**UNITED STATES**

**SECURITIES ANDEXCHANGE 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, 2006**                                                                                                                                                                                                                                                                                                                                                                  |
| **OR**         |
| o              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                      |
|           | **For the transition period from                                  to                                ** |

 

**COMMISSIONFILE NUMBER 001-32363**

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

(Exact name of registrantas specified in its charter)

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

 

**135 North Church Street**

**Spartanburg, South Carolina  29306**

(Address of principal executive offices) (Zip Code)

**864-342-5600**

(Registrant’s telephone number, including area code)

**None**

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

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

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

 

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

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| **Class**                              | ** ** | **Outstanding  as of November 8, 2006** |
|----------------------------------------|------------|----------------------------------------------|
| Common Stock, par value $.01 per share |       | 79,539,816 shares                            |

 

 

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

**Form 10-Q**

**For the threemonths and nine months ended September 30, 2006**
|                                         | ** ** | **Page**                                                                                                                 |
|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|
| **FORWARD-LOOKING  STATEMENTS**         |       | 3                                                                                                                        |
| **PART I.  FINANCIAL INFORMATION** |       | 4                                                                                                                        |
| Item 1.                                 |       | Financial Statements                                                                                                     |   | 4 |
|                                    |       | Unaudited Consolidated Balance Sheets  December 31, 2005 and  September 30, 2006                               |   | 4 |
|                                    |       | Interim Unaudited Consolidated Statements of Income  Three Months and Nine Months Ended September 30, 2005 and 2006 |   | 5 |
|                                    |       | Interim Unaudited Consolidated Statement of  Stockholders’ Equity Nine Months Ended September 30, 2006         |   | 6 |
|                                    |       | Interim Unaudited Consolidated Statements of Cash  Flows Nine Months Ended September 30, 2005 and 2006              |   | 7 |
|                                    |       | Notes to Interim Unaudited Consolidated Financial  Statements                                                            |   | 8 |
| Item 2.                                 |       | Management’s Discussion and Analysis of Financial  Condition and Results  of Operations                             |   | 20 |
| Item 3.                                 |       | Quantitative and Qualitative Disclosures About Market  Risk                                                              |   | 43 |
| Item 4.                                 |       | Controls and Procedures                                                                                                  |   | 43 |
| **PART II.  OTHER INFORMATION**    |       | 44                                                                                                                       |
| Item  1.                                |       | Legal  Proceedings                                                                                                       |   | 44 |
| Item  1A.                               |       | Risk  Factors                                                                                                            |   | 44 |
| Item 2.                                 |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                             |   | 56 |
| Item 6.                                 |       | Exhibits                                                                                                                 |   | 56 |
| **SIGNATURES**                          |       | 57                                                                                                                       |
| **INDEX TO EXHIBITS**                   |       | 58                                                                                                                       |

 

2

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**FORWARD-LOOKINGSTATEMENTS**

The matters discussed in this Quarterly Report onForm 10-Q that are forward-looking statements are based on currentmanagement expectations that involve substantial risks and uncertainties, whichcould cause actual results to differ materially from the results expressed in,or implied by, these forward-looking statements. These statements can beidentified by the fact that they do not relate strictly to historical orcurrent facts. They use words such as “expect,” “intend,” “plan,” “believe,”“project,” “anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,”“continue” and other words and terms of similar meaning in conjunction with adiscussion of future operating or financial performance. You should readstatements that contain these words carefully because they discuss our futureexpectations, contain projections of our future results of operations or of ourfinancial position or state other “forward-looking” information.

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

Forward-looking statements speak only as of the dateof this Quarterly Report. Except as required under federal securities laws andthe rules and regulations of the U.S. Securities and Exchange Commission,we do not have any intention, and do not undertake, to update anyforward-looking statements to reflect events or circumstances arising after thedate of this Quarterly Report, whether as a result of new information, futureevents or otherwise. As a result of these risks and uncertainties, readers arecautioned not to place undue reliance on the forward-looking statementsincluded in this Quarterly Report or that may be made elsewhere from time totime by, or on behalf of, us. All forward-looking statements attributable to usare expressly qualified by these cautionary statements.

3

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**PART I.  FINANCIAL INFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS.

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

| ** **                                                                                                                                                                                          | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                                                                                                          |       |                        |       |                         |       |   |   |   |   |
| Current assets                                                                                                                                                                                      |       |                        |       |                         |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                          |       |                        | $          | 27,259                       |       |   |   | $ | 50,219 |   |   |
| Advances and fees  receivable, net                                                                                                                                                                  |       |                        | 193,468    |                         |       |   | 222,428 |   |   |
| Deferred income taxes                                                                                                                                                                               |       |                        | 6,367      |                         |       |   | 9,947 |   |   |
| Other current assets                                                                                                                                                                                |       |                        | 5,033      |                         |       |   | 12,910 |   |   |
| Total current assets                                                                                                                                                                                |       |                        | 232,127    |                         |       |   | 295,504 |   |   |
| Restricted cash                                                                                                                                                                                     |       |                        | 10,034     |                         |       |   | 10,908 |   |   |
| Property and equipment,  net                                                                                                                                                                        |       |                        | 64,990     |                         |       |   | 61,406 |   |   |
| Goodwill                                                                                                                                                                                            |       |                        | 122,586    |                         |       |   | 122,627 |   |   |
| Other assets                                                                                                                                                                                        |       |                        | 6,651      |                         |       |   | 5,754 |   |   |
| Total assets                                                                                                                                                                                        |       |                        | $          | 436,388                      |       |   |   | $ | 496,199 |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                       |       |                        |       |                         |       |   |   |   |   |
| Current liabilities                                                                                                                                                                                 |       |                        |       |                         |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                    |       |                        | $          | 9,306                        |       |   |   | $ | 11,054 |   |   |
| Accrued liabilities                                                                                                                                                                                 |       |                        | 29,895     |                         |       |   | 26,822 |   |   |
| Income taxes payable                                                                                                                                                                                |       |                        | 11,349     |                         |       |   | 3,994 |   |   |
| Accrual for excess bank  losses                                                                                                                                                                     |       |                        | 1,373      |                         |       |   | — |   |   |
| Current portion of long-term  debt                                                                                                                                                                  |       |                        | 503        |                         |       |   | 498 |   |   |
| Total current  liabilities                                                                                                                                                                          |       |                        | 52,426     |                         |       |   | 42,368 |   |   |
| Revolving credit  facility                                                                                                                                                                          |       |                        | 37,933     |                         |       |   | 96,838 |   |   |
| Long-term debt                                                                                                                                                                                      |       |                        | 6,185      |                         |       |   | 5,808 |   |   |
| Deferred income taxes                                                                                                                                                                               |       |                        | 15,706     |                         |       |   | 14,993 |   |   |
| Other liabilities                                                                                                                                                                                   |       |                        | 44         |                         |       |   | 179 |   |   |
| Total liabilities                                                                                                                                                                                   |       |                        | 112,294    |                         |       |   | 160,186 |   |   |
| Non-controlling interest  in variable interest entity                                                                                                                                               |       |                        | 21,069     |                         |       |   | 39,169 |   |   |
| Commitments and contingencies (Note 7)                                                                                                                                                              |       |                        |       |                         |       |   |   |   |   |
| Stockholders’ equity                                                                                                                                                                           |       |                        |       |                         |       |   |   |   |   |
| Preferred stock, par  value $.01 per share, 25,000 shares authorized; no shares issued and  outstanding                                                                                             |       |                        | —     |                         |       |   | — |   |   |
| Common stock, par value  $.01 per share, 250,000 shares authorized; 96,821 shares issued and 82,219  and 80,061 outstanding as of December 31, 2005 and September 30,  2006, respectively |       |                        | 968        |                         |       |   | 968 |   |   |
| Paid in capital                                                                                                                                                                                     |       |                        | 282,840    |                         |       |   | 284,727 |   |   |
| Retained earnings                                                                                                                                                                                   |       |                        | 83,842     |                         |       |   | 108,146 |   |   |
| Common stock in treasury  (14,602 and 16,760 shares at cost at December 31, 2005 and  September 30, 2006, respectively)                                                                   |       |                        | (64,625    | )                            |       |   | (96,997 | ) |   |
| Total stockholders’  equity                                                                                                                                                                    |       |                        | 303,025    |                         |       |   | 296,844 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                    |       |                        | $          | 436,388                      |       |   |   | $ | 496,199 |   |   |

 

