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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                              | ** ** | ** **                                                                                                   |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
| ** **                                                                                                                  | ** ** | ** **                                                                                                   |
| **For the quarterly period ended  September 30, 2008**                                                                 |
| ** **                                                                                                                  |
| **OR**                                                                                                                      |
| ** **                                                                                                                  |
| **o**                                                                                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                  |
| **For the transition period from        to         ** |

 

**COMMISSION FILE NUMBER 001-32363**

 

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

(Exact name of registrant asspecified in its charter)

 

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

 

**135 North Church Street**

**Spartanburg, South Carolina 29306**

(Address of principalexecutive offices) (Zip Code)

 

**864-342-5600**

(Registrant’s telephonenumber, including area code)

 

**None**

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                               | ** ** | **Outstanding as of November 4,  2008** |
|-----------------------------------------|------------|----------------------------------------------|
| Common Stock, par value  $.01 per share |       | 61,089,556 shares                            |

 

 

 

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

**Form 10-Q**

**For the three months and nine months ended September 30,2008**

 
| ** **                     | ** **                                                                                                                | **Page** |
|--------------------------------|---------------------------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING STATEMENTS** | 3                                                                                                                         |
| ** **                     | ** **                                                                                                                |     |
| **PART I.**               | **FINANCIAL  INFORMATION**                                                                                                | 4        |
| Item 1.                   | Financial Statements                                                                                                      | 4        |
|                           | Unaudited Consolidated  Balance Sheets December 31, 2007 and September 30, 2008                                 | 4        |
|                           | Interim Unaudited  Consolidated Statements of Income Three Months and Nine Months Ended  September 30, 2007 and 2008 | 5        |
|                           | Interim  Unaudited Consolidated Statement of Stockholders’ Equity Nine Months Ended  September 30, 2008         | 6        |
|                           | Interim  Unaudited Consolidated Statements of Cash Flows Nine Months Ended  September 30, 2007 and 2008              | 7        |
|                           | Notes to  Interim Unaudited Consolidated Financial Statements                                                             | 8        |
| Item 2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               | 19       |
| Item 3.                   | Quantitative  and Qualitative Disclosures About Market Risk                                                               | 40       |
| Item 4.                   | Controls  and Procedures                                                                                                  | 41       |
| ** **                     | ** **                                                                                                                |     |
| **PART II.**              | **OTHER INFORMATION**                                                                                                     | 41       |
| Item 1.                   | Legal  Proceedings                                                                                                        | 41       |
| Item 1A.                  | Risk Factors                                                                                                              | 41       |
| Item 2.                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              | 42       |
| Item 6.                   | Exhibits                                                                                                                  | 43       |
| ** **                     |                                                                                                                      |
| **SIGNATURES**                 | 44                                                                                                                        |
| ** **                     |                                                                                                                      |
| **INDEX  TO EXHIBITS**         | 45                                                                                                                        |
|                                |                                                                                                                           |          |  |

 

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**FORWARD-LOOKING STATEMENTS**

 

The matters discussed inthis Quarterly Report on Form 10-Q that are forward-looking statements arebased on current management expectations that involve substantial risks anduncertainties, which could cause actual results to differ materially from theresults expressed in, or implied by, these forward-looking statements. Thesestatements can be identified by the fact that they do not relate strictly tohistorical or current facts. They use words such as “expect,” “intend,” “plan,”“believe,” “project,” “anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,”“continue” and other words and terms of similar meaning in conjunction with 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 matters described in “Part I.Item 1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2007 and in “Part II. Item 1A. Risk Factors” ofour Quarterly Reports on Form 10-Q, as well as any cautionary language inthis Quarterly Report, provide examples of risks, uncertainties and events thatmay cause our actual results to differ materially from the expectations wedescribe in our forward-looking statements. Although we believe that ourexpectations are based on reasonable assumptions, actual results may differmaterially from those in the forward-looking statements as a result of variousfactors, including, but not limited to, the examples we provided.

 

Forward-looking statementsspeak only as of the date of this Quarterly Report. Except as required underfederal securities laws and the rules and regulations of the U.S.Securities and Exchange Commission, we do not have any intention, and do notundertake, to update any forward-looking statements to reflect events orcircumstances arising after the date of this Quarterly Report, whether as aresult of new information, future events or otherwise. As a result of theserisks and uncertainties, readers are cautioned not to place undue reliance onthe forward-looking statements included in this Quarterly Report or that may bemade elsewhere from time to time by, or on behalf of, us. All forward-looking statementsattributable to us are expressly qualified by these cautionary statements.

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

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

 

**Unaudited Consolidated Balance SheetsDecember 31, 2007 and September 30, 2008**

 

**(in thousands, except pershare data)**

 
| ** **                                                                                                                                                                                                    | ** ** | **December 31,  2007** | ** ** | **September 30,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                                                                                                                    |       |                        |       |                         |       |
| Current assets                                                                                                                                                                                                |       |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                                     |       | $                           | 28,251     |                         | $          | 16,001 |   |
| Advances and fees receivable, net                                                                                                                                                                             |       | 221,480                     |       | 211,237                      |       |
| Deferred income taxes                                                                                                                                                                                         |       | 13,737                      |       | 12,942                       |       |
| Other current assets                                                                                                                                                                                          |       | 13,578                      |       | 22,257                       |       |
| Total current assets                                                                                                                                                                                          |       | 277,046                     |       | 262,437                      |       |
| Restricted cash                                                                                                                                                                                               |       | 5,701                       |       | 5,201                        |       |
| Property and equipment, net                                                                                                                                                                                   |       | 57,616                      |       | 49,638                       |       |
| Goodwill                                                                                                                                                                                                      |       | 127,286                     |       | 127,605                      |       |
| Other assets                                                                                                                                                                                                  |       | 4,049                       |       | 4,907                        |       |
| Total assets                                                                                                                                                                                                  |       | $                           | 471,698    |                         | $          | 449,788 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                 |       |                        |       |                         |       |
| Current liabilities                                                                                                                                                                                           |       |                        |       |                         |       |
| Accounts payable                                                                                                                                                                                              |       | $                           | 16,204     |                         | $          | 11,892 |   |
| Accrued liabilities                                                                                                                                                                                           |       | 31,823                      |       | 27,761                       |       |
| Accrual for third-party lender losses                                                                                                                                                                         |       | 4,587                       |       | 3,755                        |       |
| Current portion of long-term debt                                                                                                                                                                             |       | 542                         |       | 570                          |       |
| Total current liabilities                                                                                                                                                                                     |       | 53,156                      |       | 43,978                       |       |
| Revolving credit facility                                                                                                                                                                                     |       | 142,302                     |       | 203,005                      |       |
| Long-term debt                                                                                                                                                                                                |       | 5,136                       |       | 4,704                        |       |
| Deferred income taxes                                                                                                                                                                                         |       | 20,629                      |       | 22,189                       |       |
| Deferred revenue                                                                                                                                                                                              |       | —                      |       | 5,365                        |       |
| Other liabilities                                                                                                                                                                                             |       | 184                         |       | 257                          |       |
| Total liabilities                                                                                                                                                                                             |       | 221,407                     |       | 279,498                      |       |
| Commitments and contingencies (Note 5)                                                                                                                                                                   |       |                        |       |                         |       |
| 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 and 96,821 shares issued and 72,947 and 61,083 outstanding as of  December 31, 2007 and September 30, 2008, respectively |       | 968                         |       | 968                          |       |
| Paid in capital                                                                                                                                                                                               |       | 286,999                     |       | 288,520                      |       |
| Retained earnings                                                                                                                                                                                             |       | 133,789                     |       | 141,840                      |       |
| Accumulated other comprehensive loss                                                                                                                                                                          |       | (75                         | )          | (889                         | )          |
| Common stock in treasury (23,874 and 35,738 shares at cost at December 31,  2007 and September 30, 2008, respectively)                                                                              |       | (171,390                    | )          | (260,149                     | )          |
| Total stockholders’ equity                                                                                                                                                                               |       | 250,291                     |       | 170,290                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                               |       | $                           | 471,698    |                         | $          | 449,788 |   |

 

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

 

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

 

**Interim Unaudited Consolidated Statements of IncomeThree Months and Nine Months Ended September 30, 2007 and 2008**

 

**(in thousands, except pershare data)**

 
| ** **                                                    | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                                   | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Total Revenues**                                            |       | $                                                          | 183,926    |                                                | $          | 173,861 |   | $ | 525,948 |   | $ | 501,459 |   |
| **Center Expenses:**                                          |       |                                                       |       |                                                |       |   |   |   |   |
| Salaries and related payroll costs                            |       | 50,235                                                     |       | 47,783                                              |       | 149,191 |   | 148,489 |   |
| Provision for doubtful accounts                               |       | 50,704                                                     |       | 42,126                                              |       | 97,343 |   | 93,132 |   |
| Occupancy costs                                               |       | 24,949                                                     |       | 25,204                                              |       | 72,168 |   | 75,233 |   |
| Center depreciation expense                                   |       | 4,343                                                      |       | 4,115                                               |       | 12,876 |   | 12,638 |   |
| Advertising expense                                           |       | 6,537                                                      |       | 6,109                                               |       | 19,438 |   | 16,099 |   |
| Other center expenses                                         |       | 16,561                                                     |       | 11,095                                              |       | 44,247 |   | 36,730 |   |
| Total center expenses                                         |       | 153,329                                                    |       | 136,432                                             |       | 395,263 |   | 382,321 |   |
| Center gross profit                                           |       | 30,597                                                     |       | 37,429                                              |       | 130,685 |   | 119,138 |   |
| **Corporate and Other Expenses (Income):**                    |       |                                                       |       |                                                |       |   |   |   |   |
| General and administrative expenses                           |       | 15,043                                                     |       | 18,312                                              |       | 44,006 |   | 50,696 |   |
| Corporate depreciation expense                                |       | 780                                                        |       | 760                                                 |       | 2,410 |   | 2,320 |   |
| Interest expense                                              |       | 3,168                                                      |       | 3,029                                               |       | 7,771 |   | 8,246 |   |
| Interest income                                               |       | (63                                                        | )          | (37                                                 | )          | (261 | ) | (107 | ) |
| Loss on disposal of property and equipment                    |       | 1,893                                                      |       | 221                                                 |       | 2,428 |   | 439 |   |
| Loss on impairment of assets                                  |       | —                                                     |       | —                                              |       | 314 |   | 236 |   |
| Income before income taxes                                    |       | 9,776                                                      |       | 15,144                                              |       | 74,017 |   | 57,308 |   |
| Income tax expense                                            |       | 3,792                                                      |       | 6,689                                               |       | 30,321 |   | 24,775 |   |
| Income before income of consolidated variable interest entity |       | 5,984                                                      |       | 8,455                                               |       | 43,696 |   | 32,533 |   |
| Income of consolidated variable interest entity               |       | (251                                                       | )          | —                                              |       | (811 | ) | — |   |
| Net income                                                    |       | $                                                          | 5,733      |                                                | $          | 8,455 |   | $ | 42,885 |   | $ | 32,533 |   |
| Net income per common share:                                  |       |                                                       |       |                                                |       |   |   |   |   |
| Basic                                                         |       | $                                                          | 0.07       |                                                | $          | 0.14 |   | $ | 0.54 |   | $ | 0.50 |   |
| Diluted                                                       |       | $                                                          | 0.07       |                                                | $          | 0.14 |   | $ | 0.54 |   | $ | 0.50 |   |
| Dividends declared per common share                           |       | $                                                          | 0.125      |                                                | $          | 0.125 |   | $ | 0.375 |   | $ | 0.375 |   |
| Weighted average number of shares outstanding:                |       |                                                       |       |                                                |       |   |   |   |   |
| Basic                                                         |       | 78,068                                                     |       | 61,000                                              |       | 78,765 |   | 65,375 |   |
| Diluted                                                       |       | 78,136                                                     |       | 61,008                                              |       | 78,822 |   | 65,378 |   |

 

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

 

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

 

**InterimUnaudited Consolidated Statement of Stockholders’ EquityNine Months Ended September 30, 2008**

 

**(in thousands, except per share data)**

 
| ** **                                              | ** ** | **Common  Stock** | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated  Other** | ** ** | **Common Stock** | ** ** | ** **           | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|------------|------------|-------------|------------|------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                              | ** ** | ** **        | ** ** | **Par**    | ** ** | **Paid-In** | ** ** | **Retained**           | ** ** | **Comprehensive**     | ** ** | **In Treasury** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Shares**        | ** ** | **Value**  | ** ** | **Capital** | ** ** | **Earnings**           | ** ** | **Loss**              | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Total** | ** ** |
| **Balances, December 31, 2007**                    |       | 96,821            |       | $          | 968        |        | $          | 286,999                |       | $                     | 133,789    |                 | $          | (75 | ) | (23,874 | ) | $ | (171,390 | ) | $ | 250,291 |   |
| Comprehensive income:                                   |       |              |       |       |       |        |       |                   |       |                  |       |                 |       |   |   |   |   |
| Net income                                              |       | —            |       | —     |       | —      |       | 32,533                 |       | —                |       | —               |       | — |   | 32,533 |   |
| Foreign currency translation                            |       | —            |       | —     |       | —      |       | —                 |       | (814                  | )          | —               |       | — |   | (814 | ) |
| Total comprehensive income                              |       |              |       |       |       |        |       |                   |       |                  |       |                 |       |   |   | 31,719 |   |
| Dividends paid ($0.375 per share)                       |       | —            |       | —     |       | —      |       | (24,377                | )          | —                |       | —               |       | — |   | (24,377 | ) |
| Dividends payable                                       |       | —            |       | —     |       | —      |       | (105                   | )          | —                |       | —               |       | — |   | (105 | ) |
| Purchases of treasury stock                             |       | —            |       | —     |       | —      |       | —                 |       | —                |       | (11,917              | )          | (88,953 | ) | (88,953 | ) |
| Issuance of restricted stock                            |       | —            |       | —     |       | —      |       | —                 |       | —                |       | 42                   |       | — |   | — |   |
| Vesting of restricted stock issued from  treasury stock |       | —            |       | —     |       | (119        | )          | —                 |       | —                |       | —               |       | 119 |   | — |   |
| Amortization of restricted stock                        |       | —            |       | —     |       | 665         |       | —                 |       | —                |       | —               |       | — |   | 665 |   |
| Stock option expense                                    |       | —            |       | —     |       | 979         |       | —                 |       | —                |       | —               |       | — |   | 979 |   |
| Issuance of common stock to director in  lieu of cash   |       | —            |       | —     |       | (4          | )          | —                 |       | —                |       | 11                   |       | 75 |   | 71 |   |
| **Balances, September 30, 2008**                   |       | 96,821            |       | $          | 968        |        | $          | 288,520                |       | $                     | 141,840    |                 | $          | (889 | ) | (35,738 | ) | $ | (260,149 | ) | $ | 170,290 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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

 

**InterimUnaudited Consolidated Statements of Cash FlowsNine Months Ended September 30, 2007 and 2008**

 

**(in thousands)**

 
| ** **                                                                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating activities**                                                              |       |     |       |     |       |
| Net income                                                                                            |       | $        | 42,885     |     | $          | 32,533 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities, net of acquisition |       |     |       |     |       |
| Income of consolidated variable interest  entity                                                      |       | 811      |       | —   |       |
| Depreciation and amortization                                                                         |       | 15,286   |       | 14,993   |       |
| Non-cash interest expense                                                                             |       | 743      |       | 548      |       |
| Provision for doubtful accounts                                                                       |       | 97,343   |       | 93,132   |       |
| Deferred income taxes                                                                                 |       | 675      |       | 2,355    |       |
| Loss on disposal of property and equipment                                                            |       | 2,428    |       | 439      |       |
| Loss on impairment of assets                                                                          |       | 314      |       | 236      |       |
| Amortization of restricted stock                                                                      |       | 694      |       | 665      |       |
| Stock option expense                                                                                  |       | 626      |       | 979      |       |
| Common stock issued to director in lieu of  cash                                                      |       | 74       |       | 71       |       |
| Changes in operating assets and liabilities                                                           |       |     |       |     |       |
| Fees receivable, net                                                                                  |       | (19,364  | )          | (13,360  | )          |
| Other current assets                                                                                  |       | (3,422   | )          | (8,825   | )          |
| Other assets                                                                                          |       | 356      |       | 209      |       |
| Accounts payable                                                                                      |       | (577     | )          | (1,379   | )          |
| Accrued liabilities                                                                                   |       | (1,773   | )          | (4,092   | )          |
| Income taxes payable                                                                                  |       | (14,978  | )          | —   |       |
| Deferred revenues                                                                                     |       | —   |       | 5,365    |       |
| Net cash provided by operating activities                                                             |       | 122,121  |       | 123,869  |       |
| **Cash flows from investing activities**                                                              |       |     |       |     |       |
| Changes in advances receivable                                                                        |       | (77,564  | )          | (70,413  | )          |
| Changes in restricted cash                                                                            |       | (198     | )          | 500      |       |
| Acquisition of business, net of cash  acquired                                                        |       | (4,980   | )          | (769     | )          |
| Proceeds from sale of property and  equipment                                                         |       | 36       |       | 22       |       |
| Purchases of property and equipment                                                                   |       | (12,002  | )          | (7,743   | )          |
| Net cash used in investing activities                                                                 |       | (94,708  | )          | (78,403  | )          |
| **Cash flows from financing activities**                                                              |       |     |       |     |       |
| Proceeds from revolving credit facility,  net                                                         |       | 1,283    |       | 60,703   |       |
| Decrease in non-controlling interest of  variable interest entity                                     |       | (1,446   | )          | —   |       |
| Payments on mortgage payable                                                                          |       | (285     | )          | (307     | )          |
| Payments on note payable                                                                              |       | (122     | )          | (97      | )          |
| Payments on long-term debt                                                                            |       | (295     | )          | —   |       |
| Payments of financing costs                                                                           |       | (11      | )          | (1,622   | )          |
| Purchases of treasury stock                                                                           |       | (27,009  | )          | (88,953  | )          |
| Payments of dividends                                                                                 |       | (29,429  | )          | (24,377  | )          |
| Changes in book overdrafts                                                                            |       | (5,289   | )          | (2,872   | )          |
| Net cash used in financing activities                                                                 |       | (62,603  | )          | (57,525  | )          |
| Effect of exchange rate changes on cash and  cash equivalents                                         |       | —   |       | (191     | )          |
| Net decrease in cash and cash equivalents                                                             |       | (35,190  | )          | (12,250  | )          |
| Cash and cash equivalents, beginning of  period                                                       |       | 67,245   |       | 28,251   |       |
| Cash and cash equivalents, end of period                                                              |       | $        | 32,055     |     | $          | 16,001 |   |
| Supplemental disclosures of cash flow  information:                                                   |       |     |       |     |       |
| Cash paid during the period for:                                                                      |       |     |       |     |       |
| Interest                                                                                              |       | $        | 7,248      |     | $          | 7,681 |   |
| Income taxes                                                                                          |       | 47,330   |       | 28,029   |       |
| Supplemental schedule of non-cash investing  and financing activity:                                  |       |     |       |     |       |
| Property and equipment purchases included  in accounts payable and accrued expenses                   |       | 473      |       | 42       |       |
| Restricted stock dividends payable                                                                    |       | 47       |       | 105      |       |
| Net assets acquired through acquisition of  business                                                  |       | 980      |       | 61       |       |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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

