | **2007 and  2008** | ** ** | **2009 and  2010** | ** ** | **2011 and  thereafter** | ** ** |
| Long-term debt  obligations:               |       |       |       |       |       |                                                |       |                    |       |   |   |   |   |   |   |   |   |
| Revolving credit facility                  |       | $          | 34,213     |       | $          | —                                              |       |                    | $          | — |   |   |   | $ | 34,213 |   |   |   | $ | — |   |   |
| Mortgage payable                           |       | 8,763      |       | 398        |       |                                                | 1,594      |                    |       |   | 1,594 |   |   |   | 5,177 |   |   |
| Note payable                               |       | 450        |       | 70         |       |                                                | 276        |                    |       |   | 104 |   |   |   | — |   |   |
| Operating lease  obligations(1)            |       | 133,206    |       | 30,319     |       |                                                | 79,719     |                    |       |   | 20,825 |   |   |   | 2,343 |   |   |
| Purchase  obligations                      |       | 1,993      |       | 1,993      |       |                                                | —     |                    |       |   | — |   |   |   | — |   |   |
| Total                                      |       | $          | 178,625    |       | $          | 32,780                                              |       |                    | $          | 81,589 |   |   |   | $ | 56,736 |   |   |   | $ | 7,520 |   |   |
|                                            |            |            |            |            |            |                                                     |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

***Long-Term DebtObligations***

*Revolving Credit Facility.  *On July 16, 2004, we entered into an amendmentand restatement of our prior credit facility with a syndicate of banks. Asamended and restated, our revolving credit facility provides us with a$265.0 million revolving line of credit, which amount includes the abilityto issue up to $20.0 million in letters of credit. Our revolving creditfacility matures on July 16, 2009. We have the option to (i) increaseour revolving credit facility by an additional $10.0 million and (ii) extendits maturity date to July 16, 2010, in each case upon our satisfaction ofcertain covenants and conditions. Any portion of our revolving credit facilitythat is repaid may be borrowed again. In May 2005, we amended ourrevolving credit facility to allow the repurchase of up to $50.0 million of ouroutstanding common stock. In June 2005, we further amended our revolvingcredit facility to permit us to operate as a CSO in Texas.

As of June 30, 2006, we had $34.2 millionoutstanding on the revolving portion of our credit facility and approximately$3.9 million of letters of credit outstanding, leaving approximately$226.9 million available for future borrowings under our credit facility.

In general, our borrowings under our revolving creditfacility bear interest, at our option, at either a base rate plus an applicablemargin or a LIBOR-based rate plus an applicable margin. The base rateequals the greater of (i) the prime rate announced by Bank of America, theadministrative agent under the revolving credit facility, and (ii) the sumof the federal funds rate plus 0.50%. The applicable margin is determined eachquarter by a pricing grid based on our senior leverage ratio of ourconsolidated senior debt to consolidated EBITDA. The base rate applicablemargin ranges from 0.75% to 1.50% based upon our senior leverage ratio. TheLIBOR-based applicable margin ranges from 2.50% to 3.25% based upon oursenior leverage ratio. As of June 30, 2006, the applicable margin for theprime-based rate was 0.75% and the applicable margin for the LIBOR-basedrate was 2.50%.

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

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Our obligations under the revolving credit facilityare guaranteed by each of our subsidiaries. Our borrowings under the revolvingcredit facility are secured by substantially all of our assets and the assetsof our subsidiaries. In addition, our borrowings under the revolving creditfacility are secured by a pledge of all of the capital stock, or similar equityinterests, of our subsidiaries. Our revolving credit facility contains variousfinancial covenants that require, among other things, the maintenance of aminimum net worth and leverage and fixed charge coverage ratios. The revolvingcredit facility contains customary covenants and events of default, includingcovenants that restrict our ability to encumber assets, to create indebtednessand to declare and pay dividends. The revolving credit facility also includescross default provisions where an event of default with respect to any otherindebtedness in excess of $1.0 million in the aggregate could cause allamounts outstanding under the revolving credit facility to become due andpayable. We were in compliance with all covenants at June 30, 2006.

We borrow under our $265.0 million revolvingcredit facility to fund our advances and 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.

*MortgagePayable**.  *Ourcorporate headquarters building and related land are subject to a mortgage, theprincipal amount of which was approximately $6.2 million and $6.0 millionat December 31, 2005 and June 30,2006, respectively. The mortgage is payable to an insurance company andis collateralized by our corporate headquarters building and related land. Themortgage is payable in 180 monthly installments of approximately $66,400,including principal and interest, and bears interest at a fixed rate of 7.30%over its term. The mortgage matures on June 10, 2017. The carrying amountof our corporate headquarters (land, land improvements and building) wasapproximately $5.4 million and $5.3 million at December 31, 2005 and June 30, 2006, respectively.

***Operating LeaseObligations***

We lease all but three ofour centers from third-party lessors under operating leases. These leasestypically have initial terms of three to five years and may contain provisionsfor renewal options, additional rental charges based on revenue and payment ofreal estate taxes and common area charges. In addition, we lease aircrafthangar space and have certain other leases for security and office equipment.The lessor under three center leases, the aircraft hanger space lease and otheroffice and warehouse space leases are companies controlled by our Chairman.

***PurchaseObligations***

We enter into agreementswith vendors to purchase furniture, fixtures and other items used to open newcenters. These purchase commitments typically extend for a period of two to threemonths after the opening of a new center. As of June 30, 2006, ourpurchase obligations totaled approximately $2.0 million.