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

4

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

| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                     | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Revenues:**                                                  |       |                             |       |                            |       |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                | 153,161    |                            | $          | 178,521 |   | $ | 373,010 |   | $ | 474,224 |   |
| Marketing, processing  and servicing fees                      |       | 19,476                           |       | 31                              |       | 88,327 |   | 12,418 |   |
| Total revenues                                                 |       | 172,637                          |       | 178,552                         |       | 461,337 |   | 486,642 |   |
| Provision for doubtful  accounts and agency bank losses        |       | (36,340                          | )          | (40,514                         | )          | (76,998 | ) | (79,825 | ) |
| Net revenues                                                   |       | 136,297                          |       | 138,038                         |       | 384,339 |   | 406,817 |   |
| **Center Expenses:**                                           |       |                             |       |                            |       |   |   |   |   |
| Salaries and related  payroll costs                            |       | 44,359                           |       | 46,661                          |       | 128,948 |   | 139,379 |   |
| Occupancy costs                                                |       | 20,455                           |       | 22,113                          |       | 58,735 |   | 64,242 |   |
| Center depreciation  expense                                   |       | 3,841                            |       | 4,081                           |       | 10,973 |   | 12,034 |   |
| Advertising expense                                            |       | 7,952                            |       | 3,780                           |       | 20,808 |   | 13,210 |   |
| Other center expenses                                          |       | 13,991                           |       | 12,955                          |       | 39,040 |   | 40,880 |   |
| Total center expenses                                          |       | 90,598                           |       | 89,590                          |       | 258,504 |   | 269,745 |   |
| Center gross profit                                            |       | 45,699                           |       | 48,448                          |       | 125,835 |   | 137,072 |   |
| **Corporate and Other Expenses (Income):**                     |       |                             |       |                            |       |   |   |   |   |
| General and  administrative expenses                           |       | 13,236                           |       | 12,933                          |       | 38,218 |   | 39,386 |   |
| General and  administrative expenses with related parties      |       | 58                               |       | 45                              |       | 222 |   | 369 |   |
| Corporate depreciation  expense                                |       | 1,241                            |       | 902                             |       | 3,390 |   | 2,798 |   |
| Interest expense                                               |       | 1,356                            |       | 2,170                           |       | 2,914 |   | 3,996 |   |
| Interest income                                                |       | (50                              | )          | (120                            | )          | (208 | ) | (419 | ) |
| Loss on disposal of  property and equipment                    |       | 325                              |       | 334                             |       | 448 |   | 825 |   |
| Loss on impairment of  assets                                  |       | 1,852                            |       | —                          |       | 1,852 |   | — |   |
| Income before income  taxes                                    |       | 27,681                           |       | 32,184                          |       | 78,999 |   | 90,117 |   |
| Income tax expense                                             |       | 11,352                           |       | 13,322                          |       | 32,187 |   | 36,559 |   |
| Income before income of  consolidated variable interest entity |       | 16,329                           |       | 18,862                          |       | 46,812 |   | 53,558 |   |
| Income of consolidated  variable interest entity               |       | (476                             | )          | (894                            | )          | (476 | ) | (2,267 | ) |
| Net income                                                     |       | $                                | 15,853     |                            | $          | 17,968 |   | $ | 46,336 |   | $ | 51,291 |   |
| Net income per common share:                                   |       |                             |       |                            |       |   |   |   |   |
| Basic                                                          |       | $                                | 0.19       |                            | $          | 0.22 |   | $ | 0.55 |   | $ | 0.63 |   |
| Diluted                                                        |       | $                                | 0.19       |                            | $          | 0.22 |   | $ | 0.55 |   | $ | 0.63 |   |
| Dividends declared per  common share                           |       | $                                | 0.09       |                            | $          | 0.11 |   | $ | 0.27 |   | $ | 0.33 |   |
| Weighted average number of shares outstanding:                 |       |                             |       |                            |       |   |   |   |   |
| Basic                                                          |       | 83,220                           |       | 80,821                          |       | 83,528 |   | 81,489 |   |
| Diluted                                                        |       | 83,449                           |       | 80,939                          |       | 83,760 |   | 81,584 |   |

 

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

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

| ** **                                           | ** ** | **Common Stock** | ** ** | **Paid-In**        | ** ** | **Retained** | ** ** | **Common Stock  In Treasury** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|--------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **Shares**            | ** ** | **Par Value** | ** ** | **Capital**  | ** ** | **Earnings**                            | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Balances, December 31, 2005                     |       |                  | 96,821     |               |       |         | $          | 968                                     |       |       | $          | 282,840 |   |   | $ | 83,842 |   |   | (14,602 | ) | $ | (64,625 | ) | $ | 303,025 |   |
| Net income                                           |       |                  | —     |               |       |         | —     |                                    |       | —     |       |   | 51,291 |   |   | — |   | — |   | 51,291 |   |
| Dividends paid ($0.33 per share)                     |       |                  | —     |               |       |         | —     |                                    |       | —     |       |   | (26,815 | ) |   | — |   | — |   | (26,815 | ) |
| Dividends payable                                    |       |                  | —     |               |       |         | —     |                                    |       | —     |       |   | (172 | ) |   | — |   | — |   | (172 | ) |
| Purchases of Treasury stock                          |       |                  | —     |               |       |         | —     |                                    |       | —     |       |   | — |   |   | (2,292 | ) | (32,384 | ) | (32,384 | ) |
| Issuance of restricted stock                         |       |                  | —     |               |       |         | —     |                                    |       | —     |       |   | — |   |   | 133 |   | — |   | — |   |
| Amortization of restricted stock                     |       |                  | —     |               |       |         | —     |                                    |       | 1,148      |       |   | — |   |   | — |   | — |   | 1,148 |   |
| Forfeiture of restricted stock                       |       |                  | —     |               |       |         | —     |                                    |       | —     |       |   | — |   |   | (1 | ) | — |   | - |   |
| Stock option expense                                 |       |                  | —     |               |       |         | —     |                                    |       | 710        |       |   | — |   |   | — |   | — |   | 710 |   |
| Issuance of common stock to director in lieu of cash |       |                  | —     |               |       |         | —     |                                    |       | 29         |       |   | — |   |   | 2 |   | 12 |   | 41 |   |
| Balances,  September 30, 2006                   |       |                  | 96,821     |               |       |         | $          | 968                                     |       |       | $          | 284,727 |   |   | $ | 108,146 |   |   | (16,760 | ) | $ | (96,997 | ) | $ | 296,844 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim UnauditedConsolidated Statements of Cash FlowsNine Months Ended September 30, 2005 and 2006(in thousands)**

| ** **                                                                                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating activities**                                                                      |       |     |       |     |       |
| Net income                                                                                                    |       | $        | 46,336     |     | $          | 51,291 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisition         |       |     |       |     |       |
| Income of consolidated  variable interest entity                                                              |       | 476      |       | 2,267    |       |
| Depreciation                                                                                                  |       | 14,363   |       | 14,832   |       |
| Non-cash interest expense                                                                                     |       | 735      |       | 740      |       |
| Provisions for doubtful  accounts and agency bank losses                                                      |       | 76,998   |       | 79,825   |       |
| Agency bank charge-offs,  net of recoveries                                                                   |       | (13,698  | )          | (2,803   | )          |
| Deferred income taxes                                                                                         |       | 291      |       | (4,293   | )          |
| Loss on disposal of  property and equipment                                                                   |       | 448      |       | 825      |       |
| Loss on impairment of  assets                                                                                 |       | 1,768    |       | —   |       |
| Amortization of  restricted stock                                                                             |       | 809      |       | 1,148    |       |
| Stock option expense                                                                                          |       | 23       |       | 710      |       |
| Common stock issued to  director in lieu of cash                                                              |       | —   |       | 41       |       |
| Changes in operating assets and liabilities                                                                   |       |     |       |     |       |
| Fees receivable, net                                                                                          |       | (8,171   | )          | (10,951  | )          |
| Other current assets                                                                                          |       | 5,940    |       | (7,878   | )          |
| Other assets                                                                                                  |       | —   |       | 165      |       |
| Accounts payable                                                                                              |       | (4,911   | )          | (1,578   | )          |
| Accrued liabilities                                                                                           |       | (304     | )          | (4,301   | )          |
| Income taxes payable                                                                                          |       | 959      |       | (7,357   | )          |
| Net cash provided by  operating activities                                                                    |       | 122,062  |       | 112,683  |       |
| **Cash flows from investing activities**                                                                      |       |     |       |     |       |
| Changes in  advances receivable                                                                               |       | (83,078  | )          | (96,404  | )          |
| Changes in  restricted cash                                                                                   |       | (364     | )          | (874     | )          |
| Acquisition of  business, net of cash acquired                                                                |       | (332     | )          | (41      | )          |
| Proceeds from sale  of property and equipment                                                                 |       | 230      |       | 41       |       |
| Purchases of  property and equipment                                                                          |       | (13,039  | )          | (10,951  | )          |
| Net cash used in  investing activities                                                                        |       | (96,583  | )          | (108,229 | )          |
| **Cash flows from financing activities**                                                                      |       |     |       |     |       |
| Proceeds from  revolving credit facility, net                                                                 |       | 4,156    |       | 58,905   |       |
| Increase in  non-controlling interest of variable interest entity                                             |       | 13,430   |       | 15,863   |       |
| Common stock  issuance costs                                                                                  |       | (169     | )          | —   |       |
| Payments on  mortgage payable                                                                                 |       | (249     | )          | (265     | )          |
| Payments on note  payable                                                                                     |       | (110     | )          | (116     | )          |
| Payments of  financing costs                                                                                  |       | (15      | )          | (8       | )          |
| Purchases of  treasury stock                                                                                  |       | (11,418  | )          | (32,384  | )          |
| Payments of  dividends                                                                                        |       | (22,552  | )          | (26,815  | )          |
| Changes in book  overdrafts                                                                                   |       | (1,062   | )          | 3,326    |       |
| Net cash (used in)  provided by financing activities                                                          |       | (17,989  | )          | 18,506   |       |
| Net increase in cash and  cash equivalents                                                                    |       | 7,490    |       | 22,960   |       |
| Cash and cash  equivalents, beginning of period                                                               |       | 18,224   |       | 27,259   |       |
| Cash and cash  equivalents, end of period                                                                     |       | $        | 25,714     |     | $          | 50,219 |   |
| Supplemental disclosures of cash flow information:                                                            |       |     |       |     |       |
| Cash paid during the period for:                                                                              |       |     |       |     |       |
| Interest, net of amounts  capitalized                                                                         |       | $        | 2,089      |     | $          | 3,170 |   |
| Income taxes                                                                                                  |       | 30,992   |       | 48,207   |       |
| Supplemental schedule of non-cash investing and  financing activity:                                          |       |     |       |     |       |
| Property and equipment  purchases included in accounts payable and accrued expenses                           |       | 1,426    |       | 1,163    |       |
| Restricted stock  dividends payable                                                                           |       | 58       |       | 172      |       |
| Issuance of restricted  common stock                                                                          |       | —   |       | 1,918    |       |
| Reclassification of  property and equipment to other assets held for sale (included in other  current assets) |       | 6,300    |       | —   |       |
| Net assets acquired through acquisition of business                                                           |       | 229      |       | —   |       |

 

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

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

**1. Summary ofSignificant Accounting Policies**

**Basis ofPresentation**

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

**Description ofBusiness**

Historically, the Companyhas conducted business in most states under the authority of a variety ofenabling state statutes including payday advance, deferred presentment,check-cashing, small loan, credit service organization and other state lawswhereby advances are made directly to customers (which is referred to as thestandard business model). In certain states the Company has previously conductedbusiness as marketing, processing and servicing agent for Federal DepositInsurance Corporation (“FDIC”) supervised, state-chartered banks that madepayday cash advances and installment loans to their customers pursuant to theauthority of the laws of the states in which they were located and theauthority of federal interstate banking laws, regulations and guidelines (whichis referred to as the agency business model). The banks for which the Companyhas acted as an agent are referred to as lending banks. The Company no longeroperates under the agency business model.

**Revenue Recognition**

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

**Concentration ofRisk**

During the three and ninemonths ended September 30, 2005 and 2006, the Company operated in up to 37states in the United States. For the three months ended September 30, 2005and 2006, total revenues 

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withinthe Company’s five largest states (measured by total revenues) accounted forapproximately 40% and 48%, respectively, of the Company’s total revenues. Forthe nine months ended September 30, 2005 and 2006, total revenues withinthe Company’s five largest states (measured by total revenues) accounted forapproximately 41% and 47%, respectively, of the Company’s total revenues.