 

**Notesto Interim Unaudited Consolidated Financial Statements**

 

**1. Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying interim unaudited consolidated financial statements ofAdvance America, Cash Advance Centers, Inc. (“AACACI”) and its whollyowned subsidiaries (collectively, the “Company”) have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and the rules and regulations of theU.S. Securities and Exchange Commission (the “SEC”). They do not include allinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. Although managementbelieves that the disclosures are adequate to prevent the information frombeing misleading, the interim unaudited consolidated financial statementsshould be read in conjunction with the Company’s audited financial statementsin the Company’s Annual Report on Form 10-K for the year ended December 31,2007 filed with the SEC. In the opinion of the Company’s management, alladjustments, consisting of normal recurring accruals considered necessary for afair statement of the Company’s financial condition, have been included. Theresults of operations for the nine months ended September 30, 2008 are notnecessarily indicative of the results that may be expected for future interimperiods or the entire year ending December 31, 2008.

 

**Description of Business**

 

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

 

**Revenue Recognition**

 

Revenues can be characterized as fees and/or interest depending on theCompany’s business operations and product offerings under enabling regulations.Revenue is recognized on a constant-yield basis ratably over the term of eachadvance. The Company has also entered into a long-term services contract forwhich the Company receives advance payments. These advance payments arerecorded as deferred revenue and recognized as revenue over the life of thecontract subject to certain terms and conditions.

 

**Concentration of Risk**

 

For the three months ended September 30, 2007 and 2008, totalrevenues within the Company’s five largest states (measured by total revenues)accounted for approximately 47% and 47%, respectively, of the Company’s totalrevenues. For the nine months ended September 30, 2007 and 2008, totalrevenues within the Company’s five largest states (measured by total revenues)accounted for approximately 46% and 48%, respectively, of the Company’s totalrevenues.

 

**Income Taxes**

 

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

 

**Earnings Per Share**

 

Basic earnings per share is computed by dividing net income by theweighted average number of common shares outstanding for the period excludingunvested restricted stock. Diluted earnings per share is computed by dividingnet income by the weighted average number of common shares outstanding for theperiod, after adjusting for the dilutive effect of

 

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unvested restricted stock and outstanding stock options. For the threeand nine months ended September 30, 2007, all of the restricted shareswere included in the computation of diluted earnings per share. For the threeand nine months ended September 30, 2008, 278,947 restricted shares were notincluded in the computation of diluted earnings per share because the effect ofincluding them would be anti-dilutive. For the three and nine months ended September 30,2007, options to purchase 1,264,583 shares of common stock were not included inthe computation of diluted earnings per share because the effect of includingthem would be anti-dilutive. For the three and nine months ended September 30,2008, options to purchase 1,612,500 shares of common stock were not included inthe computation of diluted earnings per share because the effect of including themwould be anti-dilutive.

 

The following table presents the reconciliation of the denominator usedin the calculation of basic and diluted earnings per share for the three andnine months ended September 30, 2007 and 2008 (in thousands):

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                        | ** ** | **2008**                                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| Reconciliation of denominator:                                     |       |                                            |       |                                           |       |   |   |   |   |
| Weighted average number of common shares  outstanding—basic   |       | 78,068                                          |       | 61,000                                         |       | 78,765 |   | 65,375 |   |
| Effect of dilutive unvested restricted  stock                      |       | 68                                              |       | 8                                              |       | 57 |   | 3 |   |
| Effect of dilutive outstanding stock  options                      |       | —                                          |       | —                                         |       | — |   | — |   |
| Weighted average number of common shares  outstanding—diluted |       | 78,136                                          |       | 61,008                                         |       | 78,822 |   | 65,378 |   |

 

**Recently Issued Accounting Pronouncements**

 

In September 2006, the Financial Accounting Standards Board (the “FASB”)issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”),“Fair Value Measurements,” which defines fair value, establishes guidelines formeasuring fair value and expands disclosures regarding fair value measurements.SFAS 157 does not require any new fair value measurements but rathereliminates inconsistencies in guidance found in various prior accountingpronouncements. SFAS 157 was effective for fiscal years beginning after November 15,2007. The adoption of SFAS 157 did not have a material impact on theCompany’s financial position or results of operations. 

 

In February 2007, the FASB issued SFAS No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (“SFAS 159”).SFAS 159 permits entities to choose, at specified election dates, tomeasure eligible items at fair value (the “fair value option”) and requires anentity to report unrealized gains and losses on items for which the fair valueoption has been elected in earnings at each subsequent reporting date. Upfrontcosts and fees related to items for which the fair value option is electedshall be recognized in earnings as incurred and not deferred. SFAS 159 waseffective for fiscal years beginning after November 15, 2007. The adoptionof SFAS 159 did not have a material impact on the Company’s financialposition or results of operations.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) modifiesthe accounting for business combinations and requires, with limited exceptions,the acquirer in a business combination to recognize 100% of the assetsacquired, liabilities assumed and any non-controlling interest in the acquireeat the acquisition-date fair value. In addition, SFAS 141(R) requiresthe expensing of acquisition-related transaction and restructuring costs andrequires that certain contingent assets and liabilities acquired, as well ascontingent consideration, be recognized at fair value. SFAS 141(R) alsomodifies the accounting for certain acquired income tax assets and liabilities.SFAS 141(R) is effective for new acquisitions consummated on or afterJanuary 1, 2009. The Company does not expect the adoption of this standardto have a material impact on its financial position or results of operations.

 

In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”),“Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51,” which establishes accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS 160 clarifies that a noncontrolling interest in asubsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as acomponent of equity in the consolidated financial statements. Among otherrequirements, SFAS 160 requires consolidated net income to be reported atamounts that include the amounts attributable to both the parent and thenoncontrolling interest. It also requires disclosure, on the face of theconsolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest. SFAS 160 iseffective for fiscal years beginning after December 15, 2008. The Companydoes not expect the adoption of this standard to have a material impact on itsfinancial position or results of operations.

 

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**Reclassifications**

 

Certain previously reported amounts have been reclassified to conformto the current presentation. The provision for doubtful accounts had previouslybeen included in the accompanying consolidated statements of income as areduction of revenue but is now included in center expenses for all periodspresented.

 

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

 

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

 

| ** **                        | ** ** | **December 31,  2007** | ** ** | **September 30,  2008** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Advances receivable               |       | $                           | 209,897    |                         | $          | 203,435 |   |
| Fees and interest receivable      |       | 36,454                      |       | 33,855                       |       |
| Returned items receivable         |       | 49,442                      |       | 45,032                       |       |
| Other                             |       | 11,224                      |       | 3,965                        |       |
| Allowance for doubtful accounts   |       | (61,306                     | )          | (58,864                      | )          |
| Unearned revenues                 |       | (24,231                     | )          | (16,186                      | )          |
| Advances and fees receivable, net |       | $                           | 221,480    |                         | $          | 211,237 |   |

 

**3. Allowance for Doubtful Accounts andAccrual for Third-Party Lender Losses**

 

Changes in the allowance for doubtful accounts for the three and ninemonths ended September 30, 2007 and 2008 were as follows (in thousands):

 

| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Beginning balance               |       | $                                                    | 56,312     |                                                | $          | 53,496 |   | $ | 57,396 |   | $ | 61,306 |   |
| Provision for doubtful accounts |       | 50,704                                               |       | 41,988                                              |       | 97,343 |   | 93,964 |   |
| Charge-offs                     |       | (48,402                                              | )          | (41,164                                             | )          | (117,344 | ) | (116,668 | ) |
| Recoveries                      |       | 6,161                                                |       | 4,544                                               |       | 27,380 |   | 20,262 |   |
| Ending balance                  |       | $                                                    | 64,775     |                                                | $          | 58,864 |   | $ | 64,775 |   | $ | 58,864 |   |

 

Changes in the accrual for third-party lender losses for the three andnine months ended September 30, 2007 and 2008 were as follows (inthousands):

 

| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Beginning balance               |       | $                                                    | —     |                                                | $          | 3,617 |   | $ | — |   | $ | 4,587 |   |
| Provision for doubtful accounts |       | —                                               |       | 138                                                 |       | — |   | (832 | ) |
| Ending balance                  |       | $                                                    | —     |                                                | $          | 3,755 |   | $ | — |   | $ | 3,755 |   |

 

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The total changes in the allowance for doubtful accounts and theaccrual for third-party lender losses for the three and nine months ended September 30,2007 and 2008 were as follows (in thousands):

 

| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Beginning balance               |       | $                                                    | 56,312     |                                                | $          | 57,113 |   | $ | 57,396 |   | $ | 65,893 |   |
| Provision for doubtful accounts |       | 50,704                                               |       | 42,126                                              |       | 97,343 |   | 93,132 |   |
| Charge-offs                     |       | (48,402                                              | )          | (41,164                                             | )          | (117,344 | ) | (116,668 | ) |
| Recoveries                      |       | 6,161                                                |       | 4,544                                               |       | 27,380 |   | 20,262 |   |
| Ending balance                  |       | $                                                    | 64,775     |                                                | $          | 62,619 |   | $ | 64,775 |   | $ | 62,619 |   |

 

**4. Accrued Liabilities**

 

Accrued liabilities consisted of the following (in thousands):

 

| ** **                          | ** ** | **December 31,  2007** | ** ** | **September  30, 2008** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Employee compensation               |       | $                           | 11,797     |                         | $          | 9,897 |   |
| Workers’ compensation          |       | 4,629                       |       | 4,570                        |       |
| Lease smoothing                     |       | 2,920                       |       | 2,991                        |       |
| Deferred revenue                    |       | —                      |       | 1,858                        |       |
| Legal                               |       | 1,789                       |       | 1,537                        |       |
| Center closing costs                |       | 1,696                       |       | 1,011                        |       |
| Property, sales and franchise taxes |       | 558                         |       | 1,006                        |       |
| Advertising                         |       | 436                         |       | 755                          |       |
| Accounting and tax                  |       | 1,058                       |       | 683                          |       |
| Severance                           |       | 1,113                       |       | 97                           |       |
| Construction in progress            |       | 962                         |       | 42                           |       |
| Health and dental insurance         |       | 925                         |       | 2                            |       |
| Other                               |       | 3,940                       |       | 3,312                        |       |
| Total                               |       | $                           | 31,823     |                         | $          | 27,761 |   |

 

**5. Commitments and Contingencies**

 

The Company is involved in a number of active lawsuits, includinglawsuits arising out of actions taken by state regulatory authorities, and isinvolved in various other legal proceedings with state and federal regulators.The Company is vigorously defending against these actions and will, whenmanagement believes appropriate in consideration of ongoing litigation expensesand other factors, evaluate reasonable settlement opportunities. The amount oflosses and/or the probability of an unfavorable outcome, if any, cannot bereasonably estimated at this time for these legal proceedings. Accordingly, noaccrual has been recorded for any of these matters as of September 30,2008.

 

*Brenda McGinnis v. Advance America Servicingof Arkansas, Inc. et al.*

 

On February 27, 2007, Brenda McGinnis filed a putative classaction in the Circuit Court of Clark County, Arkansas alleging violations ofthe Arkansas usury law, the Arkansas Deceptive Trade Practices Act and a 2001class action settlement agreement entered into by the Company’s priorsubsidiary in Arkansas. The complaint alleges that the Company’s currentsubsidiary made usurious loans under the Arkansas Check Cashers Act and seekscompensatory damages in amount equal to twice the interest paid on the loans,which would total approximately $87 million in damages, a declaration thatthe contracts are void, enforcement of the 2001 class action settlementagreement, attorneys’ fees and costs. The trial court has denied the Company’smotion to compel arbitration and the class was certified on April 22,2008. The Company appealed both decisions. The Appellate Court has issued astay of proceedings in the trial court pending outcome of the Company’s appealof the arbitration issue. Court-ordered mediation is scheduled for November 2008.

 

*Magee and Johnson v. Advance America Servicing of Arkansas, Inc.*

* *

On October 13, 2008, Gary Neil Magee and Charlotte Johnson filed aputative class action in the Circuit Court of Clark County, Arkansas allegingviolation of the Arkansas usury law and the Arkansas Deceptive Trade PracticesAct.  The complaint alleges that the feescharged by the Company’s subsidiary to cash checks were interest on consumerloans and usurious under state law.  Theparties seek compensatory damages in amount equal to twice the alleged interestmade on the loans from April 2008 to October 2008 and a declaration that thetransactions are void, plus attorneys’ fees and costs.

 

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*Phyliss Garrett v. Advance America, CashAdvance Centers of Arkansas, Inc., et al.*

 

On July 3, 2007, Phyliss Garrett filed a motion for contempt inthe Circuit Court of Clark County, Arkansas alleging a violation of the 2001class action settlement agreement entered into by the Company’s priorsubsidiary in Arkansas and incorporated into a court order. The relief soughtby the plaintiff and the Company’s defenses are substantially similar to thoseat issue in the *Brenda McGinnis*lawsuit described above. On September 11, 2008, the court dismissed the casepursuant to plaintiff’s motion to dismiss.

 

*Kelvin White v. Advance America, Cash AdvanceCenters of Arkansas, Inc., et al.*

 

On May 31, 2007, Kelvin White and two other individuals filed alawsuit in the Circuit Court of Ouachita County, Arkansas making substantiallysimilar allegations and seeking substantially similar relief to the *Brenda McGinnis* lawsuit described above. OnJuly 31, 2008, the court dismissed the case pursuant to the parties’stipulation.

 

*Kerri Stone v. Advance America, Cash AdvanceCenters, Inc. et al.*

 

On July 18, 2008, Kerri Stone, filed a putative class actioncomplaint in the Supreme Court of California against the Company and itsCalifornia subsidiary alleging violations of the California Deferred DepositTransaction Law, the California Unfair Competition Law and the CaliforniaConsumer Legal Remedies Act. The case has been removed to the U.S. DistrictCourt for the Southern District of California. The putative class actioncomplaint seeks trebling of compensatory damages, disgorgement of profits,attorney’s fees, punitive damages, and an order enjoining enforcement of classaction waiver clauses in cash advance contracts.

 

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

 

The Company and the Company’s subsidiary McKenzie Check Advance ofFlorida, LLC (“McKenzie”) are defendants in a putative class-action lawsuitcommenced by former customers, Wendy Betts and Donna Reuter on January 11,2001, and a third named class representative, Tiffany Kelly, in the CircuitCourt of Palm Beach County, Florida. This putative class action alleges thatMcKenzie, by and through the actions of certain officers, directors andemployees, engaged in unfair and deceptive trade practices and violated Florida’scriminal usury statute, the Florida Consumer Finance Act and the FloridaRacketeer Influenced and Corrupt Organizations Act. The suit seeks unspecifieddamages, and the named defendants could be required to refund fees and/orinterest collected, refund the principal amount of payday cash advances, paymultiple damages and pay other monetary penalties. Ms. Reuter’s claim hasbeen held to be subject to binding arbitration, which the Company expects toproceed in parallel with this case. The trial court has denied the defendants’motion to compel arbitration of Ms. Kelly’s claims, the substituted namedplaintiff. All proceedings at the trial court level are stayed pending theoutcome of the defendants’ appeal of the trial court’s decision to denyarbitration.

 

*Reuter and Betts v. Advance America, CashAdvance Centers of Florida, Inc. et al.*

 

A second Florida lawsuit was filed on August 24, 2004 in theCircuit Court of Palm Beach County by former customers Gerald Betts and Ms. Reuteragainst the Company, the Company’s subsidiary, Advance America, Cash AdvanceCenters of Florida, Inc., and certain officers and directors. The allegations,relief sought and the Company’s defenses are nearly identical to those allegedin the first *Betts and Reuter*lawsuit described above. The proceedings at the trial court level are stayedpending the outcome of the Company’s appeal of the trial court’s denial ofcertain defendants’ motion to dismiss for lack of personal jurisdiction.