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

The preparation of ourfinancial statements in conformity with GAAP requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and 

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expensesduring the reporting period. In applying the accounting principles, we mustoften make individual 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 tothe estimates and assumptions made in preparing our consolidated financialstatements will emerge over periods of time, such as estimates and assumptionsunderlying the determination of allowance for doubtful accounts. Theseestimates and assumptions are monitored and periodically adjusted ascircumstances warrant. These amounts may be adjusted based on higher or loweractual loss experience. Although there is greater risk with respect to theaccuracy of these estimates and assumptions because of the period over whichactual results may emerge, this risk is mitigated by the ability to make changesto these estimates and assumptions over the same period.

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

**Impact of Inflation**

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

**FORWARD-LOOKINGSTATEMENTS**

This Quarterly Report on Form 10-Qincludes forward-looking statements. All statements other than historicalinformation or statements of current condition contained in this QuarterlyReport, including statements regarding our future financial performance, ourbusiness 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.

Wehave based these forward-looking statements on management’s current views andexpectations. Although we believe that the current views and expectationsreflected in these forward-looking statements are reasonable, those views andexpectations, and the related statements, are inherently subject to risks,uncertainties and other factors, many of which are not under our control andmay not even be predictable. These risks, uncertainties and other factors couldcause the actual results, performance or achievements to differ materially fromany future results, performance or achievements expressed or implied by theforward-looking statements. These risks, uncertainties and factors include, butare not limited to**:**

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

·       ourability to efficiently and profitably identify, implement and manage anyalternative methods of doing business or new products;

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

·       ourability to successfully implement new methods of doing business in Pennsylvaniaand Arkansas;

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

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

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·       theaccuracy of our estimates of losses;

·       theftand employee errors;

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

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

·       ourcurrent lack of product and business diversification; and

·       theother matters set forth under “Part II. Item 1A. Risk Factors” below.

We expressly disclaim anyobligation to update or revise any of these forward-looking statements, whetherbecause of future events, new information, a change in our views orexpectations, or otherwise. We make no prediction or statement about theperformance of our shares of common stock.

You are cautioned not torely unduly on any forward-looking statements. These risks and uncertaintiesare discussed in more detail elsewhere in this Quarterly Report, includingunder “Part II. Item 1A. Risk Factors” and in this Item.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

***Interest Rate Risk***

We are exposed to interestrate risk on our revolving credit facility. Our variable interest expense issensitive to changes in the general level of interest rates. We may from timeto time enter into interest rate swaps, collars or similar instruments with theobjective of reducing our volatility in borrowing costs. We do not usederivative financial instruments for speculative or trading purposes. We had noderivative financial instruments outstanding as of December 31, 2005 or June 30,2006. The weighted average interest rate on our $37.9 million of variableinterest debt as of December 31, 2005 was approximately 7.38%. Theweighted average interest rate on our $34.2 million of variable interestdebt as of June 30, 2006 was approximately 8.34%.

We had total interestexpense of $0.7 million and $0.9 million for the three months ended June 30,2005 and 2006, respectively. We had total interest expense of $1.6 million and$1.8 million for the six months ended June 30, 2005 and 2006,respectively. The estimated change in interest expense from a hypothetical 200basis-point change in applicable variable interest rates would have beenapproximately $15.0 thousand and $45.0 thousand for the three months ended June 30,2005 and 2006, respectively, and approximately $66.0 thousand and $99.0thousand for the six months ended June 30, 2005 and 2006, respectively.

***Credit Risk***

Under the agency businessmodel, we invoice each bank for the marketing, processing and servicing feespayable to us by such bank. In addition, the lending bank in Pennsylvania isresponsible for making payments to us if actual payday cash advance andinstallment loan losses are less than the payday cash advance and installmentloan losses retained by the lending bank. We are subject to the risk that thelending banks will fail to pay all or a portion of the amounts due to us orthat they will fail to pay us on a timely basis. Any such failure could have amaterial adverse effect on our business, results of operations and financialcondition.

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**ITEM 4.**                CONTROLSAND PROCEDURES.

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, andour internal control over financial reporting, as of the end of the periodcovered by this Report. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that those disclosure controls andprocedures are effective. There were no changes in our internal control overfinancial reporting during the quarter ended June 30, 2006, that havematerially affected, or are reasonably likely to materially affect, our internalcontrol over financial reporting.

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**PART II.**   OTHERINFORMATION

**ITEM 1.**                LEGALPROCEEDINGS.

See “Part I. Item 1.Financial Statements—Notes to the Interim Unaudited Consolidated FinancialStatements—Note 7. Commitments and Contingencies,” which is incorporated hereinby reference.

**ITEM 1A.**     RISKFACTORS.

**Risks Related toOur Business and Industry**

***Our business is highly regulated.Changes in applicable laws and regulations, or our failure to comply with such laws and regulations,could have a material adverse effect on our business, results of operations andfinancial condition.***

Our business is subject to numerous federal, state andlocal laws and regulations, which are subject to change and which may imposesignificant costs or limitations on the way we conduct or expand our business.These regulations govern or affect, among other things, interest rates andother fees, check cashing fees, lending practices, recording and reporting ofcertain financial transactions, privacy of personal consumer information andcollection practices. As we develop new services, we may become subject toadditional federal, state and local regulations. State and local governmentsmay also seek to impose new licensing requirements or interpret or enforceexisting requirements in new ways. In addition, changes in current laws andfuture laws or regulations may restrict our ability to continue our currentmethods of operation or expand our operations. Changes in laws or regulations,or our failure to comply with such laws and regulations, may have a materialadverse effect on our business, results of operations and financial condition.