**Income Taxes**

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

**Earnings Per Share**

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

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

| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                      | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Reconciliation of  denominator:                                 |       |                             |       |                            |       |   |   |   |   |
| Weighted average number of common shares outstanding  - basic   |       | 83,220                           |       | 80,821                          |       | 83,528 |   | 81,489 |   |
| Effect of dilutive unvested restricted stock                    |       | 229                              |       | 118                             |       | 232 |   | 95 |   |
| Weighted average  number of common shares outstanding - diluted |       | 83,449                           |       | 80,939                          |       | 83,760 |   | 81,584 |   |

 

**Recently IssuedAccounting Pronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued Financial Interpretation No. 48, Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. The Company has not determined the impact, if any, that the adoption ofFIN 48 in January 2007 will have on its financial condition or results ofoperations.

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

**Revision to theConsolidated Statement of Cash Flows**

**TheCompany has revised the consolidated statement of cash flows for the ninemonths ended September 30, 2005 to properly present the changes in feesreceivable, net as an operating activity. The effect of this revision is todecrease net cash provided by operating activities by $8.2 million and todecrease net cash used in investing activities by the same amount. The revisiondoes not affect the net change in cash and cash equivalents for the nine monthsended September 30, 2005 and has no effect on the Company’s consolidatedstatements of income or the related earnings per share amount for that period.**

**Reclassifications**

**Certainpreviously reported amounts have been reclassified to conform to the currentpresentation.**

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

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

During the three and nine months ended September 30,2005, the Company was compensated under MP&S Agreements with the lendingbanks for marketing, processing and servicing the payday cash advances made bythe lending banks to their customers in Arkansas, Michigan, North Carolina,Pennsylvania and Texas. Operations in Michigan and Texas were converted tostate-based legislation during June and July 2005, respectively, and operationsin Pennsylvania and Arkansas were converted to state-based legislation during June 2006.During the three and nine months ended September 30, 2006, the Company wascompensated under MP&S Agreements relating to only Pennsylvania andArkansas. As of September 30, 2006, the Company only operates pursuant toenabling state statutes under its standard business model.

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

Prior to July 2005,under each MP&S Agreement, the applicable lending bank was contractuallyobligated for the losses on payday cash advances in an amount established as apercentage of the interest and/or fees charged by the banks to their customers.The Company’s marketing, processing and servicing fee increased by the lendingbank’s contractual obligation for losses. If the amount of the lending bank’s 

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uncollectedpayday cash advances and installment loans exceeded the lending bank’scontractual obligations, the Company was potentially obligated to pay thelending bank the outstanding amount of the advances and loans plus the lendingbank’s fees and/or interest receivable on the advances, less the lending bank’scontractually obligated portion of the losses. Beginning in July 2005, thelending bank offering payday cash advances and installment loans in North Carolinaand Arkansas became responsible for all losses associated with its payday cashadvances and installment loans, while the lending bank offering payday cashadvances and installment loans in Pennsylvania continued to be contractuallyobligated only for losses in an amount established as a percentage of theinterest and/or fees charged by the lending bank to its customers. Theoutstanding balances of the lending banks’ advances, installment loans and feesreceivable serviced by the Company were approximately $21.9 million at December 31,2005. There were no such outstanding balances at September 30, 2006.

**3. Advances andFees Receivable, Net**

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

| ** **                                                          | ** ** | **December 31,   2005** | ** ** | **September 30,  2006** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|
| Advances  receivable.                                               |       |                              | $          | 165,212                      |       |   |   | $ | 177,807 |   |   |
| Fees and interest  receivable                                       |       |                              | 25,945     |                         |       |   | 27,827 |   |   |
| Returned items  receivable                                          |       |                              | 35,244     |                         |       |   | 44,402 |   |   |
| Loans and fees  receivable of consolidated variable interest entity |       |                              | 24,905     |                         |       |   | 43,103 |   |   |
| Lending bank  receivable                                            |       |                              | 2,342      |                         |       |   | 36 |   |   |
| Other                                                               |       |                              | 3,350      |                         |       |   | 2,554 |   |   |
| Allowance for  doubtful accounts                                    |       |                              | (45,585    | )                            |       |   | (53,378 | ) |   |
| Unearned revenues                                                   |       |                              | (17,945    | )                            |       |   | (19,923 | ) |   |
| Advances and fees  receivable, net                                  |       |                              | $          | 193,468                      |       |   |   | $ | 222,428 |   |   |

 

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

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

| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                      | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Beginning balance               |       | $                                | 33,875     |                            | $          | 46,196 |   | $ | 29,221 |   | $ | 45,585 |   |
| Provision for doubtful accounts |       | 34,704                           |       | 40,508                          |       | 64,570 |   | 78,395 |   |
| Charge-offs                     |       | (30,097                          | )          | (38,748                         | )          | (65,618 | ) | (93,110 | ) |
| Recoveries                      |       | 3,329                            |       | 5,422                           |       | 13,638 |   | 22,508 |   |
| Ending balance                  |       | $                                | 41,811     |                            | $          | 53,378 |   | $ | 41,811 |   | $ | 53,378 |   |

 

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

| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                        | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Beginning balance                 |       | $                                | 5,337      |                            | $          | 1,014 |   | $ | 3,219 |   | $ | 1,373 |   |
| Provision for  agency bank losses |       | 1,636                            |       | 6                               |       | 12,428 |   | 1,430 |   |
| Charge-offs                       |       | (5,785                           | )          | (1,236                          | )          | (19,158 | ) | (4,752 | ) |
| Recoveries                        |       | 761                              |       | 216                             |       | 5,460 |   | 1,949 |   |
| Ending balance                    |       | $                                | 1,949      |                            | $          | — |   | $ | 1,949 |   | $ | — |   |

 

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

Thetotal changes in the allowance for doubtful accounts and the accrual for excessbank losses for the three and nine months ended September 30, 2005 and2006 were as follows (in thousands):

| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                              | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Beginning balance                                       |       | $                                | 39,212     |                            | $          | 47,210 |   | $ | 32,440 |   | $ | 46,958 |   |
| Provision for  doubtful accounts and agency bank losses |       | 36,340                           |       | 40,514                          |       | 76,998 |   | 79,825 |   |
| Charge-offs                                             |       | (35,882                          | )          | (39,984                         | )          | (84,776 | ) | (97,862 | ) |
| Recoveries                                              |       | 4,090                            |       | 5,638                           |       | 19,098 |   | 24,457 |   |
| Ending balance                                          |       | $                                | 43,760     |                            | $          | 53,378 |   | $ | 43,760 |   | $ | 53,378 |   |

 

**5. AccruedLiabilities**

Accruedliabilities were as follows (in thousands):

| ** **                            | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Employee  compensation                |       |                        | $          | 8,819                        |       |   |   | $ | 8,226 |   |   |
| Workers’  compensation.          |       |                        | 4,120      |                         |       |   | 4,874 |   |   |
| Health and dental  insurance          |       |                        | 3,352      |                         |       |   | 3,365 |   |   |
| Lease smoothing.                      |       |                        | 2,357      |                         |       |   | 2,770 |   |   |
| Advertising.                          |       |                        | 271        |                         |       |   | 734 |   |   |
| Construction in  progress             |       |                        | 3,071      |                         |       |   | 1,163 |   |   |
| Branch closing  costs                 |       |                        | 2,235      |                         |       |   | 872 |   |   |
| Accounting and  tax                   |       |                        | 1,362      |                         |       |   | 604 |   |   |
| Property, sales  and franchise taxes. |       |                        | 676        |                         |       |   | 908 |   |   |
| Legal.                                |       |                        | 583        |                         |       |   | 897 |   |   |
| Other                                 |       |                        | 3,049      |                         |       |   | 2,409 |   |   |
| Total                                 |       |                        | $          | 29,895                       |       |   |   | $ | 26,822 |   |   |

 

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**6.****                 IncomeTaxes**

Income tax expensefor the three and nine months ended September 30, 2005 and 2006 consistedof the following (in thousands):

| ** ** | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** ** | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Current    |       |                             |       |                            |       |   |   |   |   |
| Federal.   |       | $                                | 11,021     |                            | $          | 17,394 |   | $ | 26,610 |   | $ | 36,567 |   |
| State.     |       | 2,189                            |       | 1,170                           |       | 5,286 |   | 4,979 |   |
|       |       | 13,210                           |       | 18,564                          |       | 31,896 |   | 41,546 |   |
| Deferred   |       | (1,858                           | )          | (5,242                          | )          | 291 |   | (4,987 | ) |
| Total      |       | $                                | 11,352     |                            | $          | 13,322 |   | $ | 32,187 |   | $ | 36,559 |   |

 

A reconciliation of the statutory federal income taxrate and the Company’s effective income tax rate for the three and nine monthsended September 30, 2005 and 2006 follows:

| ** **                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                 | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Statutory income tax  rate |       |                             | 35.0       | %                               |       | 35.0 | % |   | 35.0 | % |   | 35.0 | % |
| State income taxes, net  . |       |                             | 4.4        |                            |       | 4.3 |   |   | 4.4 |   |   | 4.3 |   |
| Other                      |       |                             | 1.6        |                            |       | 2.1 |   |   | 1.3 |   |   | 1.3 |   |
| Effective income tax rate  |       |                             | 41.0       | %                               |       | 41.4 | % |   | 40.7 | % |   | 40.6 | % |

 

The tax effects of temporary differences that giverise to significant portions of deferred tax assets and deferred taxliabilities are (in thousands):

| ** **                                      | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Deferred tax assets                             |       |                        |       |                         |       |   |   |   |   |
| Accrued expenses                                |       |                        | $          | 4,113                        |       |   |   | $ | 5,194 |   |   |
| Bad debts                                       |       |                        | 2,491      |                         |       |   | 5,226 |   |   |
| Net operating loss  carryforwards               |       |                        | 356        |                         |       |   | 476 |   |   |
| State credit  carryforwards                     |       |                        | 275        |                         |       |   | 1,292 |   |   |
| Other                                           |       |                        | 46         |                         |       |   | 497 |   |   |
| Valuation allowance                             |       |                        | —     |                         |       |   | (306 | ) |   |
| Total deferred tax  assets.                     |       |                        | 7,281      |                         |       |   | 12,379 |   |   |
| Deferred tax liabilities                        |       |                        |       |                         |       |   |   |   |   |
| Goodwill                                        |       |                        | (10,743    | )                            |       |   | (12,893 | ) |   |
| Depreciation                                    |       |                        | (3,731     | )                            |       |   | (1,825 | ) |   |
| Prepaid expenses .                              |       |                        | (1,477     | )                            |       |   | (2,038 | ) |   |
| Book versus tax basis  difference for aircraft. |       |                        | (669       | )                            |       |   | (669 | ) |   |
| Total deferred tax  liabilities                 |       |                        | (16,620    | )                            |       |   | (17,425 | ) |   |
| Net deferred tax liability                      |       |                        | $          | (9,339                       | )          |   |   | $ | (5,046 | ) |   |

 

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

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

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quarter ended September 30,2006. This item increased the Company’s effective tax rate for the quarter byapproximately 1.9%.