 

*King and Strong v. Advance America, CashAdvance Centers of Georgia, Inc. et al.*

 

On August 6, 2004, Tahisha King and James E. Strong, who werecustomers of BankWest, the lending bank for which the Company previouslymarketed, processed and serviced payday cash advances in Georgia, filed aputative class action lawsuit in the State Court of Cobb County, Georgiaagainst the Company, William M. Webster IV, the Company’s Chairman, and otherunnamed officers, directors, owners and “stakeholders,” alleging various causesof action 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” and that the Company was the “defacto” lender. The complaint seeks compensatory damages, attorneys’ fees,punitive damages and the trebling of any compensatory damages. The Company andthe other defendants have denied the plaintiff’s claims and intend to continueto resist plaintiff’s efforts to conduct class arbitration. 

 

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* *

*Glasscock v. Advance America, Cash AdvanceCenters of Georgia, Inc. et al.*

 

The Company’s Georgia subsidiary is involved in another case in Georgiathat, although not a class action lawsuit, contains essentially the sameallegations as the *King and Strong*case described above. On March 10, 2003, Angela Glasscock, a customer ofBankWest, filed an adversary proceeding in the U.S. Bankruptcy Court for theSouthern District of Georgia alleging that the Company’s Georgia subsidiary wasmaking payday cash advances in Georgia in violation of the Georgia IndustrialLoan Act. BankWest intervened into the case and subsequently both thesubsidiary and BankWest filed a motion for summary judgment, which was grantedin September 2005. In April 2007, on appeal, the United StatesDistrict Court overturned the U.S. Bankruptcy Court’s grant of summaryjudgment.

 

*Hooper and Vaughn v. Advance America, CashAdvance Centers of Missouri, Inc.*

 

On March 10, 2008, Trishia Hooper and Josephine Vaughn filed aputative class action lawsuit in the United States District Court for theWestern District of Missouri. The action alleges that the arbitration clauseand class action waiver in the Company’s subsidiary’s loan agreement isunconscionable, that the Company’s subsidiary’s practices violate the Missouristatutes governing unfair and deceptive trade practices, interest rates, loanrenewals, debt reduction, and consideration of borrower’s ability to repay. Thelawsuit seeks certification as a class action, unspecified monetary damages,and a declaratory judgment that the arbitration clause and class action waiveris unconscionable, and injunctive relief.

 

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

 

On July 27, 2004, John Kucan, Welsie Torrence and Terry Coates,each of whom was a customer of Republic Bank & Trust Company (“Republic”),the lending bank for whom the Company previously marketed, processed andserviced payday cash advances in North Carolina, filed a putative class actionlawsuit in the General Court of Justice for the Superior Court Division for NewHanover County, North Carolina against the Company and Mr. William M.Webster IV, Chairman of the Company’s Board of Directors and prior ChiefExecutive Officer, alleging, among other things, that the relationship betweenthe Company’s North Carolina subsidiary and Republic was a “rent a charter”relationship and therefore Republic was not the “true lender” on the paydaycash advances it offered. The lawsuit also claims that the payday cash advanceswere made, administered and collected in violation of numerous North Carolinaconsumer protection laws. The lawsuit seeks an injunction barring thesubsidiary from continuing to do business in North Carolina, the return of theprincipal amount of the payday cash advances made to the plaintiff class since August 2001,the return of any interest or fees associated with those advances, trebledamages, attorneys’ fees and other unspecified costs. Litigation regarding theCompany’s arbitration rights is proceeding before the trial court.

 

*North Carolina Commissioner of Banks Order*

 

On February 1, 2005, the Commissioner of Banks of North Carolinainitiated a contested case against the Company’s North Carolina subsidiary foralleged violations of the North Carolina Consumer Finance Act. In December 2005,the Commissioner of Banks ordered that the Company’s North Carolina subsidiaryimmediately cease and desist operating. In accordance with the Commissioner ofBanks’ order, the Company’s North Carolina subsidiary ceased all businessoperations on December 22, 2005. The Company has moved to continue the stayof the case pending outcome of *Kucan*arbitration.

 

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

 

On September 27, 2006, the Pennsylvania Department of Bankingfiled a lawsuit in the Commonwealth Court of Pennsylvania alleging that theCompany’s Delaware subsidiary was providing lines of credit to borrowers inPennsylvania without a license required under Pennsylvania’s financiallicensing law and charging interest and fees in excess of the amounts permittedby Pennsylvania’s usury law. In July 2007, the court determined thatcertain aspects of the Company’s Choice Line of Credit required the Company tobe licensed under Pennsylvania’s Consumer Discount Company Act (“CDCA”) andenjoined the Company from continuing its lending activities in Pennsylvania forso long as the CDCA violations continued and from collecting monthlyparticipation fees. The Company appealed to the Pennsylvania Supreme Court. On May 29,2008, the Pennsylvania Supreme Court upheld the lower court’s ruling. ThePennsylvania Department of Banking is seeking to amend the complaint to add thePennsylvania Attorney General as a plaintiff and the Parent Company as adefendant and to perfect a claim for alleged violations of the state’s usurylaw by seeking unspecified damages, including disgorgement of profits earned inPennsylvania, treble actual damages, and restitution, which could totalapproximately $135 million, plus civil penalties of $1,000 for each violationof the Consumer Protection Law and of an additional $2,000 for violationsagainst customers over the age of 60, and attorneys fees and costs.

 

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* *

*Sharlene Johnson, Helena Love and BonnyBleacher v. Advance America, Cash Advance Centers, Inc. et al.*

 

On August 1, 2007, Sharlene Johnson, Helena Love and BonnyBleacher filed a putative class action lawsuit in the United States DistrictCourt, Eastern District of Pennsylvania against the Company and two of itssubsidiaries alleging that they provided lines of credit to borrowers inPennsylvania without a license required under Pennsylvania law and withinterest and fees in excess of the amounts permitted by Pennsylvania law. Thecomplaint seeks, among other things, a declaratory judgment that the monthly participationfee charged to customers with a line of credit is illegal, an injunctionprohibiting the collection of the monthly participation fee and the payment bythe Company of damages equal to three times the monthly participation fees paidby customers since June 2006, which could total approximately$135 million in damages plus attorneys fees and costs. In January 2008,the trial court entered an order compelling the purported class representativesto arbitrate their claims on an individual basis, unless determined otherwiseby the arbiter. Both parties appealed this order and, in July 2008, theCourt of Appeals ordered the parties to engage in mediation. The parties arecurrently engaged in court-ordered mediation.

 

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

 

On January 18, 2007, Raymond King and Sandra Coates, who werecustomers of BankWest, the lending bank for which the Company previouslymarketed, processed and serviced payday cash advances in Pennsylvania, filed aputative class action lawsuit in the United States District Court, EasternDistrict of Pennsylvania alleging various causes of action, including that thePennsylvania subsidiary made illegal payday loans in Pennsylvania in violationof Pennsylvania’s usury law, the Pennsylvania Consumer Discount Company Act,the Pennsylvania Unfair Trade Practices and Consumer Protection Law, thePennsylvania Fair Credit Extension Uniformity Act and the Pennsylvania CreditServices Act. The complaint alleges that BankWest was not the “true lender” andthat the Company was the “lender in fact.” The complaint seeks compensatorydamages, attorneys’ fees, punitive damages and the trebling of any compensatorydamages. In January 2008, the trial court entered an order compelling thepurported class representatives to arbitrate their claims on an individualbasis, unless determined otherwise by the arbiter. The parties have engaged incourt-ordered mediation.

 

*Class Actions Against South CarolinaSubsidiary*

 

Seven separate putative class actions have been filed in South Carolinaagainst the Company’s subsidiary, Advance America, Cash Advance Centers ofSouth Carolina, Inc., and several other unaffiliated defendants. John andRebecca Morgan filed a complaint on August 27, 2007 in the Horry CountyCourt of Common Pleas; Margaret Horne filed a complaint on September 6,2007 in the Spartanburg County Court of Common Pleas; Tawan Smalls filed acomplaint on September 10, 2007 in the Charleston County Court of CommonsPleas; Chadric and Lisa Wiley filed a complaint on September 27, 2007 inthe Richland County Court of Common Pleas; Mildred Weaver filed a complaint on September 27,2007 in the Darlington County Court of Common Pleas; Lisa Johnson and GilbertHerbert filed a complaint on October 2, 2007 in the Georgetown CountyCourt of Common Pleas; and Kimberly Kinney filed a complaint on October 12,2007 in the Marion County Court of Common Pleas. The allegations and reliefsought are similar in each case. Plaintiffs allege that the Company’s SouthCarolina subsidiary violated the South Carolina Deferred Presentment ServicesAct and the Consumer Protection Code by failing to perform a credit check andevaluate a customer’s ability to repay the advance. Each complaint seeks an injunctionto prohibit the Company from continuing its operations, the return of fees andinterest, actual damages, punitive damages and attorneys’ fees and costs. Eachof the lawsuits had been removed to United States District Court for theDistrict of South Carolina, which subsequently remanded all of the class actionsto state court. The Company has appealed these rulings.

 

*Francisco J. Gonzalez v. AdvanceAmerica, Cash Advance Centers of Texas, Inc.*

 

On September 12, 2007, Francisco Gonzalez filed a collectiveaction lawsuit against the Company’s subsidiary, Advance America, Cash AdvanceCenters of Texas, Inc., in the United States District Court for theSouthern District of Texas alleging violations of the Fair Labor Standards Actand Texas PayDay Act. The complaint alleges the Company’s subsidiary in Texasfailed to pay overtime wages to its employees. The complaint seeks compensatoryand liquidated damages, attorneys’ fees, interest and costs. A class ofemployees limited to the Houston, Texas area has been certified to conduct thislitigation. The Company will seek an appeal of the class certification issue.

 

*Ohio Legislation*

 

In June 2008, the Governor of Ohio signed a bill into law thatwould cap interest rates on payday loans and limit the number of advances acustomer may take in any one year. This law was scheduled to become effectiveon September 1, 2008. The Company, together with other industry leaders,has initiated legal challenges and grassroots ballot initiatives to attempt topostpone the effective date and overturn this legislation. The legislation hasbeen stayed pending the outcome of these legal challenges and ballotinitiatives. However, if these efforts are unsuccessful, this legislation willbecome effective. If this occurs, the Company may not be able to implement aneconomically viable alternative loan product, and therefore may need to closeits centers in Ohio.

 

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If it is not economically viable to continue operations in Ohio and wedecide to close our Ohio centers, our estimated range of closing costs,including severance, center tear-down costs, lease termination costs and thewrite-down of fixed assets would be approximately $7.3 million to$16.4 million. The collectibility of advances and fees receivable in Ohiowould most likely be impaired. As of September 30, 2008, the netreceivable balance in Ohio was approximately $19.5 million. The Companyhas not quantified the amount of goodwill impairment, if any, that would resultfrom the cessation of operations in Ohio.

 

*Other Matters*

 

The Company is also involved in other litigation and administrativeproceedings that are incidental to its business, including contractualdisputes, employee claims for workers’ compensation, wrongful termination,harassment, discrimination, payment of wages due and customer claims relatingto collection practices and violations of state and/or federal consumer protectionlaws.

 

**6. Capital Stock and Stock-Based CompensationPlans**

 

On May 4, 2005, the Company announced that its Board of Directorshad approved a program authorizing the repurchase by the Company of up to$50.0 million of its outstanding common stock. On August 16, 2006,the Company announced that its Board of Directors had approved an extension ofthe Company’s stock repurchase program authorizing the Company to repurchase upto $100.0 million of its outstanding common stock on and after that date.On February 13, 2008, the Company announced that its Board of Directorshad approved a further extension of the Company’s stock repurchase program tocover an additional $75.0 million of the Company’s currently outstandingcommon stock. During the three months and nine months ended September 30,2007, the Company repurchased 2,292,000 shares of its common stock pursuant toits repurchase program at a cost of approximately $32.4 million. During thethree months ended September 30, 2008, the Company repurchased 1,700,194 sharesof its common stock at a cost of approximately $9.1 million pursuant toits stock repurchase program. During the nine months ended September 30,2008, the Company repurchased 11,911,262 shares of its common stock at acost of approximately $89.0 million pursuant to its stock repurchaseprogram. The Company completed its stock repurchase program in July 2008. Additionally,for the three months ended September 30, 2007 and 2008, zero and 2,264shares, respectively, were surrendered by employees to satisfy their taxobligations with respect to the vesting of shares of restricted stock awardedpursuant to the Company’s 2004 Omnibus Stock Plan. For the nine months ended September 30,2007 and 2008, 2,826 and 5,536 shares of common stock, respectively, weresurrendered by employees to satisfy their tax obligations with respect to thevesting of shares of restricted stock awarded pursuant to the Company’s 2004Omnibus Stock Plan.

 

In 2004, the Company adopted Statement of Financial Accounting StandardsNo. 123 (Revised), Share-Based Payment (“SFAS 123(R)”). Accordingly,the Company measures the cost of its stock-based employee compensation at fairvalue on the grant date and recognizes such cost in the financial statements ona straight-line basis over the requisite service period of the awards, which isgenerally the vesting period.

 

The Company’s 2004 Omnibus Stock Plan provides for the granting ofrestricted stock, stock options and other stock awards to certain directors,officers and other key employees of the Company. Additionally, during 2005, theCompany granted stock options and shares of restricted stock to its Presidentand Chief Executive Officer under a Nonqualified Stock Option Agreement and aRestricted Stock Agreement, respectively. Both of these agreements are separatefrom the Company’s 2004 Omnibus Stock Plan.

 

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

 

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

 

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

 

·                  *Expected term*—The expected term representsthe period during which the Company’s stock options are expected to beoutstanding. The Company based its determination of the expected term by givingconsideration

 

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to the contractual terms of the stock options awards, vestingschedules, expectations of future employee behavior and published academicresearch regarding exercise behavior.

 

·                  *Expected volatility*—The expectedvolatility represents the amount by which the price of the underlying shareshas fluctuated or is expected to fluctuate during the expected term. As of thestock option grant dates, the Company was still a relatively new public companywith limited historical data regarding the volatility of the price of itspublicly-traded shares and has no other publicly-traded financial instrumentsfrom which to derive implied volatility. As such, the Company based itsestimated volatility on the historical stock price volatility of other publiccompanies in its industry, which the Company believes is representative of itsexpected future volatility over the expected term of its options.

 

·                  *Expected dividends*—The Company used its expecteddividend yield as of each stock option grant date as its expected dividendsover the expected term of the options.

 

·                  *Risk-free rate*—The Company used risk-freeinterest rates for periods within the expected terms of the options based onthe U.S. Treasury yield curve in effect at each option grant date.

 

To estimate each stock option’s weighted average fair value on thegrant dates, the following weighted average assumptions were used in theBlack-Scholes option pricing model for all stock options granted during thenine months ended September 30, 2007 and 2008:

 

| ** **                 | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Expected term (years)      |       | 4.41     |       | 5.42     |       |
| Expected volatility        |       | 45       | %          | 48       | %          |
| Expected dividends (yield) |       | 3.2      | %          | 4.1      | %          |
| Risk-free rate             |       | 4.29     | %          | 2.93     | %          |

 

The weighted average grant date fair values of options granted duringthe nine months ended September 30, 2007 and 2008 were $4.33 per optionand $2.70 per option, respectively, and are being expensed ratably over eachaward’s respective vesting period.

 

The following table provides certain information with respect to stockoptions outstanding and exercisable at September 30, 2008 under theCompany’s stock-based compensation plans:

 

| ** **                                           | ** ** | **Outstanding**   | ** ** | **Exercisable**    | ** ** |
|------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| Number of stock options                              |       | 1,612,500         |       | 441,667            |       |
| Range of exercise prices                             |       | $8.48–$14.70 |       | $12.11–$14.70 |       |
| Weighted average exercise price                      |       | $11.79            |       | $13.13             |       |
| Aggregate intrinsic value (in thousands)             |       | $(14,182          | )          | $(4,480            | )          |
| Weighted average remaining contractual term  (years) |       | 7.8               |       | 7.3                |       |

 

A summary of the Company’s authorized and available shares, activityfor the nine months ended September 30, 2008, and the weighted averagestock option exercise prices under its stock-based compensation plans follows:

 
| ** **                 | ** ** | ** **     | ** ** | **Outstanding**       | ** ** | ** **         | ** ** | **Weighted Average**     | ** ** |
|----------------------------|------------|----------------|------------|-----------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **Authorized** | ** ** | **Restricted  Stock** | ** ** | **Stock  Options** | ** ** | **Available  For Grant** | ** ** | **Stock Option  Exercise Price** | ** ** |
| At December 31, 2007  |       | 5,200,000      |       | 507,988               |       | 1,477,500          |       | 3,214,512                     |       | $ | 12.08 |   |
| Authorized                 |       | —         |       | —                |       | —             |       | —                        |       | — |   |
| Granted                    |       | —         |       | 42,000                |       | 152,500            |       | (194,500                      | )          | 8.52 |   |
| Exercised                  |       | —         |       | —                |       | —             |       | —                        |       | — |   |
| Canceled                   |       | —         |       | —                |       | (17,500            | )          | 17,500                        |       | 8.60 |   |
| At September 30, 2008 |       | 5,200,000      |       | 549,988               |       | 1,612,500          |       | 3,037,512                     |       | $ | 11.79 |   |

 

A summary of the Company’s restricted stock activity for the ninemonths ended September 30, 2008 and the weighted average grant date fairvalues follows:

 

| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Nonvested at December 31, 2007  |       | 266,667    |       | $                                      | 12.10      |   |
| Granted                              |       | 42,000     |       | 8.65                                   |       |
| Vested                               |       | (16,443    | )          | 13.41                                  |       |
| Forfeited                            |       | —     |       | —                                 |       |
| Nonvested at September 30, 2008 |       | 292,224    |       | $                                      | 11.53      |   |

 

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The total grant date fair value of restricted shares vested during thenine months ended September 30, 2007 and 2008 was approximately$0.1 million and $0.2 million, respectively, and the total marketvalue of these shares on the dates vested was approximately $0.1 millionand $0.1 million, respectively.