***Our industry is highly regulatedunder state law. Changes in state laws and regulations, or our failure tocomply with such laws and regulations, could have a material adverse effect onour business, results of operations and financial condition.***

Our business is regulated under a variety of enablingstate statutes, including payday advance, deferred presentment, check-cashing,small loan and credit services organization state laws, all of which aresubject to change and which may impose significant costs or limitations on theway we conduct or expand our business. As of June 30, 2006, 39 states andthe District of Columbia had specific laws that permitted payday cash advancesor allowed a form of payday cash advances under small loan laws. As of June 30,2006, we operated in 35 of these 39 states. We do not currently conductbusiness in the remaining four states or in the District of Columbia because wedo not believe it is economically attractive to operate in these jurisdictionsdue to specific legislative restrictions such as interest rate ceilings, anunattractive population density or unattractive location characteristics. Theremaining 11 states do not have laws specifically authorizing the payday cashadvance business. Despite the lack of specific payday advance laws, other lawsmay permit us to do business in these states. As of June 30, 2006, weoperated in one of these 11 states.

During the last few years, legislation has beenadopted in some states that prohibits or severely restricts payday cash advanceservices. Many bills have also been introduced in state legislatures. In 2005,bills that severely restrict or effectively prohibit payday cash advances wereintroduced in 26 states. In addition, two states have sunset provisions intheir payday cash advance laws that require renewal of the laws by the statelegislatures at periodic intervals. Rules currently under consideration inNew Mexico may effectively prohibit, or at least significantly restrict, ouroperations there. Oregon has enacted legislation that is currently slated tobecome effective in July 2007 that will provide for significant additionalrestrictions on the payday cash advance industry. Any such legislation couldhave a material adverse impact on our results from operations. Similar lawsprohibiting payday cash advance services or making them unprofitable could bepassed in any other state at any time or existing payday cash advance lawscould 

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expire or be amended, anyof which would have a material adverse effect on our business, results ofoperations and financial condition.

Statutes authorizing payday cash advance servicestypically provide state agencies that regulate banks and financial institutionswith significant regulatory powers to administer and enforce the law. In moststates, we are required to apply for a license, file periodic written reportsregarding business operations and undergo comprehensive state examinations toensure that we comply with applicable laws. Under statutory authority, stateregulators have broad discretionary power and may impose new licensingrequirements, interpret or enforce existing regulatory requirements indifferent ways or issue new administrative rules, even if not contained in statestatutes, that impact the way we do business and may force us to terminate ormodify our operations in particular states. They may also impose rules thatare generally adverse to our industry. Any new licensing requirements or rules couldhave a material adverse effect on our business, results of operations andfinancial condition.

In some cases, we rely on the interpretations of thestaff of state regulatory bodies with respect to the laws and regulations oftheir respective jurisdictions. These staff interpretations generally are notbinding legal authority and may be subject to challenge in administrative orjudicial proceedings. Additionally, as the staff of state regulatory bodieschange, it is possible that their interpretations of applicable laws andregulations also may change and negatively affect our business. As a result,our reliance on staff interpretations could therefore have a material adverseeffect on our business, results of operations and financial condition.

Additionally, state attorneys general and bankingregulators have begun to scrutinize payday cash advances and other alternativeproducts and take actions that could require us to modify, suspend or ceaseoperations in their respective states. In December 2005, after theconclusion of a contested case, the Commissioner of Banks for North Carolinaordered that our North Carolina subsidiary immediately cease all businessoperations. See “Part I. Item 1.Financial Statements—Notes to Interim Unaudited Financial Statements—Note 7.Commitments and Contingencies.” As a result, we closed 118 centers in NorthCarolina. The lost revenues from such closures may have a material adverseeffect on our results of operations and financial condition. In addition, it isour understanding that the newly introduced Advance America Choice-Line ofCredit is being scrutinized by the Office of the Pennsylvania Secretary ofBanking. An adverse opinion by the Secretary or other governmentalagency in Pennsylvania could significantly impair our business or force us tocease offering that new product in Pennsylvania.

***Our industry is regulated underfederal law and subject to federal and state unfair and deceptive practicesstatutes. Our failure to comply with such regulations or changes in federallaws and regulations, or changes to such laws, could have a material adverseeffect on our business, results of operations and financial condition.***

Although states provide the primary regulatoryframework under which we offer advances, certain federal laws also impact ourbusiness. Because advances are viewed as extensions of credit, we must complywith the federal Truth-in-Lending Act and Regulation Z adopted under that Act.Additionally, we are subject to the Equal Credit Opportunity Act, the Fair DebtCollection Practices Act, the Fair Credit Reporting Act and theGramm-Leach-Bliley Act. Any failure to comply with any of these federal lawsand regulations could have a material adverse effect on our business, resultsof operations and financial condition.

Additionally, since 1999, various anti-payday cashadvance legislation has been introduced in the U.S. Congress. Congressionalmembers continue to receive pressure from consumer advocates and other industryopposition groups to adopt such legislation. Recent attention has focused onthe use of short term lending and payday cash advances by military personnel.Any federal legislative or regulatory action that restricts or prohibits paydaycash advance services could have a material adverse impact on our business,results of operations and financial condition.

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Our marketing efforts and the representations we makeabout our payday cash advances also are subject to federal and state unfair anddeceptive practices statutes. The Federal Trade Commission (“FTC”) enforces theFederal Trade Commission Act and the state attorneys general and privateplaintiffs enforce the analogous state statutes. If we are found to haveviolated any of these statutes, that violation could have a material adverseeffect on our business, results of operations and financial condition.