As of December 31,2005 and September 30, 2006, the Company had net operating loss carryforwardsfor federal and state income tax purposes totaling approximately $0.8 millionand $0.5 million, respectively, which will begin to expire in 2014. A valuationallowance of $0.3 million has been recorded because management believes it ismore likely than not that the entire deferred tax asset related to state netoperating loss carryforwards will not be realized. As of December 31, 2005and September 30, 2006, the Company had credit carryforwards for federaland state income tax purposes totaling approximately $0.4 million and $2.0million, respectively, which will begin to expire in 2010.

**7.****                 Commitmentsand Contingencies**

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

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

The Company, the Company’ssubsidiary, McKenzie Check Advance of Florida, LLC (“McKenzie”) and certainofficers, directors and employees are defendants in a putative class-actionlawsuit commenced by former customers, Wendy Betts and Donna Reuter, inFlorida. This putative class action was filed by Ms. Betts and Ms. Reuterin February 2001 in the Circuit Court of Palm Beach County and allegesthat McKenzie, by and through the actions of certain officers, directors andemployees, engaged in unfair and deceptive trade practices and violated Florida’scriminal usury statute, the Florida Consumer Finance Act and the Florida RacketeerInfluenced and Corrupt Organizations Act. The suit seeks unspecified damages,and McKenzie or the other 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.

Defendants’ motion forsummary judgment was originally granted as to Ms. Betts’ claims but laterreversed by a Florida appellate court. On appeal, the Florida Supreme Courtissued an opinion in April 2006, holding that the deferred presentmenttransactions between Betts and the Company were governed by Florida’s usurylaws and not governed by the Florida Money Transmitters’ Code as the Companyasserted. The case has been remanded to the Circuit Court by the FourthDistrict Court of Appeals where discovery is now ongoing. Although this rulingby the Florida Supreme Court was adverse to the Company, it is too early inthis proceeding to identify the amount of potential losses to the Company, ifany, since the case is still in its early stages and several material issueshave yet to be addressed by the courts.

Ms. Reuters’ claims were subject to anarbitration agreement contained in the contract; defendants’ motion to compelarbitration was granted by the state trial court, upheld by the state appealscourt and affirmed by the Florida Supreme Court declining to accept certiorari.Thus, the order to compel arbitration is final as to Ms. Reuter. Thearbitration and litigation will likely proceed in parallel.

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

A second Florida lawsuitwas filed in August 2004 in the Circuit Court of Palm Beach County byformer customers Gerald Betts and Ms. Reuter against the Company, the Company’ssubsidiary, Advance America, Cash Advance Centers of Florida, Inc., andcertain officers and directors. The allegations are nearly identical to thosealleged in the first Betts and Reuter lawsuit. The Company filed motions todismiss, to stay the proceedings pending determination of dispositive actionsby the Florida Supreme Court in the original Betts and Reuter case and tocompel arbitration. Proceedings in this case were stayed pending thedisposition of the appeals in the original Betts and Reuter case. Now thatthose appeals have been resolved, the stay of proceedings has been lifted andthe Company will proceed with defending this second lawsuit. Discovery is nowongoing.

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

On September 27,2006, the Pennsylvania Department of Banking filed a lawsuit in theCommonwealth Court of Pennsylvania alleging that the Company’s Delawaresubsidiary is providing lines of credit to borrowers in Pennsylvania without alicense and with interest and fees in excess of the amounts permitted byPennsylvania law. The lawsuit seeks a declaratory judgment that the monthlyparticipation fee charged on the line of credit violates Pennsylvania law and apermanent injunction stopping the Company from charging Pennsylvania consumersa monthly participation fee for the line of credit. The Company recently filedits answer to the complaint.

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

On April 13, 2006, Raymond King, who was acustomer of the lending bank in Pennsylvania, filed a declaratory judgmentaction in the Court of Common Pleas in Philadelphia County against the Company’sPennsylvania subsidiary. The plaintiff is seeking to void his Consumer LoanAgreements with the lending bank and obtain a declaration that the arbitrationclause that prohibits a class action lawsuit is unenforceable and that he mayfile a class action for alleged violation of various Pennsylvania statutes. TheCompany has filed its answer and a Motion of Dismissal for lack of subjectmatter jurisdiction and failure to join the lending bank as an indispensableparty. The Court denied the Company’s preliminary objections. The Company isappealing this order to the Superior Court of Pennsylvania.

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

On August 6, 2004,Tahisha King and James E. Strong, who were customers of BankWest, the lendingbank for which the Company marketed, processed and serviced payday cashadvances in Georgia, filed a putative class action lawsuit in the State Courtof Cobb County, Georgia against the Company, William M. Webster IV,the Company’s Vice Chairman, and other unnamed officers, directors, owners and “stakeholders,”alleging various causes of action including that the Georgia subsidiary madeillegal payday loans in Georgia in violation of Georgia’s usury law, theGeorgia Industrial Loan Act and Georgia’s Racketeer Influenced and CorruptOrganizations Act. The complaint alleges that BankWest was not the “true lender”on the advances that were marketed, processed and serviced for BankWest inGeorgia and the Company was the “de facto” lender. The complaint seekscompensatory damages, attorneys’ fees, punitive damages and the trebling of anycompensatory damages. The Company and the other defendants denied theplaintiffs’ claims and asserted that all of the claims are subject to mandatoryand binding individual arbitration pursuant to arbitration agreements signed byeach plaintiff. In April 2006, the State Court of Cobb County entered aconsent order, which was jointly submitted by the parties, whereby the partiesagreed and consented to arbitration of all claims raised by plaintiffs in thisaction and to stay all proceedings pending the outcome of arbitration onplaintiffs’ claims. The plaintiffs filed a demand for arbitration seeking toarbitrate their claims in a class action or representative status. Anarbitrator was appointed, initial briefs were filed, and oral arguments wereheld regarding the enforceability of the arbitration provision and the classaction waiver contained in the bank’s consumer loan agreement. The Companyintends to continue to deny plaintiffs’ claims and resist plaintiffs’ effortsto conduct class arbitration.

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

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

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controversyin the case is only $350, the underlying claims of Ms. Glasscock, ifvalidated by the appellate court, could serve as a basis for future claimsagainst the Company.

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

On July 27, 2004,John Kucan, Welsie Torrence and Terry Coates, each of whom was a customer ofRepublic Bank & Trust Company (“Republic”), the lending bank for whomthe Company marketed, processed and serviced payday cash advances in NorthCarolina, filed a putative class action lawsuit in the General Court of Justicefor the Superior Court Division for New Hanover County, North Carolina againstthe Company and Mr. Webster, alleging, among other things, that therelationship between the Company’s North Carolina subsidiary and Republic was a“rent a charter” relationship and therefore Republic was not the “true lender”on the payday cash advances it offered. The lawsuit also claims that the paydaycash advances were made, administered and collected in violation of numerousNorth Carolina consumer protection laws. The lawsuit seeks an injunction barringthe subsidiary from continuing to do business in North Carolina, the return ofthe principal amount of the payday cash advances made to the plaintiff classsince August 2001, the return of any interest or fees associated withthose advances, treble damages, attorneys’ fees and other unspecified costs. OnDecember 30, 2005, the court issued an Order granting defendants’ motionfor arbitration, staying the proceedings and denying class certification. Theplaintiffs have appealed this Order to the North Carolina Court of Appeals. Theplaintiffs in this case and two other North Carolina cases currently before theCourt of Appeals filed a petition, which the Company has opposed, fordiscretionary review and consolidation of the cases. The petition is pending.

*North Carolina Commissioner ofBanks Order*

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

*New Mexico ProposedRules and Regulations Governing the Extension of Credit For Small Loans*

On February 10, 2006,the Company joined four other payday lenders in a lawsuit against the NewMexico Attorney General requesting immediate injunctive relief from theenforcement of the Attorney General’s Proposed Rules and RegulationsGoverning the Extension of Credit for Small Loans, which would have severelylimited the payday loan industry in New Mexico. The parties mutually agreed tostay any further proceedings pending the adoption of new proposed regulationspublished by the Financial Institutions Division of the New Mexico Regulationand Licensing Department (“FID”) in June 2006. In August 2006, in alawsuit filed by several other payday loan companies, the second judicialdistrict court of New Mexico issued a preliminary injunction enjoining theenforcement of the FID proposed regulations. As a result of the Court’s order,the Company has not made any changes in its New Mexico operations and ismonitoring the litigation to determine what, if any, changes may be required toits New Mexico operations in the future.

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*Department of LaborInvestigations*

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

*Other Matters*

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

The amount oflosses and/or the probability of an unfavorable outcome, if any, cannot bereasonably estimated. Accordingly, no accrual has been recorded for any of theabove matters as of September 30, 2006.

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

On May 4, 2005, the Company announced that itsBoard of Directors had approved a program authorizing the repurchase by theCompany of up to $50.0 million of its currently outstanding common stock. On August 16,2006, the Company announced that its Board of Directors had approved anextension of the Company’s stock repurchase program authorizing the Company torepurchase up to $100.0 million of its outstanding common stock on and afterthis date. During the three and nine months ended September 30, 2005, theCompany repurchased, pursuant to its stock repurchase program, 520,958 and888,158 shares of its common stock, respectively, at a cost of approximately$7.0 million and $11.4 million, respectively. During the three and nine monthsended September 30, 2006, the Company repurchased, pursuant to its stockrepurchase programs, 2,292,000 shares of its common stock at a cost ofapproximately $32.4 million.