 

A summary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three and nine months ended September 30, 2007 and 2008 follows(in thousands):

 

| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Restricted stock                       |       | $                                                    | (90        | )                                                   | $          | 225 |   | $ | 694 |   | $ | 665 |   |
| Stock options                          |       | 137                                                  |       | 329                                                 |       | 626 |   | 979 |   |
| Total stock-based compensation expense |       | $                                                    | 47         |                                                | $          | 554 |   | $ | 1,320 |   | $ | 1,644 |   |

 

As of September 30, 2008, the total compensation cost not yetrecognized related to nonvested stock awards under the Company’s plans isapproximately $6.8 million. The weighted average period over which thisexpense is expected to be recognized is approximately 4.2 years.

 

**7. Transactions with Variable InterestEntities**

 

The Company conducts business in Texas through a wholly ownedsubsidiary registered as a Credit Services Organization (“CSO”) under Texaslaw. In connection with operating as a CSO, the Company entered into a creditservices organization agreement (“CSO Agreement”) with an unaffiliatedthird-party lender in 2005. The agreement governed the terms by which theCompany referred customers in Texas to that lender, on a non-exclusive basis,for a possible extension of credit. The Company processed loan applications andcommitted to reimburse the lender for any loans or related fees that were notcollected from those customers. During the fourth quarter of 2007, the Companyterminated its agreement with this lender (the “former lender”) and enteredinto a new agreement with another unaffiliated third-party lender (the “newlender”) with substantially similar terms and conditions as the CSO Agreementwith the former lender.

 

The Company had determined that the former lender was a variableinterest entity (“VIE”) under Financial Accounting Standards BoardInterpretation No. 46 (Revised) (“FIN 46(R)”) and had also determinedthat the Company was the primary beneficiary of this VIE. As a result, theCompany consolidated the former lender into the Company’s financial statementsas of and for the three and nine months ended September 30, 2007.

 

The Company has determined that the new lender is also a VIE but thatthe Company is not the primary beneficiary of this VIE. Therefore, the Companyhas not consolidated the new lender as of and for the three and nine monthsended September 30, 2008.

 

The impact of the consolidation of the former lender on the Company’sconsolidated statements of income for the three and nine months ended September 30,2007 was to increase (decrease) the following income statement accounts asfollows (in thousands):

 

| ** **                                       | ** ** | **Three Months Ended  September 30, 2007** | ** ** | **Nine Months Ended  September 30, 2007** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Total revenues                                   |       | $                                                              | 1,023      |                                                          | $          | 3,129 |   |
| Provision for doubtful accounts                  |       | (384                                                           | )          | (1,055                                                        | )          |
| Other center expenses                            |       | 241                                                            |       | 695                                                           |       |
| Interest expense                                 |       | 728                                                            |       | 2,107                                                         |       |
| Income tax expense                               |       | 187                                                            |       | 571                                                           |       |
| Income of consolidated variable interest  entity |       | 251                                                            |       | 811                                                           |       |
|                                                  |            |                                                                |            |                                                               |            |  |  |

 

Under the terms of the Company’s agreement with its new third-partylender, the Company is contractually obligated to reimburse the lender for thefull amount of the loans and certain related fees that are not collected fromthe customers. As of September 30, 2008, the third-party lender’soutstanding advances and interest receivable (which were not recorded on theCompany’s balance sheet) totaled approximately $17.3 million, which is theamount the Company would be obligated to pay the third-party lender if theseamounts were to become uncollectible. Additionally, if these advances were to

 

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become uncollectible, the Company would also be required to pay thethird-party lender all related NSF fees and late fees on these advances.

 

Because of the Company’s economic exposure for losses related to thethird-party lender’s advances and interest receivable, the Company hasestablished an accrual for third-party lender losses to reflect the Company’sestimated probable losses related to uncollectible third-party lender advances.The accrual for third-party lender losses that was reported in the Company’sbalance sheet at September 30, 2008 was approximately $3.8 million and wasestablished on a basis similar to the allowance for doubtful accounts.

 

**8. Related Party Transactions**

 

Included in center expenses are expenses for center leases with relatedparties of approximately $15,000 and zero for the three months ended September 30,2007 and 2008, respectively, and approximately $38,000 and $5,000 for the ninemonths ended September 30, 2007 and 2008, respectively. Included ingeneral and administrative expenses are expenses with related parties, relatingprimarily to aircraft operating expenses and operating leases for office andwarehouse space, of approximately $65,000 and $70,000 for the three monthsended September 30, 2007 and 2008, respectively, and approximately$218,000 and $243,000 for the nine months ended September 30, 2007 and2008, respectively.

 

In addition, under a time-share arrangement, the Company’s currentChairman and now former Chairman have used the Company’s aircraft for privatepurposes in exchange for the Company’s use of an identical aircraft owned bythe Company’s former Chairman and formerly owned, in part, by the Company’scurrent Chairman. Included in accounts receivable at September 30, 2008 isa $4,000 net receivable related to this arrangement.

 

**9. Revolving Credit Facility**

 

In March 2008, the Company amended and restated its prior creditfacility with a syndicate of banks. This revolving credit facility now providesthe Company with a $270.0 million revolving line of credit, which amountincludes the ability to issue up to $25.0 million in letters of credit.This revolving credit facility matures on March 24, 2013. The Company hasthe option to increase the revolving credit facility by an additional$95.0 million, subject to compliance with the credit agreement’s covenantsand conditions and upon receipt of sufficient commitments from lenders in thelending syndicate.

 

The credit facility is collateralized by substantially all of theCompany’s assets and contains various financial covenants that require, amongother things, the maintenance of a minimum net worth and certain leverage andfixed charge coverage ratios and also restricts the encumbrance of assets andthe creation of indebtedness. A breach of a covenant or an event of defaultcould prohibit the Company from accessing otherwise available borrowings, orcould cause all amounts outstanding under the revolving credit facility tobecome due and payable. We were in compliance with all financial covenants at September 30,2008.

 

In general, the Company’s borrowings under the revolving creditfacility bear interest, at the Company’s option, at a base rate plus anapplicable margin or a LIBOR-based rate plus an applicable margin. The baserate equals the greater of: (i) the prime rate set by Bank of America, and(ii) the sum of the federal funds rate plus 0.50%. The applicable marginis determined each quarter by a pricing grid based on the Company’s totalleverage ratio of consolidated debt to consolidated EBITDA. The base rateapplicable margin ranges from 1.50% to 2.25% based upon the Company’s totalleverage ratio. The LIBOR-based applicable margin ranges from 2.50% to 3.25%based upon the Company’s total leverage ratio. As of September 30, 2008,the applicable margin for the prime-based rate was 1.75% and the applicablemargin for the LIBOR-based rate was 2.75%.

 

As of September 30, 2008, the Company had $203.0 millionoutstanding on the revolving portion of the credit facility and$1.1 million of letters of credit outstanding. Borrowings under therevolving credit facility are subject to compliance with certain covenants andconditions.

 

In connection with this amended and restated credit facility, theCompany incurred approximately $1.6 million in loan origination costs thatwere capitalized in other assets and are being amortized over the remainingterm of the credit facility.

 

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**10. Subsequent Events**

** **

On October 29,2008, the Company’s Board of Directors declared a cash dividend of $0.0625 pershare of common stock, payable on December 5, 2008, to shareholders ofrecord on November 25, 2008.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS.**

** **

*The following discussion of our financial condition and results ofoperations should be read in conjunction with our consolidated financialstatements and the related notes in “Item 1. Financial Statements.” Thisdiscussion contains forward-looking statements that involve risks anduncertainties such as our plans, objectives, expectations and intentions. Ouractual results could differ materially from those anticipated by theseforward-looking statements. Please see Item 1A of Part II of thisQuarterly Report and “Forward-Looking Statements” at the end of this sectionfor further discussion of the uncertainties, risks and assumptions associatedwith these statements.*

* *

**Overview**

** **

Headquarteredin Spartanburg, South Carolina, we are the largest provider of payday cashadvance services in the United States as measured by the number of centersoperated. Our centers provide short-term, unsecured cash advances that aretypically due on the customers’ next payday. As of September 30, 2008, weoperated 2,813 centers in 34 states in the United States, 17 centers inthe United Kingdom and 10 centers in Canada, and had 79 limited licenseesin the United Kingdom.

 

We conduct ourbusiness in most states under the authority of a variety of enabling statestatutes including payday advance, deferred presentment, check-cashing, smallloan, credit service organization and other state laws. In Texas, where weoperate as a credit services organization (“CSO”), we refer customers to athird-party lender that may approve and fund advances to customers. Under theterms of our agreement with this lender, we process customer applications andare contractually obligated to reimburse the lender for the full amount of theloans and certain related fees that are not collected from the customers.During 2006, we began offering the Advance America Choice-Line of Credit tocustomers in Pennsylvania and installment loans to customers in Illinois. As aresult of a July 2007 ruling in Pennsylvania, we ceased offering theChoice-Line of Credit. In the United Kingdom, we have recently started offeringshort-term advances, check-cashing and other related financial products andproviding limited licenses of our services to independent contractors.

 

We provideadvances and charge fees and/or interest as specified by the laws of thejurisdictions where we operate. The permitted size of an advance varies byjurisdiction and ranges from $50 to $1,000. The permitted fees and/or intereston an advance also vary by jurisdiction and range from 10% to 22% of the amountof a payday cash advance. Fees and interest for the line of credit product inPennsylvania consisted of a monthly service fee for the line of credit plusinterest on the average outstanding balance. Fees and interest for installmentloans are larger relative to the size of the advance because of the longer termof this product.

 

Additionalfees that we may collect include fees for returned checks and late fees. Thereturned check fee varies by state and ranges up to $30. We charge a customerthis fee if a deposited check is returned due to non-sufficient funds (“NSF”)in the customer’s account or other reasons. In three states, we are alsopermitted to charge a late fee, the amount of which varies by state. In Texas,the third-party lender charges a late fee on its loans in accordance with statelaw.

 

Although thereare numerous differences under the various enabling regulations, theapplication and approval process, underwriting criteria, delivery method,repayment and collection practices, customer and market characteristics andunderlying economics of our principal products and services are substantiallysimilar in most jurisdictions.

 

***Approval Process***

*** ***

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

 

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To obtain anadvance, a customer typically:

 

·                  completes an application and presentsthe required documentation: usually proof of identification, a pay stub orother evidence of income, and a bank statement;

 

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

 

·                  writes a personal check to cover theamount of the advance plus charges for applicable fees and/or interest; and

 

·                  makes an appointment to return on thespecified due date of the advance to repay the advance plus the applicablecharges and to reclaim his or her check.

 

We determinewhether to approve an advance to our customers (except in Texas, where thethird-party lender makes this determination). We do not undertake anyevaluation of the creditworthiness of our customers in determining whether toapprove customers for advances, other than requiring proof of identification,bank account and income source, as described above. We also consider thecustomer’s income in determining the amount of the advance.

 

***Repayment and Collection Process***

*** ***

Generally,when customers return to a center to repay their advances they may: (1) paytheir outstanding advances in full; (2) pay their outstanding advances infull and enter into a new advance on the same date; or (3) in some states,extend their outstanding advance by paying only the applicable charges (whichis often referred to in our industry as a rollover). Our policies regardingrepayment options are based on the Community Financial Services Association ofAmerica (“CFSA”) Best Practices and the various applicable state laws, which donot make a consistent distinction among stand-alone, rollover and other typesof consecutive transactions.

 

Currently, wegenerally limit transactions to the lower of either four rollovers or theapplicable state limit. Other than in regard to compliance with this policy, wedo not systematically gather, review or analyze whether a transaction may beconsidered a rollover transaction because this distinction is not consistentunder the various applicable statutes and we do not believe this distinction isrelevant to our revenue analysis.

 

If a customerdoes not return to repay the amount due, the center manager has the discretionto either: (1) commence past-due collection efforts, which typically mayproceed for up to 14 days in most states, or (2) deposit the customer’spersonal check. If the center manager has decided to commence past-duecollection efforts in lieu of depositing the customer’s personal check, centeremployees typically contact the customer by telephone or in person to obtain apayment or a promise to pay and attempt to exchange the customer’s check for acashier’s check, if funds are available.

 

If a customeris unable to meet his or her current repayment for an advance, they may qualifyfor an extended payment plan (“Payment Plan”). In most states, the terms of ourPayment Plan conform to the CFSA Best Practices and guidelines. Certain stateshave specified their own terms and eligibility requirements for Payment Plans.Generally, a customer may enter into a Payment Plan for no additional fee onceevery twelve months and the Payment Plan will call for scheduled payments thatcoincide with the customer’s next four paydays. In some states, a customer mayenter into a Payment Plan more frequently. We will not engage in collectionefforts while a customer is enrolled in a Payment Plan. If a customer misses ascheduled payment under a Payment Plan, center personnel may resume normalcollection procedures. We do not offer a Payment Plan for installment loans,nor does the third-party lender in Texas offer a Payment Plan for advances toits customers.

 

If, at the endof this past-due collection period or Payment Plan, the center has been unableto collect the amount due, the customer’s check is then deposited. For the yearended December 31, 2007, approximately 6.2% of total customer checks weredeposited and for the nine months ended September 30, 2008, approximately5.9% of total customer checks were deposited. Additional collection efforts arenot required if the customer’s deposited check clears. For the year ended December 31,2007, approximately 24% of deposited customer checks cleared (i.e., have notbeen returned by the bank) and for the nine months ended September 30,2008, approximately 25.9% of deposited customer checks cleared. If the customer’scheck does not clear and is returned because of non-sufficient funds in thecustomer’s account or because of a closed account or a stop-payment order,additional collection efforts begin. These additional collection efforts arecarried out by center employees and typically include contacting the customerby telephone or in person to obtain payment or a promise to pay and attemptingto exchange the customer’s check for a cashier’s check, if funds 

 

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become available. We also send out a seriesof collection letters, which are automatically distributed from a centrallocation based on a set of pre-determined criteria.

 

***Selected Operating Data***

** **

The followingtable presents key operating data for our business:

 
| ** **                                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Number of centers open at end of period                                                                      |       | 2,921                                                |       | 2,840                                               |       | 2,921 |   | 2,840 |   |
| Number of customers served—all credit  products (thousands)                                             |       | 924                                                  |       | 865                                                 |       | 1,327 |   | 1,245 |   |
| Number of payday cash advances originated  (thousands)                                                       |       | 3,127                                                |       | 3,047                                               |       | 8,766 |   | 8,692 |   |
| Aggregate principal amount of payday cash  advances originated (thousands)                                   |       | $                                                    | 1,128,365  |                                                | $          | 1,114,016 |   | $ | 3,141,595 |   | $ | 3,179,976 |   |
| Average amount of each payday cash advance  originated                                                       |       | $                                                    | 361        |                                                | $          | 366 |   | $ | 358 |   | $ | 366 |   |
| Average charge to customers for providing  and processing a payday cash advance                              |       | $                                                    | 55         |                                                | $          | 55 |   | $ | 55 |   | $ | 56 |   |
| Average duration of a payday cash advance  (days)                                                            |       | 16.5                                                 |       | 16.8                                                |       | 16.4 |   | 16.7 |   |
| Average number of lines of credit  outstanding during the period (thousands) (1)                        |       | 26                                                   |       | —                                              |       | 24 |   | — |   |
| Average amount of aggregate principal on  lines of credit outstanding during the period (thousands) (1) |       | $                                                    | 11,446     |                                                | $          | — |   | $ | 10,377 |   | $ | — |   |
| Average principal amount on each line of  credit outstanding  during the  period (1)               |       | $                                                    | 438        |                                                | $          | — |   | $ | 429 |   | $ | — |   |
| Number of installment loans originated  (thousands)                                                          |       | 9                                                    |       | 9                                                   |       | 23 |   | 23 |   |
| Aggregate principal amount of installment  loans originated (thousands)                                      |       | $                                                    | 3,552      |                                                | $          | 4,534 |   | $ | 9,708 |   | $ | 10,908 |   |
| Average principal amount of each  installment loan originated                                                |       | $                                                    | 417        |                                                | $          | 480 |   | $ | 414 |   | $ | 468 |   |
| Average charge to customers for providing  and processing an installment loan (2)                       |       | $                                                    | 547        |                                                | $          | 244 |   | $ | 543 |   | $ | 302 |   |

 

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(1)           We offered lines ofcredit in Pennsylvania from June 2006 through July 2007.

 

(2)           We modified the termsof our installment loan product in late March 2008. Under the new productthe average charge per installment loan is less.

 

***Revenues and Expenses***

*** ***

Our revenuesconsist of fees and/or interest paid to us directly by our customers. Ourexpenses relate primarily to the operation of our centers. These expensesinclude salaries and related payroll costs, occupancy expense related to ourleased centers, center depreciation expense, advertising expense and othercenter expenses that consist principally of costs related to center closings,communications, delivery, supplies, travel, bank charges, various complianceand collection costs and costs associated with theft.