***Our industry is subject tovarious local rules and regulations. Changes in these local regulationscould have a material adverse effect on our business, results of operations andfinancial condition.***

In addition to state and federal laws and regulations,our business can be subject to various local rules and regulations such aslocal zoning regulations. For example, several cities in the state of Oregonhave recently adopted local ordinances that have the effect of limiting ourbusiness. Any actions taken in the future by local zoning boards or other localgoverning bodies to require special use permits for, or impose otherrestrictions on, payday cash advance service providers could have a materialadverse effect on our business, results of operations and financial condition.

From time to time, we may also choose to operate in astate even if legislation or regulations cause us to lose money on ouroperations in that state. The passage of a 2002 Indiana statute established arate structure at which we could not operate on a profitable basis. However, wecontinued to provide payday cash advances in the state while experiencingoperating losses until a new, less restrictive, law was passed in March 2004.Further regulatory changes in Indiana and recently adopted legislation inIllinois have also reduced our revenue and profitability in those states. Anyof these actions or events could have a material adverse effect on ourbusiness, results of operations and financial condition.

***Current and future litigation andregulatory proceedings against us could have a material adverse effect on ourbusiness, results of operations and financial condition.***

Our business is subject to lawsuits and regulatoryproceedings that could generate adverse publicity and cause us to incursubstantial expenditures. See “Part I. Item 1. Financial Statements—Notesto Interim Unaudited Financial Statements—Note 7. Commitments andContingencies.” Adverse rulings in some of these lawsuits or regulatoryproceedings could significantly impair our business or force us to cease doingbusiness in one or more states.

We are likely to be subject to further litigation andproceedings in the future. The consequences of an adverse ruling in any currentor future litigation or proceeding could cause us to have to refund fees and/orinterest collected on payday cash advances, refund the principal amount ofpayday cash advances, pay treble or other multiple damages, pay monetary penaltiesand/or modify or terminate our operations in particular states. We may also besubject to adverse publicity. Defense of any lawsuits or proceedings, even ifsuccessful, requires substantial time and attention of our senior officers andother management personnel that would otherwise be spent on other aspects ofour business and requires the expenditure of significant amounts for legal feesand other related costs. Any of these events could have a material adverseeffect on our business, results of operations and financial condition.

***Competition in the retailfinancial services industry could cause us to lose market share or reduce ourinterest and fees, possibly resulting in a decline in our future revenues andearnings.***

The industry in which we operate has low barriers toentry and is highly fragmented and very competitive. We believe that the marketmay become even more competitive as the industry grows and/or consolidates. Wecompete with services provided by traditional financial institutions, such asoverdraft protection, and with other payday cash advance providers, small loanproviders, credit unions, short-term consumer lenders, other financial serviceentities and other retail businesses that offer consumer loans or otherproducts and services that are similar to ours. We also compete with companiesoffering payday cash advances and short-term loans over the internet as well asby phone. Some of these competitors have larger local or regional customerbases, more locations and substantially greater financial, marketing and other 

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resources than we have. Asa result of this increasing competition, we could lose market share or we mayneed to reduce our interest and fees, possibly resulting in a decline in ourfuture revenues and earnings.

***The concentration of our revenuesin certain states could adversely affect us.***

Our centers operated in 36 states and, for the threemonths ended June 30, 2005 and 2006, our five largest states (measured bytotal revenues) accounted for approximately 41% and 48%, respectively, of ourtotal revenues. For the six months ended June 30, 2005 and 2006, our fivelargest states (measured by total revenues) accounted for approximately 41% and47%, respectively, of our total revenues. While we believe we have a diversegeographic presence, for the near term we expect that significant revenues willcontinue to be generated by certain states, largely due to the currentlyprevailing economic, demographic, regulatory, competitive and other conditionsin those states. Furthermore, our five largest states, as measured by revenues,are not in all instances our five largest states as measured by the number ofcenters operated. Changes to prevailing economic, demographic, regulatory orany other conditions in the markets in which we operate could lead to areduction in demand for our products and services, a decline in our revenues oran increase in our provision for doubtful accounts and agency bank losses thatcould result in a deterioration of our financial condition.

***Media reports and publicperception of payday cash advances as being predatory or abusive couldmaterially adversely affect our business, results of operations and financialcondition.***

Over the past few years, consumer advocacy groups andcertain media reports have advocated with increasing frequency governmental andregulatory action to prohibit or severely restrict payday cash advances. Theconsumer groups and media reports typically focus on the cost to a consumer foran advance. The consumer groups and media reports typically characterize these advancesas predatory or abusive toward consumers. If this negative characterization of advancesbecomes widely accepted by consumers, demand for advance services couldsignificantly decrease, which could materially adversely affect our business,results of operations and financial condition. Negative perception of advancesor other activities could also result in increased regulatory scrutiny andincreased litigation, and encourage restrictive local zoning rules andmake it more difficult to obtain government approvals necessary to open newcenters. These trends could materially adversely affect our business, resultsof operations and financial condition.