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

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

During the nine months ended September 30, 2006,the Company issued to certain executives 133,334 shares of restricted stock underthe 2004 Omnibus Stock Plan. These restricted shares vest in equal annualinstallments over three, five or eight years beginning on the first anniversaryof the grant date.

During the nine months ended September 30, 2006,the Company granted to certain executives stock options to purchase 80,000shares of the Company’s common stock at an exercise price of $14.70 per share.These options vest in three equal annual installments beginning on the firstanniversary of the grant date and are within the Company’s 2004 Omnibus StockPlan.

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

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

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

| ** **                              | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|-----------------------------------------|------------|----------------|------------|-----------------|------------|-------------|------------|--------------------|------------|--------------|------------|
| ** **                              | ** ** | ** **     | ** ** | **Outstanding** | ** ** | ** **  | ** ** | **Average**        | ** ** |
| ** **                              | ** ** | ** **     | ** ** | **Restricted**  | ** ** | **Stock**   | ** ** | **Available**      | ** ** | **Exercise** | ** ** |
| ** **                              | ** ** | **Authorized** | ** ** | **Stock**       | ** ** | **Options** | ** ** | **For Grant** | ** ** | **Price**    | ** ** |
| Outstanding at  December 31, 2005  |       | 5,200,000      |       |            | 457,043    |        |       | 1,200,000          |       | 3,542,957    |       |   | $ | 12.47 |   |   |
| Authorized                              |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Granted                                 |       | —         |       |            | 133,334    |        |       | 80,000             |       | (213,334     | )          |   | $ | 14.70 |   |   |
| Exercised                               |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Canceled                                |       | —         |       |            | (1,333     | )           |       | —             |       | 1,333        |       |   | — |   |   |
| Outstanding at  September 30, 2006 |       | 5,200,000      |       |            | 589,044    |        |       | 1,280,000          |       | 3,330,956    |       |   | $ | 12.61 |   |   |

 

Exercise prices for stock options outstanding at September 30,2006 ranged from $12.11 to $14.70. As of September 30, 2006, there were50,000 options exercisable at a weighted average exercise price of $13.83 pershare.

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

| ** **                            | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Nonvested at  December 31, 2005  |       | 391,488    |       |                                   | $          | 12.69 |   |   |
| Granted                               |       | 133,334    |       |                                   | 14.38      |   |   |
| Vested                                |       | —     |       |                                   | —     |   |   |
| Forfeited                             |       | (1,333     | )          |                                   | 15.00      |   |   |
| Nonvested at  September 30, 2006 |       | 523,489    |       |                                   | $          | 13.12 |   |   |

 

Asummary 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, 2005 and 2006 follows(in thousands):

| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Stock-based  compensation expense:      |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restricted stock                        |       |                             | $          | 236                             |       |   |   | $ | 389 |   |   |   | $ | 809 |   |   |   | $ | 1,148 |   |   |
| Stock options                           |       |                             | 23         |                            |       |   | 243 |   |   |   | 23 |   |   |   | 710 |   |   |
| Total stock-based  compensation expense |       |                             | $          | 259                             |       |   |   | $ | 632 |   |   |   | $ | 832 |   |   |   | $ | 1,858 |   |   |

 

As of September 30,2006, the total compensation cost not yet recognized related to nonvested stockawards under the Company’s plans is approximately $11.0 million. The weightedaverage period over which this expense is expected to be recognized isapproximately 5.9 years.

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**9. Transactionswith Variable Interest Entity**

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

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

Theimpact of the consolidation of this VIE on the Company’s September 30,2005 and 2006 consolidated balance sheets was to increase the following balancesheet accounts as follows (in thousands):

| ** **                                            | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **2005**               | ** ** | **2006** | ** ** |
| Cash and cash  equivalents                            |       | $                      | 2,931      |   | $ | 9,701 |   |
| Advances and fees  receivable, net                    |       | 10,990                 |       | 29,516 |   |
| Accrued  liabilities                                  |       | 15                     |       | 48 |   |
| Non-controlling interest  in variable interest entity |       | 13,906                 |       | 39,169 |   |
|                                                       |            |                        |            |  |  |  |  |

 

Theimpact of the consolidation of this VIE on the Company’s consolidatedstatements of income for the three and nine months ended September 30,2005 and 2006 was to increase the following income statement accounts asfollows (in thousands):

| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                       | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net revenues                                     |       |                             | $          | 556                             |       |   |   | $ | 1,443 |   |   |   | $ | 556 |   |   |   | $ | 3,357 |   |   |
| Other center  expenses                           |       |                             | 80         |                            |       |   | 294 |   |   |   | 80 |   |   |   | 835 |   |   |
| Interest expense                                 |       |                             | —     |                            |       |   | 255 |   |   |   | — |   |   |   | 255 |   |   |
| Income of consolidated  variable interest entity |       |                             | 476        |                            |       |   | 894 |   |   |   | 476 |   |   |   | 2,267 |   |   |

 

**10. SubsequentEvents**

On October 15, 2006, the Company voluntarilyceased offering its services to active, full-time military personnel by nolonger qualifying customers for advances based on income from military service.The Company believes that, historically, military personnel have representedless than one percent of the Company’s total customers.

On October 25, 2006, the Company announced thatits Board of Directors declared a cash dividend of $0.11 per share of commonstock, payable on December 8, 2006 to shareholders of record on November 27,2006.

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

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

**Overview**

Headquartered in Spartanburg, South Carolina, we arethe largest provider of payday cash advance services in the United States asmeasured by the number of centers operated. Our centers provide short-term,unsecured cash advances that are typically due on the customers’ next payday.As of September 30, 2006, we operated 2,745 centers in 36 states.

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

We provide advances and charge fees and/or interest asspecified by the laws of the states where we operate under the standardbusiness model. In the states where we previously operated under the agencybusiness model, the lending banks provided advances and installment loans andcharged fees and/or interest as specified by the laws of the states in whichthey were located and consistent with the regulatory authority of the FDIC andfederal banking law. The permitted size of an advance varies by state andranges from $50 to $1,000. The permitted fees and/or interest on an advancealso vary by state and range from 10% to 22% of the amount of the advance.Additional fees that we may collect include fees for returned checks and latefees. The returned check fee varies by state and ranges up to $30. We charge acustomer this fee if a deposited check is returned due to non-sufficient funds(“NSF”) in the customer’s account or other reasons. In four states, we are alsopermitted to charge a late fee.

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

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The following tablesummarizes the most significant differences between the standard business modeland the agency business model, including the applicable separation ofobligations, fees and risks:
|                                                  | ** ** | **Standard   Business Model**                                                                                                                                                              | ** ** | **Agency   Business Model**                                                                                                                                                                                                                                                                                                                                                                              |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Approval:**                                    |       | We determine  whether to approve an advance to a customer.                                                                                                                                 |       | The lending banks  determined whether to approve an advance or installment loan to a customer  and established all of the underwriting criteria.                                                                                                                                                                                                                                                         |
| **Customer Agreements:**                         |       | We determine the  terms, conditions and features of the advances in accordance with applicable  state and federal law. The contractual advance documents are between us and  the customer. |       | All terms,  conditions and features of the advances and installment loans were determined  by the lending banks in accordance with applicable state and federal law and  the FDIC’s guidelines to examiners relating to advances and installment  loans. The agreements were between the lending banks and their customers.                                                                         |
| **Funding:**                                     |       | We fund all  advances from our operating cash and/or our revolving credit facility.                                                                                                        |       | The lending banks  funded all advances and installment loans. We typically did not repurchase or  participate in the advances or installment loans.                                                                                                                                                                                                                                                      |
| **Collection of Advances,   Fees and Interest:** |       | We deposit all  payments and receive 100% of the revenue.                                                                                                                                  |       | The lending banks  received 100% of repayments of advances, installment loans, interest and fees  that were deposited in their bank accounts. Marketing, processing and  servicing fees were remitted to us twice per month by the lending banks.                                                                                                                                                        |
| **Risks:**                                       |       | We are responsible  for all losses associated with advances.                                                                                                                               |       | The lending banks  were contractually obligated for all or a portion of the losses on advances  and installment loans. In those circumstances where the lending banks were  contractually obligated for a percentage of the fees and/or interest charged  by the lending banks to their customers, our marketing, processing and  servicing fees were reduced if actual losses exceeded that percentage. |

 

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

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***Approval Process***

In order for a new customer to be approved for anadvance, he or she is required to have a bank account and a regular source ofincome, such as a job.

To obtain anadvance, a customer typically:

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

·       enters into an agreementgoverning the terms of the advance, including the customer’s agreement to repaythe advance in full on or before a specified due date (usually the customer’snext payday), and our (or the lending bank’s) agreement to defer thepresentment or deposit of the customer’s check until the due date of theadvance;

·       writes a personal check tocover the amount of the advance plus charges for applicable fees and/orinterest; and

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

The process for installment loans was substantiallysimilar, except that the agreement with the customer usually contemplatedbi-weekly payments over a three- or four-month period.

Under the standardbusiness model, we determine whether to approve an advance to our customers(except in Texas, where the third-party lender makes this determination). We donot undertake any evaluation of the creditworthiness of our customers indetermining whether to approve customers for advances, other than requiringproof of identification, bank account and income source, as described above. Wealso consider the customer’s income in determining the amount of the advance.Under the agency business model, the lending banks determined whether toapprove an advance or installment loan utilizing third-party credit scores toevaluate and approve the customer’s application.

***Repayment andCollection Process***

If a customer does not return to repay the amount due,the center manager has the discretion to either (1) commence past-duecollection efforts, which typically may proceed for up to 14 days in moststates, or (2) deposit the customer’s personal check. If the centermanager has decided to commence past-due collection efforts in place ofdepositing the customer’s personal check, center employees typically contactthe customer by telephone or in person to obtain a payment or a promise to payand attempt to exchange the customer’s check for a cashier’s check, if fundsare available.

If at the end of thispast-due collection period, the center has been unable to collect the amountdue, the customer’s check is then deposited. For the year ended December 31,2005, approximately 5.5% of total customer checks were deposited. Additionalcollection efforts are not required if the customer’s deposited check clears.For the year ended December 31, 2005, approximately 21% of depositedcustomer checks cleared (i.e., were not returned NSF). If the customer’s checkdoes not clear and is returned because of non-sufficient funds in the customer’saccount or because of a closed account or a stop-payment order, additionalcollection efforts begin. These additional collection efforts are carried outby center employees and typically include contacting the customer by telephoneor in person to obtain payment or a promise to pay, sending a series ofcollection letters to the customer and attempting to exchange the customer’scheck for a cashier’s check, if funds become available.