 

***Income Taxes***

*** ***

The effectiveincome tax rate as a percentage of income before income taxes was 38.8% and44.2% for the three months ended September 30, 2007 and 2008,respectively. The effective income tax rate as a percentage of income beforeincome taxes was 41.0% and 43.2% for the nine months ended September 30,2007 and 2008, respectively. The increase in the current year tax rate isprimarily due to losses from our foreign operations and an increase innon-deductible expenses for the three and nine months ended September 30,2008.

 

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***Changes in Legislation***

 

During thelast few years, legislation that prohibits or severely restricts payday cashadvances and similar services has been introduced or adopted in a number ofstates, and we expect that trend to continue in other states for theforeseeable future. For example, legislation has been adopted recently inVirginia and New Hampshire that will require us to change our productofferings. Even if we are able to develop legal and financially-viablealternative products, we will likely incur a reduction in our revenues andprofitability in those states. If we are unable to do so, we may have to ceaseoperating in these states. Further, legislation permitting payday cash advancesin certain states, such as Arizona, is scheduled to expire over the next fewyears. This legislation may not be renewed or could be modified in a mannerthat effects our operations negatively. At any point in time, we are refiningour product offerings and developing new products or business models to addressrecent or anticipated legislative and regulatory changes. Some of theselegislative and regulatory changes may result in our discontinuing operationsin a state, while other changes may result in less significant short-term orlong-term changes, interruptions in revenues, and lower operating margins.Until and unless we are able to develop legal and financially-viablealternative products, we generally cannot estimate in advance the actual effectof operational changes we make in response to legislative and regulatorychanges.

 

***Operations in Ohio***

*** ***

In June 2008,the Governor of Ohio signed into law a bill that would cap interest rates onpayday loans and limit the number of advances a customer may take in any oneyear. This law was scheduled to become effective on September 1, 2008 buthas been stayed pending the outcome of the legal challenges and ballotinitiatives we support. If these legal challenges and ballot initiatives arenot successful in delaying or defeating this law and this law becomeseffective, it may not be economically viable for us to continue operations inOhio. Presently, we continue to serve our existing customers who are in goodstanding.

 

For the threemonths ended September 30, 2007 and 2008, 9.7% and 7.9%, respectively, ofour total revenues were generated from our operations in Ohio. For the ninemonths ended September 30, 2007 and 2008, 9.4% and 8.5%, respectively, ofour total revenues were generated from our operations in Ohio. The following isa summary of financial information for our operations in Ohio for the three andnine months ended September 30, 2007 and 2008 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Total revenues             |       | $                                                    | 17,901     |                                                | $          | 13,767 |   | $ | 49,657 |   | $ | 42,734 |   |
| Total center expenses      |       | 13,927                                               |       | 11,926                                              |       | 34,726 |   | 33,551 |   |
| Center gross profit (loss) |       | $                                                    | 3,974      |                                                | $          | 1,841 |   | $ | 14,931 |   | $ | 9,183 |   |

 

If it is noteconomically viable to continue operations in Ohio and we decide to close ourOhio centers, our estimated range of closing costs, including severance, centertear-down costs, lease termination costs and the write-down of fixed assetswould be approximately $7.3 million to $16.4 million. Thecollectibility of advances and fees receivable in Ohio would most likely be impaired.As of September 30, 2008, the net receivable balance in Ohio wasapproximately $19.5 million. The Company has not quantified the amount ofgoodwill impairment, if any, that would result from the cessations ofoperations in Ohio.

 

***Closings***

 

*Closing ofOperations in Arkansas*. In March 2008, wereceived a letter from the Arkansas Attorney General demanding that we stopoffering deferred presentment transactions under the Arkansas Check CashersAct.  In response, we complied with theAttorney General’s demands and began offering consumer loans at interest ratesbelow the applicable Arkansas usury cap. On September 16, 2008, we received a notice from the State Board ofCollections that the Board had determined that consumer lenders who acceptaccount withdrawal authorizations would be deemed by the Board to be engaged inthe business of making deferred presentment transactions.   During this same time, we had been indiscussions with the Arkansas Attorney General to come to a resolutionregarding our operations in Arkansas, and it was agreed that if we discontinuedour operations in Arkansas, the Attorney General would not bring suit againstus.  Although we believe we have alwaysoperated in compliance with Arkansas law, we concluded that avoidingpotentially costly litigation in this circumstance is in the best interest ofour shareholders.  As a result, we closedall 30 centers in Arkansas on or before October 31, 2008.  The costs associated with closing ourArkansas operations are estimated to be approximately $1.8 

 

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million,including $1.1 million due to the write-down of receivables.  During the third quarter of 2008, approximately$1.4 million of these costs were recognized. The remainder will be recognized during the fourth quarter of 2008.

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Total revenues             |       | $                                                    | 1,681      |                                                | $          |  1,528 |   | $ | 4,390 |   | $ |  3,879 |   |
| Total center expenses      |       | 1,217                                                |       | 2,945                                               |       | 3,378 |   | 5,694 |   |
| Center gross profit (loss) |       | $                                                    | 464        |                                                | $          | (1,417 | ) | $ | 1,012 |   | $ | (1,815 | ) |

* *

*Closing of Operations in New Mexico.*Legislationin New Mexico became effective in 2007 that limits fees and interest on allconsumer loans and gives borrowers a 130 day interest-free and fee-freeextension. As a result of this legislation, we determined that it was noteconomically viable to continue operating in New Mexico.  As a result, we closed all of our ninecenters in New Mexico in August 2008.  The closing costs associated with closing our operations in New Mexicowere approximately $0.1 million.  Thefollowing is a summary of financial information for our operations in NewMexico for the three and nine months ended September 30, 2007 and 2008 (inthousands):

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Total revenues             |       | $                                                    | 550        |                                                | $          |    — |   | $ | 1,618 |   | $ | 224 |   |
| Total center expenses      |       | 498                                                  |       | 251                                                 |       | 1,388 |   | 900 |   |
| Center gross profit (loss) |       | $                                                    |   52  |                                                | $          | (251 | ) | $ |    230 |   | $ | (676 | ) |

* *

*Closing of Operations in Pennsylvania.* In September 2006,we began offering the Advance America Choice-Line of Credit (“Choice-Line”) inPennsylvania. The Choice-Line product allowed customers access to up to $500 incredit for which we charged a monthly participation fee plus interest onoutstanding loan balances. In July 2007, an unfavorable ruling was issuedby the Commonwealth Court of Pennsylvania directing our subsidiary operating inPennsylvania to immediately suspend its operations. See “Item 1. FinancialStatements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 5. Commitments and Contingencies.” During the third andfourth quarters of 2007, we closed all of our remaining centers inPennsylvania.

 

The followingis a summary of financial information for our operations in Pennsylvania forthe three and nine months ended September 30, 2007 and 2008 (inthousands):

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** **               | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|--------------------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                             | ** **               | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Total revenues             |       | $                                                    |     3,941 |                                                | $          | — |   | $ | 25,755 |   | $ | — |   |
| Total center expenses      |       | 11,594                                               |                     | (8                                                  | )          | 22,848 |   | (24 | ) |
| Center gross profit (loss) |       | $                                                    | (7,653                   | )                                                   | $          |  8 |   | $ | 2,907 |   | $ | 24 |   |

* *

*Closing of Operations in Oregon.*  Legislation in Oregon became effective in2007 that limits fees and interest on all consumer loans. As a result of thislegislation, we determined that it was no longer economically viable tocontinue to operate in Oregon and we closed all of our remaining Oregon centersin the fourth quarter of 2007.

 

The followingis a summary of financial information for our operations in Oregon for thethree and nine months ended September 30, 2007 and 2008 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** **                   | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------------------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                             | ** **                   | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Total revenues             |       | $                                                    |      699 |                                                | $          |     1 |   | $ |  4,767 |   | $ |     8 |   |
| Total center expenses      |       | 3,356                                                |                         | 22                                                  |       | 7,299 |   | 92 |   |
| Center gross profit (loss) |       | $                                                    | (2,657                       | )                                                   | $          | (21 | ) | $ | (2,532 | ) | $ | (84 | ) |

 

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***Acquisition in the UnitedKingdom***

 

During the nine months endedSeptember 30, 2008, we acquired two centers in the United Kingdom for anaggregate purchase price, including transaction-related costs, of approximately$0.8 million in cash and an increase in goodwill of approximately$0.7 million.

 

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C***enters***

*** ***

The following tableillustrates the composition of our center network at December 31, 2007 andSeptember 30, 2008:

 
| **State**           | ** ** | **December 31,  2007** | ** ** | **September 30,  2008** | ** ** |
|---------------------|------------|-----------------------------|------------|------------------------------|------------|
| Alabama             |       | 145                         |       | 144                          |       |
| Arizona             |       | 56                          |       | 54                           |       |
| Arkansas(1)         |       | 30                          |       | 30                           |       |
| California          |       | 286                         |       | 291                          |       |
| Colorado            |       | 72                          |       | 70                           |       |
| Delaware            |       | 15                          |       | 16                           |       |
| Florida             |       | 261                         |       | 259                          |       |
| Idaho               |       | 11                          |       | 11                           |       |
| Illinois            |       | 81                          |       | 81                           |       |
| Indiana             |       | 117                         |       | 114                          |       |
| Iowa                |       | 36                          |       | 36                           |       |
| Kansas              |       | 59                          |       | 59                           |       |
| Kentucky            |       | 42                          |       | 43                           |       |
| Louisiana           |       | 85                          |       | 86                           |       |
| Michigan            |       | 150                         |       | 151                          |       |
| Mississippi         |       | 61                          |       | 61                           |       |
| Missouri            |       | 90                          |       | 91                           |       |
| Montana             |       | 7                           |       | 6                            |       |
| Nebraska            |       | 24                          |       | 24                           |       |
| Nevada              |       | 14                          |       | 14                           |       |
| New Hampshire       |       | 24                          |       | 24                           |       |
| New Mexico(2)       |       | 10                          |       | —                       |       |
| North Dakota        |       | 8                           |       | 8                            |       |
| Ohio                |       | 244                         |       | 245                          |       |
| Oklahoma            |       | 65                          |       | 68                           |       |
| Rhode Island        |       | 18                          |       | 21                           |       |
| South Carolina      |       | 136                         |       | 138                          |       |
| South Dakota        |       | 12                          |       | 12                           |       |
| Tennessee           |       | 63                          |       | 63                           |       |
| Texas               |       | 256                         |       | 254                          |       |
| Utah                |       | 6                           |       | 6                            |       |
| Virginia            |       | 150                         |       | 152                          |       |
| Washington          |       | 103                         |       | 103                          |       |
| Wisconsin           |       | 66                          |       | 68                           |       |
| Wyoming             |       | 10                          |       | 10                           |       |
| Total United States |       | 2,813                       |       | 2,813                        |       |
| Canada              |       | 7                           |       | 10                           |       |
| United Kingdom      |       | 12                          |       | 17                           |       |
| Total               |       | 2,832                       |       | 2,840                        |       |

 

----

(1)          Allcenters in Arkansas will be closed during the fourth quarter of 2008.

 

(2)          Allcenters in New Mexico were closed during the third quarter of 2008.

 

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***New centers***

 

We opened 47and 6 new centers during the three months ended September 30, 2007 and2008, respectively. We opened 153 and 42 new centers during the nine monthsended September 30, 2007 and 2008, respectively.

 

***Closed centers***

*** ***

We closed 45and 22 centers during the three months ended September 30, 2007 and2008, respectively. We closed 96 and 36 centers during the nine monthsended September 30, 2007 and 2008, respectively. The expenses related toclosing centers typically include the undepreciated costs of fixtures andsignage that cannot be moved and reused at another center, moving costs,severance payments and any lease cancellation costs. We recorded expensesrelated to center closures of approximately $4.5 million and$0.4 million in the three months ended September 30, 2007 and 2008,respectively. We recorded expenses related to center closures of approximately$5.5 million and $1.2 million in the nine months ended September 30,2007 and 2008, respectively.  During thethird quarter of 2008, we recorded approximately $1.1 million in chargesrelated to the write-down of receivables in Arkansas.  During the same period in 2007, we recordedapproximately $6.7 million in charges related to the write-down of receivablesin Pennsylvania and Oregon.

 

**Critical Accounting Policies and Use ofEstimates**

** **

In theordinary course of business, we have made a number of estimates and assumptionsrelating to the reporting of our results of operations and financial conditionin the preparation of our financial statements in conformity with generallyaccepted accounting principles in the United States (“GAAP”). We evaluate theseestimates on an ongoing basis and we base these estimates on the informationcurrently available to us and on various other assumptions that we believe arereasonable under the circumstances. Actual results could vary from theseestimates under different assumptions or conditions.

 

We believethat the following critical accounting policies affect the more significantestimates and assumptions used in the preparation of our financial statements:

 

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

*** ***

 We believe the most significant estimates madein the preparation of our accompanying consolidated financial statements relateto the determination of an allowance for doubtful accounts for estimatedprobable losses on advances we make directly to customers and an accrual forthird-party lender losses for estimated probable losses on loans and certainrelated fees for loans that we process for the third-party lender in Texas (See“Consolidation of Variable Interest Entity” in this section). The allowance fordoubtful accounts and the accrual for third-party lender losses representamounts that we believe will be adequate to absorb probable losses on existingaccounts that may become uncollectible by us or by the third-party lender. Ouradvances and fees receivable, net on our balance sheet do not include theadvances and interest receivable for loans processed by us for the third-partylender in Texas because these loans are owned by the third-party lender.

 

The allowancefor doubtful accounts and accrual for third-party lender losses are primarilybased upon models that analyze specific portfolio statistics and also reflect,to a lesser extent, management’s judgment regarding overall accuracy. Theanalytical models take into account several factors including but not limitedto the number of transactions customers complete and charge-off and recoveryrates. Additional factors such as changes in state laws, center closings, andlength of time centers have been open in a state, relative mix of new centers withina state and other relevant factors are also evaluated to determine whether theresults from the analytical models should be revised. Because of the short-termnature of our products and the charge-off process, aging of accounts is not adistinct component of the analysis.

 

We record theallowance for doubtful accounts as a reduction of advances and fees receivable,net on our balance sheet. We record the accrual for third-party lender lossesas a current liability on our balance sheet. We charge the portion of advancesand fees deemed to be uncollectible against the allowance for doubtful accountsand credit any subsequent recoveries (including sales of debt) to the allowancefor doubtful accounts.

 

Unpaidadvances and the related fees and/or interest are generally charged off60 days after the date the check was returned by the customer’s bank fornon-sufficient funds or other reasons, unless the customer has paid at least15% of the total of his or her loan plus the original fee. Unpaid advances ofcustomers who file for bankruptcy are charged off upon receipt of thebankruptcy notice. Although management uses the best information available tomake evaluations, future adjustments to the allowance for doubtful accounts andaccrual for third-party lender losses may be necessary if conditions differsubstantially from our assumptions used in assessing their adequacy.

 

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Our businessexperiences cyclicality in receivable balances from both the time of year andthe day of the week. Fluctuations in receivable balances result in acorresponding impact on the allowance for doubtful accounts, the accrual forthird-party lender losses and provision for doubtful accounts.

 

Ourreceivables are traditionally lower at the end of the first quarter,corresponding to tax refund season, and reach their highest level during thelast week of December.

 

In addition tothe seasonal fluctuations, the receivable balances can fluctuate throughout aweek, generally being at their highest levels on a Wednesday or Thursday and attheir lowest levels on a Friday. In general, receivable balances decreaseapproximately 4% to 7% from a typical Thursday to a typical Friday. The thirdquarter of 2007 began on a Sunday (a relative low point in weekly receivablebalances) and ended on a Sunday (a relative low point in weekly receivablebalances). The third quarter of 2008 began on a Tuesday (a relative low pointin weekly receivable balances) and ended on a Tuesday (a relative low point inweekly receivable balances).

 

To the extenthistorical credit experience is not indicative of future performance or otherassumptions used by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts. As of September 30, 2008, if average default rates were5% higher or lower, the allowance for doubtful accounts and accrual forthird-party lender losses would change by approximately $3.2 million.

 

***Intangible Assets***

*** ***

As a result ofour acquisition of the National Cash Advance group of affiliated companies in October 1999,we recorded approximately $143.0 million of goodwill. During 2007 and2008, we completed five acquisitions in the United Kingdom, resulting inadditional goodwill of approximately $5.5 million. As of September 30,2008, the carrying value of goodwill is $127.6 million due to the amortizationof goodwill prior to the adoption of SFAS 142 and the change in theexchange rate for our United Kingdom assets. Due to the significance ofgoodwill and the reduction of net income that would occur if goodwill wereimpaired, we assess the impairment of our long-lived and intangible assetsannually or whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Factors considered important that couldtrigger an impairment review include significant underperformance relative tohistorical or projected future cash flows, significant changes in the manner ofuse of the acquired assets or the strategy of the overall business, andsignificant negative industry trends. To identify potential impairment, wecompare the fair value of a reporting unit with its carrying amount, includinggoodwill. If the fair value of a reporting unit does not exceed its carryingamount, we measure the amount of impairment loss by comparing the implied fairvalue of the reporting unit’s goodwill with the carrying amount of thatgoodwill. The amount of any impairment would lower our net income.