***The provision for doubtfulaccounts and agency bank losses may increase and net income may decrease if weare unable to collect customers’ personal checks that are returned due tonon-sufficient funds (“NSF”) in the customers’ accounts or other reasons.***

For the three months endedJune 30, 2005 and 2006, we deposited approximately 5.7% and 6.0%,respectively, of all the customer checks we received and approximately 76% and79%, respectively, of these deposited customer checks were returned unpaidbecause of non-sufficient funds in the customers’ bank accounts or because ofclosed accounts or stop-payment orders. For the six months ended June 30,2005 and 2006, we deposited approximately 5.0% and 5.4%, respectively, of allthe customer checks we received and approximately 74% and 78%, respectively, ofthese deposited customer checks were returned unpaid because of non-sufficientfunds in the customers’ bank accounts or because of closed accounts orstop-payment orders. Total charge-offs, net of recoveries, for the three monthsended June 30, 2005 and 2006 were approximately $17.3 million and $18.7million, respectively. Total charge-offs, net of recoveries, for the six monthsended June 30, 2005 and 2006 were approximately $33.9 million and $39.1million, respectively. If the number of customer checks that we depositincreases or the percent of the customers’ returned checks that we charge-offincreases, our provision for doubtful accounts and agency bank losses willincrease and our net income will decrease.

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***If our estimates of losses arenot adequate, our provision for doubtful accounts and agency bank losses wouldincrease. This would result in a decline in our future revenues and earnings,which could have a material adverse effect on our stock price.***

We maintain an allowance for doubtful accounts forestimated losses for advances we make directly to consumers and check-cashing,deferred-presentment and other credit services we offer under the standardbusiness model and an accrual for excess bank losses for our share of losses onpayday cash advances and installment loans we will continue to service forlending banks under the agency business model. To estimate the appropriateallowance for doubtful accounts and accrual for excess bank losses, we considerthe amount of outstanding advances owed to us, the amount of payday cashadvances and installment loans owed to the lending banks and serviced by us,the contract with each lending bank, historical advances or installment loanswe have charged off, our current collection patterns and the current economictrends in the markets we serve.

As of June 30,2006, our allowance for doubtful accounts was $46.2 million and the accrual forexcess bank losses was $1.0 million. These amounts, however, are estimates, andwe have less experience upon which to base our estimates of losses frominstallment loans, check-cashing, deferred-presentment or credit services thanwith payday cash advances. If our actual advance, check-cashing,deferred-presentment or credit services losses are greater than our allowancefor doubtful accounts, our provision for doubtful accounts and agency banklosses would increase. This would result in a decline in our future revenuesand earnings, which could have a material adverse effect on our stock price.

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

Our primary business activity is offering payday cashadvance services. If we are unable to maintain and grow our advance servicesbusiness, our future revenues and earnings could decline. Our current lack ofproduct and business diversification could inhibit our opportunities forgrowth, reduce our revenues and profits and make us more susceptible toearnings fluctuations than many of our competitors who are more diversified andprovide other services such as pawn lending, title lending or other similarservices. External factors, such as changes in laws and regulations, newentrants and enhanced competition, could also make it more difficult for us tooperate as profitably as a more diversified company could operate. Any internalor external change in our industry could result in a decline in our futurerevenues and earnings, which could have a material adverse effect on our stockprice.

***Our inability to efficiently andprofitably introduce or manage new products or alternative methods forconducting business could have a material adverse effect on our business,results of operations and financial condition.***

In July 2005 we beganoffering credit services as a CSO to customers in Texas. In June 2006, webegan offering consumers in Pennsylvania a new financial service called theAdvance America Choice-Line of Credit, operating under an existing state checkcashing law in Arkansas and offering advances under a deferred presentmentservice transactions act in Michigan. Further, we intend to introduceadditional new products and services in the future, such as a prepaid debitcard. In order to offer such new products, we will need to comply withadditional regulatory and licensing requirements. Each of these changes,alternative methods of conducting business and new products are subject to riskand uncertainty and require significant investment in time and capital. Due toour lack of experience in offering some of these alternative services andproducts, we cannot assure you that we will be able to successfully implementany of these changes or successfully introduce any new products, or to do so ina timely manner. Furthermore, we cannot predict the demand for any of these newservices or products, nor do we know if we will be able to offer these newservices or products in an efficient manner or on a profitable basis. Ourfailure to do so, 

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or lowcustomer demand for any of these new services or products, could have amaterial adverse effect on our business, results of operations and financialcondition.

***Ourability to manage our growth may deteriorate and our ability to execute ourgrowth strategy may be adversely affected.***

We have experiencedsubstantial growth in recent years. Our growth strategy, which is based onopening centers in existing and new markets, is subject to significant risks.We cannot assure you that we will be able to expand our market presence in ourcurrent markets or successfully enter new markets through the opening of newcenters or acquisitions. Moreover, the start-up costs and the losses frominitial operations attributable to each newly opened center place demands uponour liquidity and cash flow, and we cannot assure you that we will be able tosatisfy these demands.

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

·       theprevailing laws and regulatory environment of each state in which we operate orseek to operate, which are subject to change at any time;

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

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

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

·       ourability to compete for expansion opportunities in suitable locations;

·       ourability to recruit, train and retain qualified personnel;

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

·       ourability to obtain adequate financing for our expansion plans.

We cannot assure you thatour systems, procedures, controls and existing space will be adequate tosupport expansion of our operations. Our growth has placed significant demandson all aspects of our business, including our administrative, technical andfinancial personnel and systems. Additional growth or expansion may furtherstrain our management, financial and other resources. Our future results ofoperations will substantially depend on the ability of our officers and keyemployees to manage changing business conditions and to implement and improveour technical, administrative, financial control and reporting systems. Inaddition, we cannot assure you that we will be able to implement our businessstrategy profitably in geographic areas or product lines we do not currentlyserve.