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***Revenues andExpenses***

Wehave historically derived our revenues from (1) fees and/or interest paidto us directly by our customers under the standard business model and (2) marketing,processing and servicing fees paid to us by the lending banks under the formeragency business model. Our total revenuesfor the three and nine months ended September 30, 2005 and 2006 consistedof (dollars in millions):

| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **Dollars**                      | ** ** | **%**                           | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest  charged to customers   |       | $                                | 153.1      |                            | 88.7       |   | $ | 178.5 |   | 100.0 |   | $ | 373.0 |   | 80.9 |   | $ | 474.2 |   | 97.4 |   |
| Marketing,  processing and servicing fees |       | 19.5                             |       | 11.3                            |       | — |   | — |   | 88.3 |   | 19.1 |   | 12.4 |   | 2.6 |   |
| Total revenues                            |       | $                                | 172.6      |                            | 100.0      |   | $ | 178.5 |   | 100.0 |   | $ | 461.3 |   | 100.0 |   | $ | 486.6 |   | 100.0 |   |

 

As of September 30, 2006, we were operating underour standard business model in all of our 2,745 centers.

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

***Former AgencyBusiness Model***

During the three and nine months ended September 30,2005, we were marketing, processing and servicing payday cash advances made bylending banks to their customers in Arkansas, Michigan, North Carolina,Pennsylvania and Texas. In March 2005, the FDIC issued revised guidance(the “Revised Guidance”) to FDIC supervised institutions that offered paydaycash advances, including the lending banks for which we then acted asmarketing, processing and servicing agent. The Revised Guidance materiallyconstrained payday lending under the agency business model and, despite theintroduction of installment loans by the lending banks, significantly reducedour marketing, processing and servicing fees. In response to the RevisedGuidance, in June and July 2005, we modified our MP&S Agreementsin Arkansas, North Carolina and Pennsylvania and started operating in Texas andMichigan under existing state-based legislation. In response to an order fromthe North Carolina Commissioner of Banks, we closed all our centers in NorthCarolina in December 2005.

In February 2006, the FDIC instructed the lendingbanks, including those for which we still marketed, processed and servicedpayday cash advances and installment loans in Pennsylvania and Arkansas, todiscontinue offering payday cash advances and installment loans if they couldnot adequately address the FDIC’s continued concerns. In response, the lendingbanks in Pennsylvania and Arkansas stopped originating payday cash advances andinstallment loans and our marketing, processing and servicing fees declinedduring the second and third quarters of 2006. During June 2006, we beganoperating in Pennsylvania and Arkansas pursuant to existing state-basedlegislation under the standard business model. As a result, we now operateunder the standard business model in all of our centers. We recently agreed toprovide the FDIC 30-days prior written notice before entering into an agreementwith a state non-member bank to market, process or service any payday loanproducts.

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

After terminating our prior MP&S Agreement forMichigan, we began offering check-cashing and deferred-presentment servicesdirectly to customers in Michigan. The profitability of our check-cashing anddeferred-presentment business and average fees, check amounts and duration forwhich we held checks was similar to what we historically experienced under thestandard business model.****Because of therecent adoption of a new affirmative payday lending law in Michigan, we beganoffering payday cash advances in Michigan in June 2006. Due to the limitson fees and charges included in that law, we expect that our revenues inMichigan will be lower, at least initially, than our historical experienceunder the standard business model.

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

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

*Conversion of Operations in Pennsylvania andArkansas*.   In response to instructions from the FDIC,the lending bank for Pennsylvania ceased its payday cash advance andinstallment loan originations as of the close of business on March 27,2006. As a result, our revenues and center gross profits from Pennsylvaniasignificantly decreased during the second quarter. Through August 28,2006, we continued to service all of this lending bank’s payday cash advancesand installment loans that were outstanding as of March 27, 2006**.**In June 2006, we began offering the Advance AmericaChoice-Line of Credit (“Choice-Line”) in Pennsylvania. The Choice-Line productallows customers access to up to $500 in credit for a monthly participation feeplus interest on outstanding loan balances. We expect the profitability andcash flows of operating under state-based legislation to be similar to historiclevels. Therefore, we do not believe that the changes in our Pennsylvaniaoperations will result in any impairment of goodwill.

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Thefollowing is a summary of financial information for our operations inPennsylvania for the three and nine months ended September 30, 2005 and2006 (in thousands):

| ** **             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **             | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net revenues           |       | $                                | 8,924      |                            | $          | 7,735 |   | $ | 28,247 |   | $ | 16,405 |   |
| Total center  expenses |       | 4,145                            |       | 3,680                           |       | 12,187 |   | 10,993 |   |
| Center gross profit    |       | $                                | 4,779      |                            | $          | 4,055 |   | $ | 16,060 |   | $ | 5,412 |   |

 

In addition, the lending bank for Arkansasdiscontinued offering installment loans on April 8, 2006 anddiscontinued offering payday cash advances on June 24, 2006. As a result,our revenues and center gross profits in Arkansas also deterioratedsignificantly during the second quarter. We continued, through September 8,2006, to service all of this lending bank’s payday cash advances andinstallment loans that were outstanding as of these dates. In June 2006,we began operating in Arkansas under existing state-based legislation anddirectly providing check-cashing services to customers in Arkansas. We expect theprofitability and cash flows of operating under state-based legislation to besimilar to historic levels. Therefore, we do not believe that the changes inour Arkansas operations will result in any impairment of goodwill.

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

| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                  | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net revenues                |       | $                                | 1,273      |                            | $          | 1,040 |   | $ | 4,587 |   | $ | 3,271 |   |
| Total center  expenses      |       | 1,327                            |       | 954                             |       | 3,223 |   | 2,859 |   |
| Center gross  profit/(loss) |       | $                                | (54        | )                               | $          | 86 |   | $ | 1,364 |   | $ | 412 |   |

 

***Closings***

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

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

| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                  | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net revenues                |       | $                                | 4,060      |                            | $          | — |   | $ | 17,428 |   | $ | (35 | ) |
| Total center  expenses      |       | 4,465                            |       | 3                               |       | 12,269 |   | 967 |   |
| Center gross  profit/(loss) |       | $                                | (405       | )                               | $          | (3 | ) | $ | 5,159 |   | $ | (1,002 | ) |

 

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***Centers***

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

| **State**      | ** ** | ** ** | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** |
|----------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|
| Alabama        |       |       | 140        |                        |       |                         | 141        | ** ** |   |
| Arizona        |       |       | 53         |                        |       |                         | 57         | ** ** |   |
| Arkansas       |       |       | 30         |                        |       |                         | 30         | ** ** |   |
| California     |       |       | 298        |                        |       |                         | 300        | ** ** |   |
| Colorado       |       |       | 62         |                        |       |                         | 64         | ** ** |   |
| Delaware       |       |       | 13         |                        |       |                         | 13         | ** ** |   |
| Florida        |       |       | 211        |                        |       |                         | 233        | ** ** |   |
| Idaho          |       |       | 13         |                        |       |                         | 14         | ** ** |   |
| Illinois       |       |       | 60         |                        |       |                         | 69         | ** ** |   |
| Indiana        |       |       | 116        |                        |       |                         | 118        | ** ** |   |
| Iowa           |       |       | 35         |                        |       |                         | 36         | ** ** |   |
| Kansas         |       |       | 42         |                        |       |                         | 52         | ** ** |   |
| Kentucky       |       |       | 39         |                        |       |                         | 43         | ** ** |   |
| Louisiana      |       |       | 75         |                        |       |                         | 75         | ** ** |   |
| Michigan       |       |       | 111        |                        |       |                         | 128        | ** ** |   |
| Mississippi    |       |       | 53         |                        |       |                         | 51         | ** ** |   |
| Missouri       |       |       | 70         |                        |       |                         | 80         | ** ** |   |
| Montana        |       |       | 9          |                        |       |                         | 9          | ** ** |   |
| Nebraska       |       |       | 25         |                        |       |                         | 23         | ** ** |   |
| Nevada         |       |       | 10         |                        |       |                         | 10         | ** ** |   |
| New Hampshire  |       |       | 16         |                        |       |                         | 18         | ** ** |   |
| New Mexico     |       |       | 12         |                        |       |                         | 12         | ** ** |   |
| North Dakota   |       |       | 7          |                        |       |                         | 8          | ** ** |   |
| Ohio           |       |       | 210        |                        |       |                         | 218        | ** ** |   |
| Oklahoma       |       |       | 67         |                        |       |                         | 65         | ** ** |   |
| Oregon         |       |       | 56         |                        |       |                         | 56         | ** ** |   |
| Pennsylvania   |       |       | 101        |                        |       |                         | 99         | ** ** |   |
| Rhode Island . |       |       | 3          |                        |       |                         | 11         | ** ** |   |
| South Carolina |       |       | 112        |                        |       |                         | 125        | ** ** |   |
| South Dakota   |       |       | 11         |                        |       |                         | 12         | ** ** |   |
| Tennessee      |       |       | 62         |                        |       |                         | 63         | ** ** |   |
| Texas          |       |       | 207        |                        |       |                         | 216        | ** ** |   |
| Virginia       |       |       | 120        |                        |       |                         | 134        | ** ** |   |
| Washington     |       |       | 105        |                        |       |                         | 109        | ** ** |   |
| Wisconsin      |       |       | 45         |                        |       |                         | 47         | ** ** |   |
| Wyoming        |       |       | 5          |                        |       |                         | 6          | ** ** |   |
| Total          |       |       | 2,604      |                        |       |                         | 2,745      | ** ** |   |

 

*Newcenters.  *We opened 82 and 91 new centers during thethree months ended September 30, 2005 and 2006, respectively. We opened208 and 179 new centers during the nine months ended September 30, 2005and 2006, respectively.

*Closedcenters.**  ***We closed 93(including 86 in Georgia) and 16 centers during the three months ended September 30,2005 and 2006, respectively. We closed 107 (including 86 in Georgia) and 38centers during the nine months ended September 30, 2005 and 2006,respectively. The expenses related to closing 

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centerstypically include the undepreciated costs of fixtures and signage that cannotbe moved and reused at another center, moving costs, severance payments and anylease cancellation costs. We recorded expenses related to center closures,including loss on impairment of assets, of approximately $2.0 million and $0.3million in the three months ended September 30, 2005 and 2006,respectively. We recorded expenses related to center closures, including losson impairment of assets, of approximately $2.3 million and $1.2 million in thenine months ended September 30, 2005 and 2006, respectively.