 

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

*** ***

Accruedliabilities in our December 31, 2007 and September 30, 2008 financialstatements include accruals of approximately $0.9 million and zero,respectively, for the remaining liability under our former self-insured healthand dental insurance plans and approximately $4.6 million and$4.6 million, respectively, for workers’ compensation. Beginning in thefourth quarter of 2007 and first quarter of 2008, we are no longer self-insuredfor our health insurance and dental insurance, respectively. We recognize ourobligations associated with our self-insured benefits in the period the claimis incurred. The costs of both reported claims and claims incurred but notreported, up to specified deductible limits, are estimated based on historicaldata, current enrollment, employee statistics and other information. We reviewestimates and periodically update our estimates and the resulting reserves andany necessary adjustments are reflected in earnings currently. To the extenthistorical claims are not indicative of future claims, there are changes inenrollment or employee history, workers’ compensation loss development factorschange or other assumptions used by management do not prevail, our expense andrelated accrued liabilities could increase or decrease.

 

***Consolidation of Variable Interest Entity***

*** ***

In connectionwith our CSO operations in Texas, we entered into an agreement with anunaffiliated third-party lender in 2005. We determined that the third-partylender was a variable interest entity (“VIE”) under Financial AccountingStandards Board Interpretation No. 46 (Revised) (“FIN 46(R)”) andthat we were the primary beneficiary of this VIE. As a result, we consolidatedthe lender as of and for the three and nine months ended September 30,2007. During the fourth quarter of 2007, we terminated our CSO agreement withthis lender and entered into an agreement with another unaffiliated third-partylender with substantially similar terms and conditions as the agreement withour former lender. This new lender is also a VIE but we have determined that weare not the primary beneficiary of this VIE. Therefore, we have notconsolidated our new lender as of and for the three and nine months ended September 30,2008. See “Item 1. Financial Statements—Notes 

 

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to Interim Unaudited Consolidated FinancialStatements—Note 7. Transactions with Variable Interest Entities” for theimpact of consolidating our former lender on our results of operations andfinancial condition.

 

***Accounting for Stock-Based Employee Compensation***

*** ***

In 2004, weadopted Statement of Financial Accounting Standards No. 123 (Revised),Share-Based Payment(“SFAS 123(R)”). Accordingly, we measure the cost of our stock-basedemployee compensation at the grant date based on fair value and recognize suchcost in the financial statements over each award’s requisite service period. Asof September 30, 2008, the total compensation cost not yet recognizedrelated to nonvested stock awards under our stock-based employee compensationplans is approximately $6.8 million. The weighted average period overwhich this expense is expected to be recognized is approximately4.2 years. See “Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 6. Capital Stock andStock-Based Compensation Plans” for a description of our restricted stock andstock option awards and the assumptions used to calculate the fair value ofsuch awards including the expected volatility assumed in valuing our stockoption grants.

 

***Recently Issued Accounting Pronouncements***

*** ***

See “Item 1.Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 1. Summary of Significant Accounting Policies” for adescription of the most recent pronouncements.

 

**Results of Operations**

** **

***Three Months Ended September 30, 2007 Compared to Three MonthsEnded September 30, 2008***

*** ***

The followingtables set forth our results of operations for the three months ended September 30,2007 compared to the three months ended September 30, 2008:

 
| ** **                                                           | ** ** | **Three Months Ended September 30,**                       | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                                                       | ** ** | **2008** | ** ** | **Variance  Favorable/(Unfavorable)** | ** ** |
| ** **                                                           | ** ** | **Dollars**                                                                    | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                           |       | **(Dollars in thousands, except center information)** |       |
| **Total Revenues**                                                   |       | $                                                                              | 183,926    |   | 100.0 | % | $ | 173,861 |   | 100.0 | % | $ | (10,065 | ) | (5.5 | )% |
| **Center Expenses:**                                                 | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and related payroll costs                                   |       | 50,235                                                                         |       | 27.3 | % | 47,783 |   | 27.5 | % | 2,452 |   | 4.9 | % |
| Provision for doubtful accounts                                      |       | 50,704                                                                         |       | 27.6 | % | 42,126 |   | 24.2 | % | 8,578 |   | 16.9 | % |
| Occupancy costs                                                      |       | 24,949                                                                         |       | 13.6 | % | 25,204 |   | 14.5 | % | (255 | ) | (1.0 | )% |
| Center depreciation expense                                          |       | 4,343                                                                          |       | 2.4 | % | 4,115 |   | 2.4 | % | 228 |   | 5.2 | % |
| Advertising expense                                                  |       | 6,537                                                                          |       | 3.5 | % | 6,109 |   | 3.5 | % | 428 |   | 6.5 | % |
| Other center expenses                                                |       | 16,561                                                                         |       | 9.0 | % | 11,095 |   | 6.4 | % | 5,466 |   | 33.0 | % |
| Total center expenses                                                |       | 153,329                                                                        |       | 83.4 | % | 136,432 |   | 78.5 | % | 16,897 |   | 11.0 | % |
| Center gross profit                                                  |       | 30,597                                                                         |       | 16.6 | % | 37,429 |   | 21.5 | % | 6,832 |   | 22.3 | % |
| **Corporate and Other Expenses (Income):**                           | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative expenses                                  |       | 15,043                                                                         |       | 8.2 | % | 18,312 |   | 10.5 | % | (3,269 | ) | (21.7 | )% |
| Corporate depreciation expense                                       |       | 780                                                                            |       | 0.4 | % | 760 |   | 0.5 | % | 20 |   | 2.6 | % |
| Interest expense                                                     |       | 3,168                                                                          |       | 1.7 | % | 3,029 |   | 1.7 | % | 139 |   | 4.4 | % |
| Interest income                                                      |       | (63                                                                            | )          | — | % | (37 | ) | — | % | (26 | ) | (41.3 | )% |
| Loss on disposal of property and equipment                           |       | 1,893                                                                          |       | 1.0 | % | 221 |   | 0.1 | % | 1,672 |   | 88.3 | % |
| Total corporate and other expenses                                   |       | 20,821                                                                         |       | 11.3 | % | 22,285 |   | 12.8 | % | (1,464 | ) | (7.0 | )% |
| Income before income taxes                                           |       | 9,776                                                                          |       | 5.3 | % | 15,144 |   | 8.7 | % | 5,368 |   | 54.9 | % |
| Income tax expense                                                   |       | 3,792                                                                          |       | 2.1 | % | 6,689 |   | 3.8 | % | (2,897 | ) | (76.4 | )% |
| Income before income of consolidated  variable  interest entity |       | 5,984                                                                          |       | 3.2 | % | 8,455 |   | 4.9 | % | 2,471 |   | 41.3 | % |
| Income of consolidated variable  interest entity                     |       | (251                                                                           | )          | (0.1 | )% | — |   | — |   | 251 |   | 100.0 | % |
| Net income                                                           |       | $                                                                              | 5,733      |   | 3.1 | % | $ | 8,455 |   | 4.9 | % | $ | 2,722 |   | 47.5 | % |

 

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| ** **                                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2007**                                             | ** ** | **2008** | ** ** |
| **Center Information:**                                                                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Number of centers open at beginning of  period                                                               |       | 2,909                                                |       | 2,856 |   |
| Opened                                                                                                       |       | 47                                                   |       | 6 |   |
| Acquired                                                                                                     |       | 10                                                   |       | — |   |
| Closed                                                                                                       |       | (45                                                  | )          | (22 | ) |
| Number of centers open at end of period                                                                      |       | 2,921                                                |       | 2,840 |   |
| Weighted average number of centers open  during the period                                                   |       | 2,923                                                |       | 2,848 |   |
| Number of customers served—all credit  products (thousands)                                             |       | 924                                                  |       | 865 |   |
| Number of payday cash advances originated  (thousands)                                                       |       | 3,127                                                |       | 3,047 |   |
| Aggregate principal amount of payday cash  advances originated (thousands)                                   |       | $                                                    | 1,128,365  |   | $ | 1,114,016 |   |
| Average amount of each payday cash advance  originated                                                       |       | $                                                    | 361        |   | $ | 366 |   |
| Average charge to customers for providing  and processing a payday cash advance                              |       | $                                                    | 55         |   | $ | 55 |   |
| Average duration of a payday cash advance  (days)                                                            |       | 16.5                                                 |       | 16.8 |   |
| Average number of lines of credit  outstanding during the period (thousands) (1)                        |       | 26                                                   |       | — |   |
| Average amount of aggregate principal on  lines of credit outstanding during the period (thousands) (1) |       | $                                                    | 11,446     |   | $ | — |   |
| Average principal amount on each line of  credit outstanding during the period (1)                      |       | $                                                    | 438        |   | $ | — |   |
| Number of installment loans originated  (thousands)                                                          |       | 9                                                    |       | 9 |   |
| Aggregate principal amount of installment  loans originated (thousands)                                      |       | $                                                    | 3,552      |   | $ | 4,534 |   |
| Average principal amount of each  installment loan originated                                                |       | $                                                    | 417        |   | $ | 480 |   |
| Average charge to customers for providing  and processing an installment loan (2)                       |       | $                                                    | 547        |   | $ | 244 |   |

 

----

(1)           We offered lines ofcredit in Pennsylvania from June 2006 through July 2007.

 

(2)           We modified the termsof our installment loan product in late March 2008. Under the new productthe average charge per installment loan is less.

 
| ** **                                                                            | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                                 | ** ** | **2008** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                              | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                     | ** ** |
| **Per Center (based on weighted average number  of centers open during the period):** | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Center revenues                                                                       |       | $                                                        | 62.9       |   | 100.0 | % | $ | 61.0 |   | 100.0 | % | $ | (1.9 | ) | (3.0 | )% |
| Center expenses:                                                                      |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 17.2                                                     |       | 27.3 | % | 16.8 |   | 27.5 | % | 0.4 |   | 2.3 | % |
| Provision for doubtful accounts                                                       |       | 17.3                                                     |       | 27.6 | % | 14.8 |   | 24.2 | % | 2.5 |   | 14.5 | % |
| Occupancy costs                                                                       |       | 8.5                                                      |       | 13.6 | % | 8.8 |   | 14.5 | % | (0.3 | ) | (3.5 | )% |
| Center depreciation expense                                                           |       | 1.5                                                      |       | 2.4 | % | 1.4 |   | 2.4 | % | 0.1 |   | 6.7 | % |
| Advertising expense                                                                   |       | 2.2                                                      |       | 3.5 | % | 2.1 |   | 3.5 | % | 0.1 |   | 4.5 | % |
| Other center expenses                                                                 |       | 5.7                                                      |       | 9.0 | % | 3.9 |   | 6.4 | % | 1.8 |   | 31.6 | % |
| Total center expenses                                                                 |       | 52.4                                                     |       | 83.4 | % | 47.8 |   | 78.5 | % | 4.6 |   | 8.8 | % |
| Center gross profit                                                                   |       | $                                                        | 10.5       |   | 16.6 | % | $ | 13.2 |   | 21.5 | % | $ | 2.7 |   | 25.7 | % |

*** ***

***Revenue Analysis***

*** ***

Total revenuesdecreased approximately $10.1 million during the three months ended September 30,2008 compared to the same period in 2007. Total revenues for the 2,681 centersopened prior to July 1, 2007 and still open as of September 30, 2008decreased $7.1 million from $176.8 million for the three months ended September 30,2007 to $169.7 million for the same period in 2008. Centers opened priorto July 1, 2007 were at least three months and fifteen months old as of September 30,2007 and 2008, respectively. Total revenues for the 159 centers opened or acquiredafter 

 

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July 1, 2007 and still open as of September 30,2008 increased $3.7 million from $0.2 million for the three monthsended September 30, 2007 to $3.9 million for the same period in 2008.Total revenues for the remaining 278 centers that closed represented adecrease of approximately $6.7 million for the three months ended September 30,2008 compared to the same period in 2007. Of this decrease, approximately$3.9 million and $0.7 million were due to the closure of our centersin Pennsylvania and Oregon, respectively, during the third quarter of 2007.

 

***Center Expense Analysis***

*** ***

*Salariesand related payroll costs.*  The decrease in salaries and related payrollcosts for the three months ended September 30, 2008 compared to the sameperiod in 2007 was due primarily to a decrease in the number of centers open in2008 as compared to 2007 and lower medical costs for our health and dentalplans.  We averaged approximately 1.95and 1.92 full-time equivalent field employees, including district directors,per center during the three months ended September 30, 2007 and 2008,respectively.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts decreased to 24.2% for the three months ended September 30,2008 from 27.6% for the same period in 2007. The decrease in the provisionduring the third quarter of 2008 was due to approximately $6.7 million incharges related to the suspension of operations in Pennsylvania and Oregon thatwas recorded in the quarter ended September 30, 2007.  In the third quarter of 2008, the provisionincludes a charge related to the suspension of operations in Arkansas ofapproximately $1.1 million. Excluding the charges for the suspension ofoperations for both periods, the provision for doubtful accounts would havebeen  23.6% for three months endedSeptember 30, 2008 and 23.9% for the same period in 2007.

 

*Occupancy costs.*  The increase in occupancy costs for the threemonths ended September 30, 2008 compared to the same period in 2007 wasdue primarily to higher rents and utility costs.

 

*Advertising expense.*  Advertising expense decreased for the threemonths ended September 30, 2008 compared to the same period in 2007 dueprimarily to a reduction in marketing activity in Ohio, New Mexico, Arkansasand New Hampshire in response to pending legislation regarding payday lenders.

 

* Other center expenses.*  The decrease in other center expenses for thethree months ended September 30, 2008 compared to the same period in 2007was due primarily to a decrease in center closing costs and a decrease inexpenses related to a previously consolidated variable interest entity.

 

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

*** ***

*General and administrative expenses.*  The increase in general and administrativeexpenses for the three months ended September 30, 2008 compared to thesame period in 2007 was due primarily to:

 

·                  higher expenses of approximately $3.6million in our public and government relations department primarily forconsultants, trade association dues and public relations;

 

·                  an increase of approximately $0.6million of expenses related to personnel, accounting and other costs (excludinglegal fees) associated with the expansion of our operations in the UnitedKingdom;

 

·                  an increase in legal fees ofapproximately $0.4 million; 

 

partiallyoffset by

 

·                  a decrease of approximately $0.6million in expenses related to personnel, consulting and other costs associatedwith new product development and management;

 

·                  a decrease of approximately $0.3million in accounting fees and others expenses related to SEC reporting andcompliance;

 

 ·               a decrease of approximately $0.3 millionin expenses related to reduced headcount in our field operations department;

 

·                  and a decrease of approximately $0.2million related to reduced headcount in our real estate and constructiondepartments.

 

*Loss on disposal of property and equipment.*  The decrease in loss on disposal of propertyand equipment for the three months ended September 30, 2008 compared tothe same period in 2007 was primarily due to fewer centers closing during 2008.

 

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*Interestexpense.*  Thedecrease in interest expense for the three months ended September 30, 2008compared to the same period in 2007 was due to a decrease in weighted averageinterest rates as compared to the prior year. This decrease was partially offset by an increase in the averageoutstanding balance of our revolving credit facility in the three months ended September 30,2008.

 

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**Results of Operations**

 

***Nine Months Ended September 30, 2007 Compared to Nine Months EndedSeptember 30, 2008***

 