***Wemay incur substantial additional debt, which could adversely affect ourbusiness, results of operations and financial condition by limiting our abilityto obtain financing in the future and react to changes in our business.***

We may incur substantialadditional debt in the future. As of June 30, 2006, our total debt wasapproximately $40.6 million and our stockholders’ equity was approximately$319.5 million. The total availability under our current credit facility is$265.0 million, which we may borrow at any time, subject to compliance withcertain covenants and conditions. Due to the seasonal nature of our business,our total debt is historically the lowest during the first calendar quarter andthen increases during the remainder of the year. If we incur substantialadditional debt, it could have important consequences to our business. Forexample, it could:

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

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

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

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

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

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

The terms of our debt limit our ability to incuradditional debt but do not prohibit us from incurring additional debt. Whendebt levels increase, the related risks that we now face will also increase.

If we fail to generate sufficient cash flow fromfuture operations to meet our debt service obligations, we may need to seekrefinancing of all or a portion of our indebtedness or obtain additionalfinancing in order to meet our obligations with respect to our indebtedness. Wecannot assure you that we will be able to refinance any of our indebtedness orobtain additional financing on satisfactory terms or at all.

***We depend on loans and cashmanagement services from banks to operate our business. If banks decide to stopmaking loans and/or providing cash management services to companies in ourindustry, it could have a material adverse affect on our business, results ofoperations and financial condition.***

We depend on borrowings under our revolving creditfacility to fund advances, capital expenditures to build new centers and otherneeds. One major regional bank announced that it had revised its creditpolicies to prohibit future loans to companies engaged in the payday cashadvance services or car title lending industries in a letter that the bankfiled with the Federal Reserve Board in connection with the bank’s applicationfor approval of an acquisition. The bank’s letter referred to comments filed bycertain consumer advocacy organizations in connection with the bank’sapplication, and stated that it had revised its credit policies “afterconsidering the potential reputational risks and consumer harm” that couldresult from lending to companies in these industries. While this bank is notone of our existing lenders under our revolving credit facility, if our currentor potential credit banks decided not to lend money to companies in ourindustry, we could face higher borrowing costs, limitations on our ability togrow our business as well as possible cash shortages, any of which could have amaterial adverse effect on our business, results of operations and financialcondition. This bank also no longer provides cash management services,including operating depository accounts, to payday advance companies. There areother banks that have notified us and other companies in the payday cashadvance and check-cashing industries, that they will no longer maintain bankaccounts for these companies due to reputational risks and increased compliancecosts of servicing money services businesses and other cash intensiveindustries. While none of our larger depository banks has requested that weclose our bank accounts or put other restrictions on how we use their services,if any of our larger current or future depository banks were to take suchaction, we could face higher costs of managing our cash and limitations on ourability to grow our business, both of which could have a material adverseeffect on our business, results of operations and financial condition.

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***We depend to a substantial extenton borrowings under our revolving credit facility to fund our liquidity needs.***

We have an existingrevolving credit facility that allows us to borrow up to $265.0 million,assuming we are in compliance with a number of covenants and conditions.Because we typically use substantially all of our available cash generated fromour operations to repay borrowings on our revolving credit facility on acurrent basis, we have limited cash balances and we expect that a substantial portionof our liquidity needs, including any amounts to pay any future cash dividendson our common stock, will be funded primarily from borrowings under ourrevolving credit facility. As of June 30, 2006, we had approximately$226.9 million available for future borrowings under this facility. Due to theseasonal nature of our business, our borrowings are historically the lowestduring the first calendar quarter and increase during the remainder of theyear. If our existing sources of liquidity are insufficient to satisfy ourfinancial needs, we may need to raise additional debt or equity in the future.

***Our revolving credit facilitycontains restrictions and limitations that could significantly affect ourability to operate our business.***

Our revolving credit facility contains a number ofsignificant covenants that could adversely affect our business. These covenantsrestrict our ability, and the ability of our subsidiaries to, among otherthings:

·       incuradditional debt;

·       createliens;

·       effectmergers or consolidations;

·       makeinvestments, acquisitions or dispositions;

·       paydividends, repurchase stock or make other payments;

·       enterinto certain sale and leaseback transactions;

·       becomesubject to further restrictions on the creation of liens; and

·       haveforeign subsidiaries.

The breach of any covenantor obligation in our revolving credit facility will result in a default. Ifthere is an event of default under our revolving credit facility, the lendersunder the revolving credit facility could cause all amounts outstandingthereunder to be due and payable, subject to applicable grace periods. Thiscould trigger cross-defaults under our other existing or future debtinstruments. As a result, our ability to respond to changing business andeconomic conditions and to secure additional financing, if needed, may besignificantly restricted, and we may be prevented from engaging in transactionsthat might further our growth strategy. If we are unable to repay, refinance orrestructure our indebtedness under our revolving credit facility, the lendersunder that facility could proceed against the collateral securing thatindebtedness. Our obligations under the revolving credit facility areguaranteed by each of our existing and future subsidiaries. The borrowings underthe revolving credit facility and the subsidiary guarantees are secured bysubstantially all of our assets and the assets of the subsidiary guarantors. Inaddition, borrowings under the revolving credit facility are secured by apledge of substantially all of the capital stock, or similar equity interests,of the subsidiary guarantors. In the event of our insolvency, liquidation,dissolution or reorganization, the lenders under our revolving credit facilityand any other existing or future debt of ours would be entitled to payment infull from our assets before distributions, if any, were made to ourstockholders.