**Critical AccountingPolicies and Use of Estimates**

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

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

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

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

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

For those states where we previously operated as amarketing, processing and servicing agent for a lending bank under the former agencybusiness model, the estimate of probable losses was reduced by the lending bank’scontractual obligation for such losses, as described above, to arrive at anestimate of excess loan losses. We recorded this as an accrual for excess banklosses, a current liability on our balance sheet.

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

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Under the standard business model, unpaid advances andthe related fees and/or interest are generally charged off if a customer doesnot make a payment of at least 15% of his or her outstanding balance within 60days of the date the check was returned by the customer’s bank fornon-sufficient funds or other reasons. Under the agency business model, unpaidpayday cash advances and the related fees and/or interest generally werecharged off 60 days from the due date. Under the agency business model, unpaid installmentloans and the related fees and/or interest generally were charged off 60 daysfrom the deposit date if the check is returned by the customer’s bank fornon-sufficient funds or other reasons. Under either model, unpaid advances ofcustomers who file for bankruptcy are charged off upon receipt of thebankruptcy notice. Although management uses the best information available tomake evaluations, future adjustments to the allowance for doubtful accounts maybe necessary if conditions differ substantially from our assumptions used inassessing their adequacy.

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

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

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

To the extent historicalcredit experience is not indicative of future performance or other assumptionsused by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts. As of September 30, 2006, if average default rates were5% higher or lower, the allowance for doubtful accounts would change byapproximately $2.6 million.

***Intangible Assets***

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

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

Accrued liabilities in ourDecember 31, 2005 and September 30, 2006 financial statements includeaccruals of approximately $3.4 and $3.4 million, respectively, for theself-insured portion of our health and dental insurance and approximately$4.1 million and $4.9 million, respectively, for workers’ compensation. Werecognize our obligations associated with those benefits in the period theclaim is incurred. The costs 

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of bothreported claims and claims incurred but not reported, up to specifieddeductible limits, are estimated based on historical data, current enrollment,employee statistics and other information. We review and periodically updateour estimates and the resulting reserves and any necessary adjustments arereflected in earnings currently. To the extent historical claims are notindicative of future claims, there are changes in enrollment or employeehistory, workers’ compensation loss development factors change or otherassumptions used by management do not prevail, our expense and related accruedliabilities could increase or decrease.

***Consolidation ofVariable Interest Entity***

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

***Accounting for Stock-BasedEmployee Compensation***

In 2004, we adoptedStatement of Financial Accounting Standards No. 123 (Revised), Share-BasedPayment (“SFAS 123(R)”). Accordingly, we measure the cost of our stock-basedemployee compensation at the grant date based on fair value and recognize suchcost in the financial statements over each award’s requisite service period. Asof September 30, 2006, the total compensation cost not yet recognizedrelated to nonvested stock awards under our stock-based employee compensationplans is approximately $11.0 million. The weighted average period over whichthis expense is expected to be recognized is approximately 5.9 years. See “Item1. Financial Statements—Notes to Interim Unaudited Financial Statements—Note 8.Capital Stock and Stock-Based Compensation Plans” for a description of ourrestricted stock and stock option awards and the assumptions used to calculatethe fair value of such awards including the expected volatility assumed invaluing our stock option grants.

***Recently IssuedAccounting Pronouncements***

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued Financial Interpretation No. 48, Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. We have not determined the impact, if any, that the adoption of FIN 48 inJanuary 2007 will have on our financial condition or results ofoperations.

In September 2006,the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”) whichexpresses the view of the SEC’s staff (the “Staff”) regarding the process ofquantifying financial statement misstatements. SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. The Staffbelieves 

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registrantsmust quantify the impact of correcting all misstatements, including both thecarryover and reversing effects of prior year misstatements, on its currentyear financial statements. Registrants electing not to restate prior periodsshould reflect the effects of initially applying the guidance in SAB 108 intheir annual financial statements covering the first fiscal year ending after November 15,2006. We do not expect the application of the guidance in SAB 108 in fiscalyear 2006 to have a material impact on our financial condition or results ofoperations.

**Results ofOperations**

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

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

| ** **                                                     | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                                 | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                              | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                                  |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                        | 153,161    |   |   | 112.4 | % |   | $ | 178,521 |   |   | 129.3 | % |   | $ | 25,360 |   | 16.6 | % |
| Marketing,  processing and servicing fees                      |       | 19,476                                                   |       |   | 14.3 | % |   | 31 |   |   | — |   |   | (19,445 | ) | (99.8 | )% |
| Total revenues                                                 |       | 172,637                                                  |       |   | 126.7 | % |   | 178,552 |   |   | 129.3 | % |   | 5,915 |   | 3.4 | % |
| Provision for  doubtful accounts and agency bank losses        |       | (36,340                                                  | )          |   | (26.7 | )% |   | (40,514 | ) | ** ** | (29.3 | )% |   | (4,174 | ) | (11.5 | )% |
| Net revenues                                                   |       | 136,297                                                  |       |   | 100.0 | % |   | 138,038 |   |   | 100.0 | % |   | 1,741 |   | 1.3 | % |
| **Center  Expenses:**                                          |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                             |       | 44,359                                                   |       |   | 32.6 | % |   | 46,661 |   |   | 33.8 | % |   | 2,302 |   | 5.2 | % |
| Occupancy costs                                                |       | 20,455                                                   |       |   | 15.0 | % |   | 22,113 |   |   | 16.0 | % |   | 1,658 |   | 8.1 | % |
| Center depreciation expense                                    |       | 3,841                                                    |       |   | 2.8 | % |   | 4,081 |   |   | 3.0 | % |   | 240 |   | 6.2 | % |
| Advertising expense                                            |       | 7,952                                                    |       |   | 5.8 | % |   | 3,780 |   |   | 2.7 | % |   | (4,172 | ) | (52.5 | )% |
| Other center expenses                                          |       | 13,991                                                   |       |   | 10.3 | % |   | 12,955 |   |   | 9.4 | % |   | (1,036 | ) | (7.4 | )% |
| Total center expenses                                          |       | 90,598                                                   |       |   | 66.5 | % |   | 89,590 |   |   | 64.9 | % |   | (1,008 | ) | (1.1 | )% |
| Center gross profit                                            |       | 45,699                                                   |       |   | 33.5 | % |   | 48,448 |   |   | 35.1 | % |   | 2,749 |   | 6.0 | % |
| **Corporate  and Other Expenses (Income):**                    |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses .                         |       | 13,294                                                   |       |   | 9.7 | % |   | 12,978 |   |   | 9.4 | % |   | (316 | ) | (2.4 | )% |
| Corporate  depreciation expense                                |       | 1,241                                                    |       |   | 0.9 | % |   | 902 |   |   | 0.7 | % |   | (339 | ) | (27.3 | )% |
| Interest expense                                               |       | 1,356                                                    |       |   | 1.0 | % |   | 2,170 |   |   | 1.6 | % |   | 814 |   | 60.0 | % |
| Interest income                                                |       | (50                                                      | )          |   | — |   |   | (120 | ) |   | (0.1 | )% |   | (70 | ) | (140.0 | )% |
| Loss on disposal  of property and equipment                    |       | 325                                                      |       |   | 0.2 | % |   | 334 |   |   | 0.2 | % |   | 9 |   | 2.8 | % |
| Loss on  impairment of assets                                  |       | 1,852                                                    |       |   | 1.4 | % |   | — |   |   | — |   |   | (1,852 | ) | (100.0 | )% |
| Total corporate and other expenses                             |       | 18,018                                                   |       |   | 13.2 | % |   | 16,264 |   |   | 11.8 | % |   | (1,754 | ) | (9.7 | )% |
| Income before  income taxes                                    |       | 27,681                                                   |       |   | 20.3 | % |   | 32,184 |   |   | 23.3 | % |   | 4,503 |   | 16.3 | % |
| Income tax  expense                                            |       | 11,352                                                   |       |   | 8.3 | % |   | 13,322 |   |   | 9.7 | % |   | 1,970 |   | 17.4 | % |
| Income before  income of consolidated variable interest entity |       | 16,329                                                   |       |   | 12.0 | % |   | 18,862 |   |   | 13.6 | % |   | 2,533 |   | 15.5 | % |
| Income of  consolidated variable interest entity               |       | (476                                                     | )          |   | (0.4 | )% |   | (894 | ) |   | (0.6 | )% |   | (418 | ) | (87.8 | )% |
| Net income                                                     |       | $                                                        | 15,853     |   |   | 11.6 | % |   | $ | 17,968 |   |   | 13.0 | % |   | $ | 2,115 |   | 13.3 | % |

 

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| ** **                                                                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                              | ** ** | **September 30,**           | ** ** |
| ** **                                                                                              | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| **Center Information:**                                                                                 |       |                             |       |   |   |
| Number of centers  open at beginning of period                                                          |       | 2,520                            |       | 2,670 |   |
| Opened                                                                                                  |       | 82                               |       | 91 |   |
| Acquired                                                                                                |       | 3                                |       | — |   |
| Closed (excluding Georgia)                                                                              |       | (7                               | )          | (16 | ) |
| Number of centers  open at end of period                                                                |       | 2,598                            |       | 2,745 |   |
| Weighted average  number of centers open during the period                                              |       | 2,565                            |       | 2,710 |   |
| Number of payday  cash advances provided and processed (in thousands)                                   |       | 3,072                            |       | 3,119 |   |
| Amount of average  payday cash advance provided and processed                                           |       | $                                | 340        |   | $ | 355 |   |
| Number of  installment loans provided and processed (in thousands)                                      |       | 45                               |       | — |   |
| Amount of average  installment loan provided and processed                                              |       | $                                | 494        |   | — |   |
| Number of lines  of credit outstanding at end of period (in thousands)                                  |       | —                           |       | 22 |   |
| Aggregate  principal amount of lines of credit outstanding at end of period (in  thousands)             |       | —                           |       | $ | 10,208 |   |
| Average number of  lines of credit outstanding during the period (in thousands)                         |       | —                           |       | 18 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period (in  thousands) |       | —                           |       | $ | 8,326 |   |