The followingtables set forth our results of operations for the nine months ended September 30,2007 compared to the nine months ended September 30, 2008:

 
| ** **                                                     | ** ** | **Nine Months Ended September 30,**                        | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                                                       | ** ** | **2008** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                                                    | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                     |       | **(Dollars in thousands, except center information)** |       |
| ** **                                                     |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Revenues**                                             |       | $                                                                              | 525,948    |   | 100.0 | % | $ | 501,459 |   | 100.0 | % | $ | (24,489 | ) | (4.7 | )% |
| **Center Expenses:**                                           |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                             |       | 149,191                                                                        |       | 28.4 | % | 148,489 |   | 29.6 | % | 702 |   | 0.5 | % |
| Provision for doubtful accounts                                |       | 97,343                                                                         |       | 18.5 | % | 93,132 |   | 18.6 | % | 4,211 |   | 4.3 | % |
| Occupancy costs                                                |       | 72,168                                                                         |       | 13.7 | % | 75,233 |   | 15.0 | % | (3,065 | ) | (4.2 | )% |
| Center depreciation expense                                    |       | 12,876                                                                         |       | 2.4 | % | 12,638 |   | 2.5 | % | 238 |   | 1.8 | % |
| Advertising expense                                            |       | 19,438                                                                         |       | 3.7 | % | 16,099 |   | 3.2 | % | 3,339 |   | 17.2 | % |
| Other center expenses                                          |       | 44,247                                                                         |       | 8.4 | % | 36,730 |   | 7.3 | % | 7,517 |   | 17.0 | % |
| Total center expenses                                          |       | 395,263                                                                        |       | 75.1 | % | 382,321 |   | 76.2 | % | 12,942 |   | 3.3 | % |
| Center gross profit                                            |       | 130,685                                                                        |       | 24.9 | % | 119,138 |   | 23.8 | % | (11,547 | ) | (8.8 | )% |
| **Corporate and Other Expenses (Income):**                     |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses                            |       | 44,006                                                                         |       | 8.4 | % | 50,696 |   | 10.1 | % | (6,690 | ) | (15.2 | )% |
| Corporate depreciation expense                                 |       | 2,410                                                                          |       | 0.4 | % | 2,320 |   | 0.5 | % | 90 |   | 3.7 | % |
| Interest expense                                               |       | 7,771                                                                          |       | 1.5 | % | 8,246 |   | 1.7 | % | (475 | ) | (6.1 | )% |
| Interest income                                                |       | (261                                                                           | )          | — | % | (107 | ) | — | % | (154 | ) | (59.0 | )% |
| Loss on disposal of property and equipment                     |       | 2,428                                                                          |       | 0.5 | % | 439 |   | 0.1 | % | 1,989 |   | 81.9 | % |
| Loss on impairment of assets                                   |       | 314                                                                            |       | — | % | 236 |   | — | % | 78 |   | 24.8 | % |
| Total corporate and other expenses                             |       | 56,668                                                                         |       | 10.8 | % | 61,830 |   | 12.4 | % | (5,162 | ) | (9.1 | )% |
| Income before income taxes                                     |       | 74,017                                                                         |       | 14.1 | % | 57,308 |   | 11.4 | % | (16,709 | ) | (22.6 | )% |
| Income tax expense                                             |       | 30,321                                                                         |       | 5.8 | % | 24,775 |   | 4.9 | % | 5,546 |   | 18.3 | % |
| Income before income of consolidated  variable interest entity |       | 43,696                                                                         |       | 8.3 | % | 32,533 |   | 6.5 | % | (11,163 | ) | (25.5 | )% |
| Income of consolidated variable interest  entity               |       | (811                                                                           | )          | (0.1 | )% | — |   | — | % | 811 |   | 100.0 | % |
| Net income                                                     |       | $                                                                              | 42,885     |   | 8.2 | % | $ | 32,533 |   | 6.5 | % | $ | (10,352 | ) | (24.1 | )% |
|                                                                |            |                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2007**                                            | ** ** | **2008** | ** ** |
| **Center Information:**                                                                                        |       |                                                |       |   |   |
| Number of centers open at beginning of  period                                                                 |       | 2,853                                               |       | 2,832 |   |
| Opened                                                                                                         |       | 153                                                 |       | 42 |   |
| Acquired                                                                                                       |       | 11                                                  |       | 2 |   |
| Closed                                                                                                         |       | (96                                                 | )          | (36 | ) |
| Number of centers open at end of period                                                                        |       | 2,921                                               |       | 2,840 |   |
| Weighted average number of centers open  during the period                                                     |       | 2,881                                               |       | 2,852 |   |
| Number of customers served—all credit  products (thousands)                                               |       | 1,327                                               |       | 1,245 |   |
| Number of payday cash advances originated  (thousands)                                                         |       | 8,766                                               |       | 8,692 |   |
| Aggregate principal amount of payday cash  advances originated (thousands)                                     |       | $                                                   | 3,141,595  |   | $ | 3,179,976 |   |
| Average amount of each payday cash advance  originated                                                         |       | $                                                   | 358        |   | $ | 366 |   |
| Average charge to customers for providing  and processing a payday cash advance                                |       | $                                                   | 55         |   | $ | 56 |   |
| Average duration of a payday cash advance  (days)                                                              |       | 16.4                                                |       | 16.7 |   |
| Average number of lines of credit  outstanding during the period (thousands) (1)                               |       | 24                                                  |       | — |   |
| Average amount of aggregate principal on  lines of credit outstanding during the period   (thousands) (1) |       | $                                                   | 10,377     |   | $ | — |   |
| Average principal amount on each line of  credit outstanding during the period (1)                             |       | $                                                   | 429        |   | $ | — |   |
| Number of installment loans originated  (thousands)                                                            |       | 23                                                  |       | 23 |   |
| Aggregate principal amount of installment  loans originated (thousands)                                        |       | $                                                   | 9,708      |   | $ | 10,908 |   |
| Average principal amount of each  installment loan originated                                                  |       | $                                                   | 414        |   | $ | 468 |   |
| Average charge to customers for providing  and processing an installment loan (2)                              |       | $                                                   | 543        |   | $ | 302 |   |

 

----

(1)                                 Weoffered lines of credit in Pennsylvania from June 2006 through July 2007.

 

(2)                                 Wemodified the terms of our installment loan product in late March 2008. Underthe new product the average charge per installment loan is less.

 
| ** **                                                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                             | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            |       | **(Dollars in thousands)**                    |       |
| **Per Center (based on weighted average number  of centers open during the period):** |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Center revenues                                                                       |       | $                                                       | 182.6      |   | 100.0 | % | $ | 175.8 |   | 100.0 | % | $ | (6.8 | ) | (3.7 | )% |
| Center expenses:                                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 51.8                                                    |       | 28.4 | % | 52.1 |   | 29.6 | % | (0.3 | ) | (0.6 | )% |
| Provision for doubtful accounts                                                       |       | 33.8                                                    |       | 18.5 | % | 32.7 |   | 18.6 | % | 1.1 |   | 3.3 | % |
| Occupancy costs                                                                       |       | 25.0                                                    |       | 13.7 | % | 26.4 |   | 15.0 | % | (1.4 | ) | (5.6 | )% |
| Center depreciation expense                                                           |       | 4.5                                                     |       | 2.4 | % | 4.4 |   | 2.5 | % | 0.1 |   | 2.2 | % |
| Advertising expense                                                                   |       | 6.7                                                     |       | 3.7 | % | 5.6 |   | 3.2 | % | 1.1 |   | 16.4 | % |
| Other center expenses                                                                 |       | 15.4                                                    |       | 8.4 | % | 12.9 |   | 7.3 | % | 2.5 |   | 16.2 | % |
| Total center expenses                                                                 |       | 137.2                                                   |       | 75.1 | % | 134.1 |   | 76.2 | % | 3.1 |   | 2.3 | % |
| Center gross profit                                                                   |       | $                                                       | 45.4       |   | 24.9 | % | $ | 41.7 |   | 23.8 | % | (3.7 | ) | (8.1 | )% |
|                                                                                       |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

*** ***

***Revenue Analysis***

*** ***

Total revenuesdecreased approximately $24.5 million during the nine months ended September 30,2008 compared to the same period in 2007. Total revenues for the 2,611 centersopened prior to January 1, 2007 and still open as of 

 

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September 30, 2008 decreased$3.8 million from $483.9 million for the nine months ended September 30,2007 to $480.1 million for the same period in 2008. Centers opened priorto January 1, 2007 were at least nine months and twenty-one months old asof September 30, 2007 and 2008, respectively. Total revenues for the 265centers opened or acquired after January 1, 2007 and still open as of September 30,2008 increased $16.6 million from $3.2 million for the nine months ended September 30,2007 to $19.8 million for the same period in 2008. Total revenues for theremaining 278 centers that closed represented a decrease of approximately$37.3 million for the nine months ended September 30, 2008 comparedto the same period in 2007. Of this decrease, approximately $25.8 millionand $4.8 million were due to the closure of our centers in Pennsylvaniaand Oregon, respectively, during the third and fourth quarters of 2007. Inaddition, we believe the demand for payday advance products decreased due tothe government’s economic stimulus payment made in the second quarter of 2008.

 

***Center Expense Analysis***

*** ***

*Salaries and related payroll costs.*  The decrease in salaries and related payrollcosts for the nine months ended September 30, 2008 compared to the sameperiod in 2007 was due primarily to a reduction in the number of centers openduring the nine months ended September 30, 2008 as compared to the sameperiod in 2007 and lower medical costs for our health and dental plans.  This was partially offset by higher salariesand related payroll costs.  We averagedapproximately 2.07 and 2.01 full-time equivalent field employees, includingdistrict directors, per center during the nine months ended September 30,2007 and 2008, respectively.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts increased to 18.6% for the nine months ended September 30,2008 from 18.5% for the same period in 2007. In the third quarter of 2008, theprovision includes a charge related to the suspension of operations in Arkansasof approximately $1.1 million.  Duringthe third quarter of 2007, $6.7 million in charges related to the suspension ofoperations in Pennsylvania and Oregon were recorded.  Excluding the charges for the suspension ofoperations for both periods, the provision for doubtful accounts would havebeen 18.3% for the nine months ended September 30, 2008 and 17.2% for the sameperiod in 2007.

 

*Occupancy costs.*  The increase in occupancy costs for the ninemonths ended September 30, 2008 compared to the same period in 2007 wasdue primarily to higher rents and repair and maintenance charges.

 

*Advertising expense.*  Advertising expense decreased for the ninemonths ended September 30, 2008 compared to the same period in 2007 dueprimarily to a reduction in marketing activity in Ohio, New Mexico, Arkansasand New Hampshire in response to pending legislation regarding payday lenders.

 

*Other center expenses.*  The decrease in other center expenses for thethree months ended September 30, 2008 compared to the same period in 2007was due primarily to a decrease in expense related to the ramp up of ourprepaid card in 2007 a decrease in center closing costs, a decrease in cashshort and a decrease in expenses related to a previously consolidated variableinterest entity.

 

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

*** ***

*General and administrative expenses.*  The increase in general and administrativeexpenses for the three months ended September 30, 2008 compared to thesame period in 2007 was due primarily to:

 

·                  higher expenses of approximately $6.8million in our public and government relations department primarily forconsultants, trade association dues and public relations;

 

·                  an increase of approximately $1.8million of expenses related to personnel, accounting and other costs (excludinglegal fees) associated with the expansion of our operations in the UnitedKingdom;

 

·                  an increase in legal fees ofapproximately $1.2 million; 

 

partiallyoffset by

 

·                  a decrease of approximately $1.1million in expenses related to personnel, consulting and other costs associatedwith new product development and management;

 

·                  a decrease of approximately $0.9million in accounting fees and others expenses related to SEC reporting andcompliance;

 

·                  a decrease of approximately $0.7million related to reduced headcount in our real estate and constructiondepartments; and

 

·                  a decrease of approximately $0.5million in expenses related to reduced headcount in our field operationsdepartment.

 

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* *

*Loss on disposal of property and equipment.*  The decrease in loss on disposal of propertyand equipment for the nine months ended September 30, 2008 compared to thesame period in 2007 was primarily due to fewer centers closing in 2008.

 

*Loss on impairment of assets.*  Loss on impairment of assets in 2007 and 2008represents the write-down of the undepreciated costs of certain fixed assets inour centers identified for closure.

 

*Interestexpense.*  Theincrease in interest expense for the nine months ended September 30, 2008compared to the same period in 2007 was due to an increase in the averageoutstanding balance of our revolving credit facility during the nine monthsended September 30, 2008.  Thisincrease was partially offset by a decrease in weighted average interest ratesas compared to prior year.

 

**Liquidity andCapital Resources**

** **

The followingtable presents a summary of cash flows for the nine months ended September 30,2007 and 2008 (dollars in thousands):

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                                    | ** ** | **2007**   | ** ** | **2008**   | ** ** | **Dollars**  | ** ** | **%** | ** ** |
| Cash flows provided by (used in):                             |       |       |       |       |       |         |       |   |   |
| Operating activities                                          |       | $          | 122,121    |       | $          | 123,869      |       | $ | 1,748 |   | 1.4 | % |
| Investing activities                                          |       | (94,708    | )          | (78,403    | )          | 16,305       |       | 17.2 | % |
| Financing activities                                          |       | (62,603    | )          | (57,525    | )          | 5,078        |       | 8.1 | % |
| Effect of exchange rate changes on cash and  cash equivalents |       | —     |       | (191       | )          | (191         | )          | (100.0 | )% |
| Net decrease in cash and cash equivalents                     |       | (35,190    | )          | (12,250    | )          | 22,940       |       | 65.2 | % |
| Cash and cash equivalents, beginning of  period               |       | 67,245     |       | 28,251     |       | (38,994      | )          | (58.0 | )% |
| Cash and cash equivalents, end of period                      |       | $          | 32,055     |       | $          | 16,001       |       | $ | (16,054 | ) | (50.1 | )% |

 

Our principalsources of cash are from operations and from borrowings under our revolvingcredit facility. See “Certain Contractual Cash Commitments—Long-Term DebtObligations” in this section for a detailed description of our revolving creditfacility. We anticipate that our primary uses of cash will be to provideworking capital, finance capital expenditures, meet debt service requirements,fund advances, finance center growth, fund acquisitions, pay dividends on ourcommon stock and repurchase shares of our outstanding common stock.

 

We borrowunder our revolving credit facility to fund our advances and to meet our otherliquidity needs. Our day-to-day balances under our revolving credit facility,as well as our cash balances, vary because of seasonal and day-to-dayrequirements resulting from making and collecting advances. For example, if amonth ends on a Friday (a typical payday), our borrowings and our cash balanceswill be high compared to a month that does not end on a Friday. This is becausea substantial portion of the advances will be repaid in cash on that day butsufficient time will not yet have passed for the cash to reduce the outstandingborrowings under our revolving credit facility. Our borrowings under ourrevolving credit facility will also increase as the demand for advancesincreases during our peak periods such as the back-to-school and holidayseasons. Conversely, our borrowings typically decrease during the tax refundseason when cash receipts from customers peak or the customer demand for newadvances decreases. Advances and fees receivable, net decreased approximately$26.6 million, or 11.2%, to $211.2 million at September 30, 2008,compared to $237.8 million at September 30, 2007. Advances and feesreceivable, net decreased approximately $10.3 million, or 4.7%, to $211.2million at September 30, 2008 compared to $221.5 million at December 31,2007.

 

In May 2005,our Board of Directors approved a program authorizing the repurchase of up to$50.0 million of our outstanding common stock. In August 2006, ourBoard of Directors approved an extension of our stock repurchase programauthorizing us to repurchase up to $100.0 million of our outstandingcommon stock on and after that date. Additionally, in February 2008, ourBoard of Directors approved a further extension of our stock repurchase programauthorizing us to repurchase up to an additional $75.0 million of ouroutstanding common stock. Our Board of Directors determined that thecontinuation and increase of the stock repurchase program served the bestinterest of us and our stockholders by returning capital to our stockholders.

 

During thenine months ended September 30, 2007 and 2008, we repurchased 2,292,000shares and 11,911,262 shares of our common stock, respectively, at a cost ofapproximately $32.4 million and $89.0 million, respectively. Additionally,for the nine months ended September 30, 2007 and 2008, 2,826 and 5,536shares of common stock, respectively, were surrendered by employees to satisfytheir tax obligations with respect to the vesting of shares of restricted 

 

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stock awarded pursuant to our 2004 OmnibusStock Plan. We completed our authorized share repurchase program in July 2008.

 

Although ourrevolving credit 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 from Operating Activities***

*** ***

Net cashprovided by operating activities increased approximately 1.4% to$123.9 million for the nine months ended September 30, 2008 comparedto the same period ended September 30, 2007.  The increase in operating cash flows wasattributable to the net change of $17.7 million in operating assets andliabilities.  This was partially offsetby a decrease in net income of $10.4 million and a decrease in non-cashexpense items of $5.6 million

 

***Cash Flows from Investing Activities***

*** ***

Net cash usedin investing activities decreased approximately 17.2% to $78.4 million forthe nine months ended September 30, 2008 compared to the same period endedSeptember 30, 2007. The decrease was primarily related to decreases inadvances receivable of $7.2 million, acquisitions of $4.2 million, and purchasesof property and equipment of $4.3 million.

 

***Cash Flows from Financing Activities***

*** ***

Net cash usedin financing activities decreased 8.1% to $57.5 million compared to thesame period ended September 30, 2007. During the nine months ended September 30,2008, the Company had net borrowings under the revolving credit facility ofapproximately $60.7 million. Uses of cash during the nine months ended September 30,2008, included purchases of treasury stock of $89.0 million and payment ofdividends of $24.4 million.

 

**Capital Expenditures**

** **

For the ninemonths ended September 30, 2007 and 2008, we spent $12.0 million and$7.7 million, respectively, on capital expenditures. Capital expendituresincluded expenditures for: (1) new centers opened; (2) centerremodels; and (3) computer equipment replacements in our centers and atour corporate headquarters.

 

**Off-Balance Sheet Arrangement withThird-Party Lender**

** **

In Texas,where we operate as a CSO, we offer a fee-based credit services package toassist customers in trying to improve their credit and in obtaining anextension of consumer credit through a third-party lender. Under the terms ofour agreement with this lender, we process customer applications and arecontractually obligated to reimburse the lender for the full amount of theloans and certain related fees that are not collected from the customers. As ofSeptember 30, 2008, the third-party lender’s outstanding advances andinterest receivable (which were not recorded on our balance sheet) totaledapproximately $17.3 million, which is the amount we would be obligated topay the third-party lender if these amounts were to become uncollectible.Additionally, if these advances were to become uncollectible, we would also berequired to pay the third-party lender all related NSF fees and late fees onthese advances.

 

Because of oureconomic exposure for losses related to the third- party lender’s advances andinterest receivable, we have established an accrual for third-party lenderlosses to reflect our estimated probable losses related to uncollectiblethird-party lender advances. The accrual for third-party lender losses that wasreported in our balance sheet at September 30, 2008 was approximately$3.8 million and was established on a basis similar to the allowance fordoubtful accounts. If actual losses on the third-party lender’s advances arematerially greater than our accrual for third-party lender losses, ourbusiness, results of operations and financial condition could be adverselyaffected. See “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 7. Transactions with VariableInterest Entities.”