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***Our business is seasonal innature, which causes our revenues, collection rates and earnings to fluctuate.These fluctuations could have a material adverse effect on our results ofoperations and stock price.***

Our business is seasonal due to the impact offluctuating demand for advances and fluctuating collection rates throughout theyear. Demand has historically been highest in the third and fourth quarters ofeach year, corresponding to the back-to-school and holiday seasons, and lowestin the first quarter of each year, corresponding to our customers’ receipt ofincome tax refunds. Our provision for doubtful accounts and agency bank losses,allowance for doubtful accounts and accrual for excess bank losses arehistorically lowest as a percentage of revenues in the first quarter of eachyear, corresponding to our customers’ receipt of income tax refunds, andincrease as a percentage of revenues for the remainder of each year. Thisseasonality requires us to manage our cash flows over the course of the year.If our revenues or collections were to fall substantially below what we wouldnormally expect during certain periods, our ability to service our debt, paydividends on our common stock and meet our other liquidity requirements may beadversely affected, which could have a material adverse effect on our resultsof operations and stock price.

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

***Because we maintain a significantsupply of cash in our centers, we may be subject to cash shortages due toemployee and third-party theft and errors. We also may be subject to liabilityas a result of crimes at our centers.***

Because our businessrequires us to maintain a significant supply of cash in each of our centers, weare subject to the risk of cash shortages resulting from employee andthird-party theft and errors. Although we have implemented various programs toreduce these risks, maintain insurance coverage for theft and provide securityfor our employees and facilities, we cannot assure you that employee andthird-party theft and errors will not occur. Cash shortages from employee andthird-party theft and errors were approximately $0.4 million (0.24% of totalrevenues) and $0.4 million (0.27% of total revenues) in the three months ended June 30,2005 and 2006, respectively. Cash shortages from employee and third-party theftand errors were approximately $0.6 million (0.21% of total revenues) and $0.7million (0.24% of total revenues) in the six months ended June 30, 2005and 2006, respectively. Theft and errors could lead to cash shortages and couldadversely affect our business, results of operations and financial condition.It is also possible that crimes such as armed robberies may be committed at ourcenters. We could experience liability or adverse publicity arising from suchcrimes. For example, we may be liable if an employee, customer or bystandersuffers bodily injury, emotional distress or death. Any such event may have amaterial adverse effect on our business, results of operations and financialcondition.

***Any disruption in theavailability of our information systems could adversely affect operations atour centers.***

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

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***Our centralized headquartersfunctions are susceptible to disruption by catastrophic events, which couldhave a material adverse effect on our business, results of operations andfinancial condition.***

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

***Potential futureacquisitions could be difficult to integrate, divert the attention of keymanagement personnel, disrupt our business, dilute stockholder value andadversely affect our business, results of operations and financial condition.***

We may consideracquisitions of companies, technologies and products that we feel couldaccelerate our ability to compete or allow us to enter new markets.Acquisitions involve numerous risks, including:

·       difficultiesin integrating operations, technologies, accounting and personnel;

·       difficultiesin supporting and transitioning customers of our acquired companies;

·       diversionof financial and management resources from existing operations;

·       risksof entering new markets;

·       potentialloss of key employees; and

·       inabilityto generate sufficient revenues to offset acquisition costs.

Acquisitions alsofrequently result in the recording of goodwill and other intangible assets thatare subject to potential impairments in the future that could harm ourfinancial results. In addition, if we finance acquisitions by issuingconvertible debt or equity securities, our existing stockholders may bediluted, which could affect the market price of our stock. As a result, if wefail to properly evaluate acquisitions or investments, we may not achieve theanticipated benefits of any such acquisitions, and we may incur costs in excessof what we anticipate, either of which could have a material adverse effect onour business, results of operations and financial condition.

***Regular turnoveramong our managers and employees at our centers makes it more difficult for usto operate our centers and increases our costs of operations, which could havean adverse effect on our business, results of operations and financialcondition.***

The annual turnover as of June 30,2006, among our center managers was approximately 55% and among our othercenter employees was approximately 106%. Approximately 50% of the turnover hastraditionally occurred in the first six months following the hire date of ourcenter managers and employees. This turnover increases our cost of operationsand makes it more difficult to operate our centers. If we are unable to retainour employees in the future, our business, results of operations and financialcondition could be adversely affected.

***We used to be taxedas an S corporation under Subchapter S of the Internal Revenue Code and claimsof taxing authorities related to our prior status as an S corporation couldharm us.***

Between October 1, 2001, and the closing of ourinitial public offering (“IPO”) on December 21, 2004, we were taxed as a “pass-through”entity under Subchapter S of the Internal Revenue Code. Currently, we are taxedas a C corporation under Subchapter C of the Internal Revenue Code, which isapplicable to most corporations and treats the corporation as an entity that isseparate and distinct from its stockholders. 

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If our tax returns for theyears in which we were an S corporation were to be audited by the InternalRevenue Service or another taxing authority and we were determined not to havequalified for, or to have violated, our S corporation status, we could beobligated to pay back taxes, interest and penalties. These amounts couldinclude taxes on all of our net income while we were an S corporation. Taxableincome during the period we were an S corporation was $211.0 million. Any suchclaims could result in additional costs to us and could have a material adverseeffect on our business, results of operations and financial condition.

Until we file our finalincome tax returns as an S corporation, the amount of deferred income taxliability recorded as a result of our conversion from an S status to a C statusremains an estimate. Any change in this deferred income tax liability willresult in a change in income tax expense when the final S corporation incometax return is filed. This should occur in the third quarter of 2006.

**Risks Related toOur Common Stock**

***Our executive officers anddirectors may be able to exert significant influence over our future direction.***

Our executive officers anddirectors together with certain trusts for the benefit of some of the familymembers of certain directors, control approximately 35%****ofour outstanding common stock. As a result, these stockholders, if they acttogether, may be able to influence any matter requiring our stockholders’approval, including the election of directors and approval of significantcorporate transactions. As a result, this concentration of ownership may delay,prevent or deter a change in control, could deprive our stockholders of anopportunity to receive a premium for their common stock as part of a sale ofour company or its assets and might reduce the market price of our commonstock.

***Applicable laws andour certificate of incorporation and bylaws may discourage takeovers andbusiness combinations that our stockholders might consider in their bestinterest.***

State laws and our certificate of incorporation andbylaws may delay, defer, prevent or render more difficult a takeover attemptthat our stockholders might consider in their best interests. For instance,they may prevent our stockholders from receiving the benefit from any premiumto the market price of our common stock offered by a bidder in a takeovercontext. Even in the absence of a takeover attempt, the existence of theseprovisions may adversely affect the prevailing market price of our common stockif they are viewed as discouraging takeover attempts in the future.

State laws and our certificate of incorporation andbylaws may also make it difficult for stockholders to replace or remove ourdirectors. These provisions may facilitate entrenchment of directors that maydelay, defer or prevent a change in our control, which may not be in the bestinterests of our stockholders.

The followingprovisions that are included in our certificate of incorporation and bylawshave anti-takeover effects and may delay, defer or prevent a takeover attemptthat our stockholders might consider in their best interests. In particular,our certificate of incorporation and bylaws:

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

·       prohibitstockholders from filling vacancies on our Board of Directors;

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

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

·       requirethe approval by the holders of at least 80% of the voting power of ouroutstanding capital stock entitled to vote on the matter for the stockholdersto amend the provisions of our bylaws and 

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certificate of incorporationdescribed in the second through fourth bullet points above and in this bulletpoint.

In addition, many of our subsidiaries are licensed by,and subject to, the regulatory and supervisory jurisdiction of the states wherethey do business. Under change in control statutes of some of these states, anyperson, acting alone or with others, who is seeking to acquire, directly orindirectly, 5% or more of our outstanding common stock may need to be approvedby the authorities within those states. As a result, prospective investors whointend to acquire a substantial portion of our common stock may need to beaware of and to comply with those state requirements, to the extent applicable.

In addition, Section 203of the General Corporation Law of the State of Delaware may limit the abilityof an “interested stockholder” to engage in business combinations with us. Aninterested stockholder is defined to include persons owning 15% or more of ouroutstanding voting stock.

***We can redeem yourcommon stock if you are or if you become a disqualified person.***

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

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On May 4, 2005, weannounced a stock repurchase program pursuant to which we were authorized torepurchase up to $50.0 million of our outstanding common stock. We made nostock repurchases during the six months ended June 30, 2006. As of June 30,2006, the approximate dollar value of shares that may yet be purchased underthe program was $24.4 million.

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

Thefollowing table summarizes the votes at the Annual Meeting of our stockholdersheld on May 18, 2006:

| **Matter**                                                                                                       | ** ** | ** ** | ** ** | **For** | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------|------------|-------------|------------|--------------|------------|-------------|------------|--------------|------------|
| Election of Directors:                                                                                           |       |       |       |    |       |        |       |         |       |        |       |         |       |   |   |
| George D. Johnson, Jr.                                                                                      |       | 71,046,751 |       | —  |       | 1,324,736   |       |         | —     |        |       |         |       | — |   |
| William M. Webster IV                                                                                            |       | 71,911,323 |       | —  |       | 460,164     |       |         | —     |        |       |         |       | — |   |
| Stephen K. Benjamin                                                                                              |       | 72,059,401 |       | —  |       | 312,086     |       |         | —     |        |       |         |       | — |   |
| Robert H. Chapman III                                                                                       |       | 72,185,722 |       | —  |       | 185,765     |       |         | —     |        |       |         |       | — |   |
| Kenneth E. Compton                                                                                               |       | 72,038,184 |       | —  |       | 333,303     |       |         | —     |        |       |         |       | — |   |
| Thomas E. Hannah                                                                                                 |       | 72,058,897 |       | —  |       | 312,590     |       |         | —     |        |       |         |       | — |   |
| Donovan A. Langford III                                                                                |       | 72,186,022 |       | —  |       | 185,465     |       |         | —     |        |       |         |       | — |   |
| W. Olin Nisbet                                                                                                   |       | 72,185,602 |       | —  |       | 185,885     |       |         | —     |        |       |         |       | — |   |
| Ratification of the  appointment of PricewaterhouseCoopers LLP As Independent Auditors for the  Company for 2006 |       | 72,147,297 |       | 219,691 |       | —      |       |         | 4,499      |        |       |         |       | — |   |

 

 

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**ITEM6.**                EXHIBITS.
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                              |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1            |       | Certification of  Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                               |
| 31.2            |       | 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**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                     | **ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.** |
|---------------------|-------------------------------------------------|
| August 8, 2006 | By:                                             | /s/ JOHN I. HILL |   |
|                |                                            | John I. Hill |
|                |                                            | *Executive Vice President and  Chief Financial Officer* |
|                |                                            | *(Duly authorized officer and  principal financial officer)* |

 

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**INDEXTO EXHIBITS**
| Exhibit  Number | ** ** | ** **                                                                                                                                                                                                        | **Description** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 31.1            |       | Certification of  Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 31.2            |       | 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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