 

**Certain Contractual Cash Commitments**

** **

Our principalfuture contractual obligations and commitments as of September 30, 2008,including periodic interest payments, included the following (dollars inthousands):

 

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| ** **                                 | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | **Total**  | ** ** | **2008**                                            | ** ** | **2009 and  2010** | ** ** | **2011 and  2012** | ** ** | **2013 and  thereafter** | ** ** |
| Long-term debt obligations:                |       |       |       |                                                |       |   |   |   |   |   |   |
| Revolving credit facility                  |       | $          | 203,005    |                                                | $          | — |   | $ | — |   | $ | — |   | $ | 203,005 |   |
| Mortgage payable                           |       | 6,971      |       | 200                                                 |       | 1,593 |   | 1,593 |   | 3,585 |   |
| Note payable                               |       | 138        |       | 34                                                  |       | 104 |   | — |   | — |   |
| Operating lease obligations (1)       |       | 153,945    |       | 16,742                                              |       | 100,450 |   | 31,811 |   | 4,942 |   |
| Purchase obligations                       |       | 322        |       | 311                                                 |       | 11 |   | — |   | — |   |
| Other                                      |       | 3,380      |       | 770                                                 |       | 2,160 |   | 450 |   | — |   |
| Total                                      |       | $          | 367,761    |                                                | $          | 18,057 |   | $ | 104,318 |   | $ | 33,854 |   | $ | 211,532 |   |

 

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

 

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***Long-Term Debt Obligations***

*** ***

*Revolving Credit Facility.*  In March 2008, we amended and restatedour credit facility with a syndicate of banks. Our revolving credit facilitynow provides us with a $270.0 million revolving line of credit, whichamount includes the ability to issue up to $25.0 million in letters ofcredit. Our revolving credit facility matures on March 24, 2013. We havethe option to increase the revolving credit facility by an additional$95.0 million upon receipt of sufficient commitments from lenders in thelending syndicate. Any portion of our revolving credit facility that is repaidmay be borrowed again.

 

As of September 30,2008, we had $203.0 million outstanding on the revolving portion of ourcredit facility and $1.1 million of letters of credit outstanding.Borrowings under our revolving credit facility are subject to compliance withcertain covenants and conditions. We believe our credit facility in addition tocash generated from operations should be sufficient to meet our currentlyanticipated liquidity requirements.

 

In general,our borrowings under our revolving credit facility bear interest, at ouroption, at a base rate plus an applicable margin or a LIBOR-based rate plus anapplicable margin. The base rate equals the greater of: (i) the prime rateset by Bank of America, the administrative agent under the revolving creditfacility, and (ii) the sum of the federal funds rate plus 0.50%. Theapplicable margin is determined each quarter by a pricing grid based on ourtotal leverage ratio of consolidated debt to consolidated earnings beforeinterest, taxes, depreciation, and amortization (“EBITDA”) as defined in thecredit agreement. The base rate applicable margin ranges from 1.50% to 2.25%based upon our total leverage ratio. The LIBOR-based applicable margin rangesfrom 2.50% to 3.25% based upon our total leverage ratio. As of September 30,2008, the applicable margin for the prime-based rate was 1.75% and theapplicable margin for the LIBOR-based rate was 2.75%.

 

The applicablerate is chosen when we request a draw down under the revolving credit facilityand is based on the forecasted working capital requirements and the requirednotice period for each type of borrowing. LIBOR-based rates can be selected forone-, two-, three- or nine-month terms. In the case of a base rate loan, wemust notify the bank on the requested date of any required borrowing and in thecase of a LIBOR-based loan, we must notify the bank three business days priorto the date of the requested borrowing. Base rate loans are variable, and therates on those loans are changed whenever the underlying rate changes.LIBOR-based loans bear interest for the term of the loan at the rate set at thetime of borrowing for that loan.

 

Ourobligations under the revolving credit facility are guaranteed by each of ourdomestic subsidiaries. Our borrowings under the revolving credit facility arecollateralized by substantially all of our assets and the assets of oursubsidiaries. In addition, our borrowings under the revolving credit facilityare secured by a pledge of all of the capital stock, or similar equityinterests, of our domestic subsidiaries and 65% of the voting capital stock, orsimilar equity interests, of our foreign subsidiaries. Our revolving creditfacility contains various financial covenants that require, among other things,the maintenance of minimum net worth, maximum leverage and senior leverage,minimum fixed charge coverage and maximum charge-off ratios. The maximumleverage allowed under the revolving credit facility is 3.5 times trailingtwelve month EBITDA as defined in the credit agreement. The maximum seniorleverage allowed under the revolving credit facility is 2 times trailing twelvemonth EBITDA as defined in the credit agreement. Our trailing twelve-monthEBITDA, as defined in the credit agreement, as of September 30, 2008 wasapproximately $111.9 million. As of September 30, 2008, our senior leveragelimitation was $223.8 million. The revolving credit facility contains customarycovenants, including covenants that restrict our ability to, among other things(i) incur liens, (ii) incur certain indebtedness (includingguarantees or other contingent obligations), (iii) engage in mergers andconsolidations, (iv) engage in sales, transfers, and other dispositions ofproperty and assets (including sale-leaseback transactions), (v) makeloans, acquisitions, joint ventures, and other investments, (vi) makedividends and other distributions to, and redemptions and repurchases from,equity holders, (vii) prepay, redeem, or repurchase certain debt, (viii) makechanges in the nature of our business, (ix) amend our organizationaldocuments, or amend or otherwise modify certain of our debt documents, (x) changeour fiscal quarter and fiscal year ends, (xi) enter into transactions withour affiliates, and (xii) issue certain equity interests. The revolvingcredit facility contains customary events of default, including events ofdefault resulting from (i) our failure to pay principal when due orinterest, fees, or other amounts after grace periods to be mutually agreedupon, (ii) covenant defaults, (iii) our material breach of anyrepresentation or warranty, (iv) cross defaults to any other indebtednessin excess of $1.0 million in the aggregate, (v) bankruptcy,insolvency, or other similar proceedings, (vi) our inability to pay debts,(vii) monetary judgment defaults in excess of $1.0 million in theaggregate, (viii) customary ERISA defaults, (ix) actual or assertedinvalidity of any material provision of the loan documentation or impairment ofa material portion of the collateral, and (x) a change of control. Abreach of a covenant or an event of default could cause all amounts outstandingunder the revolving credit facility to become due and payable. We were incompliance with all financial covenants at September 30, 2008. See “Liquidityand Capital Resources” in this section for a description of how we utilize therevolving credit facility to meet our liquidity needs.

 

*Mortgage Payable.*  Our corporate headquarters building andrelated land are subject to a mortgage, the principal amount of which wasapproximately $5.4 million and $5.1 million at December 31, 2007and September 30, 2008, respectively. The mortgage is payable to aninsurance company and is collateralized by our corporate headquarters building

 

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and related land. The mortgage is payable in180 monthly installments of approximately $66,400, including principal andinterest, and bears interest at a fixed rate of 7.30% over its term. Themortgage matures on June 10, 2017. The carrying amount of our corporateheadquarters (land, land improvements and building) was approximately$4.9 million and $4.8 million at December 31, 2007 and September 30,2008, respectively.

 

***Operating Lease Obligations***

*** ***

We lease allof our 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 certain security and office equipment. The lessors under theaircraft hangar space lease and other office and warehouse space leases arecompanies controlled by or affiliated with Mr. George D. Johnson, Jr.,our former Chairman. See “Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 8. Related PartyTransactions.”

 

***Purchase Obligations***

*** ***

We enter intoagreements with vendors to purchase furniture, fixtures and other items used toopen new centers. These purchase commitments typically extend for a period oftwo to three months after the opening of a new center. As of September 30,2008, our purchase obligations totaled approximately $0.3 million.

 

***Other***

*** ***

We haveentered into a consulting arrangement for which the retainer will be recognizedover the anticipated term of the engagement. We have also entered into acontract with a service provider that specifies certain minimum payments overthe term of the contract.

 

**Critical Estimates, Uncertainties orAssessments in the Financial Statements**

** **

Thepreparation of our financial statements in conformity with GAAP requires us tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and 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 resultsrelated to the estimates and assumptions made in preparing our consolidatedfinancial statements will emerge over periods of time, such as estimates andassumptions underlying the determination of allowance for doubtful accounts andaccrual for third-party lender losses. These estimates and assumptions aremonitored and periodically adjusted as circumstances warrant. These amounts maybe adjusted based on higher or lower actual loss experience. Although there isgreater risk with respect to the accuracy of these estimates and assumptionsbecause of the period over which actual results may emerge, this risk ismitigated by the ability to make changes to these estimates and assumptionsover the same period.

 

Weperiodically review the carrying value of goodwill and other intangible assetswhen events and circumstances warrant such a review. One of the methods usedfor this review is performed using estimates of future cash flows. If thecarrying value of goodwill or other intangible assets is considered impaired,an impairment charge is recorded for the amount by which the carrying value ofthe goodwill or intangible assets exceeds its fair value. We believe that theestimates of future cash flows and fair value are reasonable. Changes inestimates of those cash flows and fair value, however, could affect theevaluation.

 

**Impact of Inflation**

** **

We believe ourresults of operations are not dependent upon the levels of inflation.

 

**Forward-Looking Statements**

** **

The mattersdiscussed in this Quarterly Report on Form 10-Q that are forward-lookingstatements are based on current management expectations that involvesubstantial risks and uncertainties, which could cause actual results to differmaterially from the results expressed in, or implied by, these forward-lookingstatements. These statements can be identified

 

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by the fact that they do not relate strictlyto historical or current facts. They use words such as “expect,” “intend,” “plan,”“believe,” “project,” “anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,”“continue” and other words and terms of similar meaning in conjunction with 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.

 

Potentialrisks and uncertainties, which may cause our actual results to differmaterially from the expectations we describe in our forward-looking statements,include, but are not limited to those factors described under the heading “RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2007 and under Item 1A of Part II of our Quarterly Reports on Form 10-Q,and the following:

 

·                  our ability to continue to generatesufficient cash flow to satisfy our liquidity needs, including future cashdividends;

 

·                  the effect of the current adverse economicconditions on our revenues and loss rates;

 

·                  foreign, federal and stategovernmental regulation of payday cash advance services, consumer lending andrelated financial products and services;

 

·                  current and future litigation andregulatory proceedings against us;

 

·                  our ability to identify and enter newmarkets;

 

·                  the adequacy of our allowance fordoubtful accounts, accrual for third-party lender losses and estimates oflosses;

 

·                  our ability to identify andsuccessfully implement new product and service offerings;

 

·                  the availability of adequatefinancing;

 

·                  the effect of extended repaymentplans on our revenues, loss experience, provision for doubtful accounts andresults of operations;

 

·                  the fragmentation of our industry andcompetition from various other sources providing similar financial products, orother alternative sources of credit, to consumers;

 

·                  our relationship with the banks thatare party to our revolving credit facility;

 

·                  theft and employee errors; and

 

·                  other risks and uncertaintiesdetailed from time to time in our filings with the Securities and ExchangeCommission.

 

Allforward-looking statements in this Quarterly Report are based on informationavailable to us as of the date of this Quarterly Report. Except as requiredunder federal securities laws and the rules and regulations of the U.S.Securities and Exchange Commission, we do not have any intention, and do notundertake, to update any forward-looking statements to reflect events orcircumstances arising after the date of this Quarterly Report, whether as aresult of new information, future events or otherwise. As a result of theserisks and uncertainties, readers are cautioned not to place undue reliance onthe forward- looking statements included in this Quarterly Report or that maybe made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by thesecautionary statements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

** **

We have nomarket-risk-sensitive instruments entered into for trading purposes, as definedby GAAP.

 

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*** ***

***Interest Rate Risk***

 

We are exposedto interest rate risk on our revolving credit facility. Our variable interestexpense is sensitive to changes in the general level of interest rates. We mayfrom time to time enter into interest rate swaps, collars or similarinstruments with the objective of reducing our volatility in borrowing costs.We do not use derivative financial instruments for speculative or trading purposes.We had no derivative financial instruments outstanding as of December 31,2007 or September 30, 2008. The weighted average interest rate on our$142.3 million of variable interest debt as of December 31, 2007 wasapproximately 7.76%. The weighted average interest rate on our$203.0 million of variable interest debt as of September 30, 2008 wasapproximately 6.22%.

 

We had totalinterest expense of $3.2 million and $3.0 million for the threemonths ended September 30, 2007 and 2008, respectively. We had totalinterest expense of $7.8 million and $8.2 million for the nine monthsended September 30, 2007 and 2008, respectively. The estimated change ininterest expense from a hypothetical 200 basis-point change in applicablevariable interest rates would have been approximately $0.4 million and$1.0 million for the three months ended September 30, 2007 and 2008,respectively. The estimated change in interest expense from a hypothetical 200basis-point change in applicable variable interest rates would have beenapproximately $0.8 million and $2.4 million for the nine months ended September 30,2007 and 2008, respectively.

 

***Foreign Currency Exchange Rate Risk***

*** ***

The expansionof our operations to the United Kingdom and Canada in 2007 has exposed us toshifts in currency valuations. We may from time to time elect to purchasefinancial instruments as hedges against foreign exchange rate risks with theobjective of protecting our results of operations in the United Kingdom andCanada against foreign currency fluctuations. We had no such financialinstruments outstanding as of December 31, 2007 or September 30,2008.

 

As currencyexchange rates change, translation of the financial results of our UnitedKingdom and Canadian operations into United States dollars will be impacted.Changes in exchange rates have resulted in cumulative translation adjustmentswhich decreased our net assets by approximately $75,000 and $889,000 as of December 31,2007 and September 30, 2008, respectively. These cumulative translationadjustments are included in accumulated other comprehensive loss as a separatecomponent of stockholders’ equity. Due to the immateriality of our currentoperations in the United Kingdom and Canada, a change in foreign currencyexchange rates is not expected to have a significant impact on our consolidatedfinancial position, results of operations or cash flows.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

** **

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, and our internal control overfinancial reporting, as of the end of the period covered by this Report. Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that those disclosure controls and procedures are effective. Therewere no changes in our internal control over financial reporting during thequarter ended September 30, 2008, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II. OTHER INFORMATION**

** **

**ITEM 1. LEGAL PROCEEDINGS.**

** **

See “Part I.Item 1. Financial Statements—Notes to Interim Unaudited ConsolidatedFinancial Statements—Note 5. Commitments and Contingencies,” which isincorporated herein by reference.

 

**ITEM 1A. RISK FACTORS.**

** **

Our operationsand financial results are subject to various risks and uncertainties that couldadversely affect our business, results of operations, financial condition,future results and the trading price of our common stock. In addition to theother information set forth in this Quarterly Report, you should carefullyconsider the factors described under the heading “Risk Factors” in Part Iof our Annual Report on Form 10-K for the year ended December 31,2007 and in Part II of our Quarterly Report on Form 10-Q for thequarter ended June 30, 2008, which could materially affect our business,results of operations, financial condition, future results and the tradingprice of our common stock. The following items are additions to the risks anduncertainties previously disclosed.

 

***Adverse economic conditions may significantlyand adversely affect our business, results from operations, financial conditionand access to liquidity.***

 

The currentglobal economic crisis may adversely affect our business in several ways.  For example, a rise in unemployment levelsmay reduce the number of customers who qualify for an advance, which in turn mayreduce our revenues.  Similarly, reducedconsumer confidence and spending may decrease the demand for our products.  Also, we are unable to predict how the widespreadloss of jobs, housing foreclosures and general economic uncertainty may effectour loss experience.  Our methodology forestablishing our provision for doubtful accounts is based in large part on ourhistoric loss experience.  If customerbehavior changes as a result of current economic conditions, our provision maybe inadequate.  Additionally, because werely on our credit facility to fund customer advances, conditions in the creditmarkets could cause our access to liquidity to be restrained or even eliminatedas a result of a default by our lenders, a failure by us to comply withcovenants under our credit agreement or our inability to renew, extend ormodify our existing credit facility.  Ifwe are unable to maintain access to external sources of liquidity, our abilityto finance our current operations or future dividends would be impaired.  Lastly, given the unprecedented nature of thecurrent economic crisis, our business may be adversely affected in ways that weare unable to anticipate.

 

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

The followingtable sets forth information about our stock repurchases for the three monthsended September  30, 2008:

 
| **Period (1)**                   | ** ** | **Total Number  of Shares  Purchased (2)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be  Purchased Under the  Plans or Programs (3)** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1 to July 31           |       | 1,350,444                                                 |       | $                                            | 5.34       |                                                                                                                             | 1,350,444  |                                                                                                                                                        | $          | — |   |
| August 1 to August 31       |       | —                                                    |       | —                                       |       | —                                                                                                                           |       | —                                                                                                                                                      |       |
| September 1 to September 30 |       | 2,264                                                     |       | $                                            | 4.78       |                                                                                                                             | —     |                                                                                                                                                        | —     |   |
| Total                                 |       | 1,352,708                                                 |       | $                                            | 5.34       |                                                                                                                             | 1,350,444  |                                                                                                                                                        | $          | — |   |

 

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(1)                                  Basedon trade date.

 

(2)                                  Thiscolumn includes any shares surrendered by employees to satisfy their taxobligations with respect to the vesting of shares of restricted stock awardedpursuant to the Company’s 2004 Omnibus Stock Plan.

 

(3)                                  OnAugust 16, 2006, we announced an extension of our stock repurchase programpursuant to which we were authorized to repurchase up to $100.0 million ofour outstanding common stock beginning on that date. Additionally, on February 13,2008, we announced an extension of our stock repurchase program pursuant towhich we were authorized to repurchase up to an additional $75.0 millionof our outstanding common stock beginning on that date. In July 2008, wecompleted this stock repurchase program.

 

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** **

**ITEM 6. EXHIBITS.**

 
| **Exhibit** | ** ** | **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**

** **

Pursuant tothe 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. |
|-----------------------|---------------------------------------------------|
|                  |                                              |   |
|                  |                                              |   |
| November 4, 2008 | By:                                               | /s/ J. PATRICK O’SHAUGHNESSY * * |
|                  |                                              | J. Patrick O’Shaughnessy |
|                  |                                              | *Executive Vice President and* |
|                  |                                              | *Chief Financial Officer* |
|                  |                                              | *(Duly authorized officer and* |
|                  |                                              | *principal financial officer)* |

 

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** **

**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                   |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                              |
| 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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