 

| ** **                                                                            | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                                 | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                              | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       |                                                     | $          | 53.1 |   |   |   | 100.0 | % |   |   | $ | 50.9 |   |   |   | 100.0 | % |   |   | $ | (2.2 | ) |   | (4.1 | )% |
| Center expenses:                                                                      |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       |                                                     | 17.3       |   |   |   | 32.6 | % |   |   | 17.2 |   |   |   | 33.8 | % |   |   | (0.1 | ) |   | (0.6 | )% |
| Occupancy costs                                                                       |       |                                                     | 8.0        |   |   |   | 15.0 | % |   |   | 8.2 |   |   |   | 16.0 | % |   |   | 0.2 |   |   | 2.5 | % |
| Center depreciation expense                                                           |       |                                                     | 1.5        |   |   |   | 2.8 | % |   |   | 1.5 |   |   |   | 3.0 | % |   |   | — |   |   | — |   |
| Advertising expense                                                                   |       |                                                     | 3.1        |   |   |   | 5.8 | % |   |   | 1.3 |   |   |   | 2.7 | % |   |   | (1.8 | ) |   | (58.1 | )% |
| Other center expenses                                                                 |       |                                                     | 5.4        |   |   |   | 10.3 | % |   |   | 4.8 |   |   |   | 9.4 | % |   |   | (0.6 | ) |   | (11.1 | )% |
| Total center expenses                                                                 |       |                                                     | 35.3       |   |   |   | 66.5 | % |   |   | 33.0 |   |   |   | 64.9 | % |   |   | (2.3 | ) |   | (6.5 | )% |
| Center gross profit                                                                   |       |                                                     | $          | 17.8 |   |   |   | 33.5 | % |   |   | $ | 17.9 |   |   |   | 35.1 | % |   |   | $ | 0.1 |   |   | 0.6 | % |

 

***Revenue Analysis***

Total revenues increased approximately $5.9 millionduring the three months ended September 30, 2006 compared to the sameperiod in 2005. The increase was primarilydue to the opening of new centers and revenue growth in existing centers. Totalrevenues for the 2,331 centers opened prior to July 1, 2005 and still openas of September 30, 2006 increased $7.5 million from $161.6 million forthe three months ended September 30, 2005 to $169.1 million for the sameperiod in 2006. Centers opened prior to July 1, 2005 were at least threemonths and fifteen months old at the end of the three-month periods ended September 30,2005 and 2006, respectively. Total revenues for the 414 centers opened after July 1,2005 and still open as of September 30, 2006 increased $8.8 million from$0.3 million for the three months ended September 30, 2005 to $9.1 millionfor the same period in 2006. Total revenues for the remaining 275 centers thatclosed represented a decrease of approximately $10.4 million for the threemonths ended 

31

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September 30, 2006compared to the same period in 2005. This decrease is primarily due to thesuspension and subsequent closure of operations in North Carolina during thefourth quarter of 2005.

In addition to theclosed centers mentioned in the preceding paragraph, the increase in totalrevenues during the three months ended September 30, 2006 was partiallyoffset by:

·       theimplementation of the FDIC Revised Guidance in Pennsylvania and Arkansasbeginning during the third quarter of 2005 and the lending banks’ suspension oforiginations in the first half of 2006. Total revenues for the third quarter of2006 in Pennsylvania and Arkansas were approximately $2.7 million lessthan the third quarter of 2005. This decrease in revenues was partially offsetby the conversion of our operations in Pennsylvania and Arkansas to state-basedlegislation in June 2006; and

·       theimplementation of material changes in enabling legislation in Illinois andIndiana. Total revenues for the third quarter of 2006 in Illinois and Indianawere approximately $5.1 million less than the third quarter of 2005.

As a percentage of totalrevenues, the provision for doubtful accounts and agency bank losses increasedto 22.7% for the three months ended September 30, 2006 from 21.0% for thesame period in 2005. The increase in the provision during the third quarter of2006 is due primarily to increased loss rates. This increase was partiallyoffset by the sale of certain customer accounts receivable to a collectionagency, which generated proceeds of approximately $1.0 million which wasrecorded as a reduction in the 2006 provision.

***Center ExpenseAnalysis***

*Salariesand related payroll costs.**  *The increase in salaries and related payroll costsfor the three months ended September 30, 2006 was due primarily to the newcenters opened in 2005 and 2006. We averaged approximately 2.15 and 2.20full-time equivalent field employees, including district directors, per centerduring the three months ended September 30, 2005 and 2006, respectively.

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

*Advertisingexpense.**  *Advertisingexpense decreased for the three months ended September 30, 2006 comparedto the same period in 2005 due primarily to a change in marketing strategy.During the third quarter of 2006, we launched a new advertising campaign whichwe expect to evolve in the future with new center merchandising materials,direct mail and television and radio commercials. Advertising expense in thethird quarter 2006 also reflects the improved efficiencies in marketing to ourtraditional customer base. Going forward, we expect increased marketingexpenditures tied to the introduction of new products and a more aggressiveoverall marketing strategy.

*Othercenter expenses.**  *Othercenter expenses decreased for the three months ended September 30, 2006compared to the same period in 2005 due primarily to lower office supplies andcenter closing costs in 2006.

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

*General and administrativeexpenses.**  *Thedecrease in general and administrative expenses for the three months ended September 30,2006 was due primarily to:

·       adecrease in airplane operating expenses of approximately $0.6 million;

·       adecrease in legal fees of approximately $0.5 million; offset by

·       approximately$0.2 million related to consultant costs for new product development; and

·       anincrease in stock-based compensation expense of approximately $0.4 million.

*Loss on impairment ofassets.**  *Loss on impairment of assets in 2005represents a writedown of approximately $1.5 million to market value ofan aircraft subsequently sold in 2005 as well as a writedown of approximately$0.4 million of the undepreciated costs of certain fixed assets in centersidentified for closure.

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***Nine Months Ended September 30, 2005 Compared toNine Months Ended September 30, 2006***

Thefollowing tables set forth our results of operations for the nine months ended September 30,2005 compared to the nine months ended September 30, 2006 (dollars inthousands, except Center Information):

| ** **                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                             | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Revenues:**                                                  |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                       | 373,010    |   |   | 97.0 | % |   | $ | 474,224 |   |   | 116.6 | % |   | $ | 101,214 |   | 27.1 | % |
| Marketing,  processing and servicing fees                      |       | 88,327                                                  |       |   | 23.0 | % |   | 12,418 |   |   | 3.0 | % |   | (75,909 | ) | (85.9 | )% |
| Total revenues                                                 |       | 461,337                                                 |       |   | 120.0 | % |   | 486,642 |   |   | 119.6 | % |   | 25,305 |   | 5.5 | % |
| Provision for  doubtful accounts and agency bank losses        |       | (76,998                                                 | )          |   | (20.0 | )% |   | (79,825 | ) |   | (19.6 | )% |   | (2,827 | ) | (3.7 | )% |
| Net revenues                                                   |       | 384,339                                                 |       |   | 100.0 | % |   | 406,817 |   |   | 100.0 | % |   | 22,478 |   | 5.8 | % |
| **Center Expenses:**                                           |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                             |       | 128,948                                                 |       |   | 33.5 | % |   | 139,379 |   |   | 34.3 | % |   | 10,431 |   | 8.1 | % |
| Occupancy costs                                                |       | 58,735                                                  |       |   | 15.3 | % |   | 64,242 |   |   | 15.8 | % |   | 5,507 |   | 9.4 | % |
| Center depreciation expense                                    |       | 10,973                                                  |       |   | 2.9 | % |   | 12,034 |   |   | 3.0 | % |   | 1,061 |   | 9.7 | % |
| Advertising expense                                            |       | 20,808                                                  |       |   | 5.4 | % |   | 13,210 |   |   | 3.2 | % |   | (7,598 | ) | (36.5 | )% |
| Other center expenses                                          |       | 39,040                                                  |       |   | 10.2 | % |   | 40,880 |   |   | 10.0 | % |   | 1,840 |   | 4.7 | % |
| Total center expenses                                          |       | 258,504                                                 |       |   | 67.3 | % |   | 269,745 |   |   | 66.3 | % |   | 11,241 |   | 4.3 | % |
| Center gross profit                                            |       | 125,835                                                 |       |   | 32.7 | % |   | 137,072 |   |   | 33.7 | % |   | 11,237 |   | 8.9 | % |
| **Corporate and Other Expenses  (Income):**                    |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses .                         |       | 38,440                                                  |       |   | 10.0 | % |   | 39,755 |   |   | 9.7 | % |   | 1,315 |   | 3.4 | % |
| Corporate  depreciation expense                                |       | 3,390                                                   |       |   | 0.9 | % |   | 2,798 |   |   | 0.7 | % |   | (592 | ) | (17.5 | )% |
| Interest expense                                               |       | 2,914                                                   |       |   | 0.7 | % |   | 3,996 |   |   | 1.0 | % |   | 1,082 |   | 37.1 | % |
| Interest income                                                |       | (208                                                    | )          |   | (0.1 | )% |   | (419 | ) |   | (0.1 | )% |   | (211 | ) | (101.4 | )% |
| Loss on disposal  of property and equipment                    |       | 448                                                     |       |   | 0.1 | % |   | 825 |   |   | 0.2 | % |   | 377 |   | 84.2 | % |
| Loss on  impairment of assets                                  |       | 1,852                                                   |       |   | 0.5 | % |   | — |   |   | — |   |   | (1,852 | ) | (100.0 | )% |
| Total corporate and other expenses                             |       | 46,836                                                  |       |   | 12.1 | % |   | 46,955 |   |   | 11.5 | % |   | 119 |   | 0.3 | % |
| Income before  income taxes                                    |       | 78,999                                                  |       |   | 20.6 | % |   | 90,117 |   |   | 22.2 | % |   | 11,118 |   | 14.1 | % |
| Income tax  expense                                            |       | 32,187                                                  |       |   | 8.4 | % |   | 36,559 |   |   | 9.0 | % |   | 4,372 |   | 13.6 | % |
| Income before  income of consolidated variable interest entity |       | 46,812                                                  |       |   | 12.2 | % |   | 53,558 |   |   | 13.2 | % |   | 6,746 |   | 14.4 | % |
| Income of  consolidated variable interest entity               |       | (476                                                    | )          |   | (0.1 | )% |   | (2,267 | ) |   | (0.6 | )% |   | (1,791 | ) | (376.3 | )% |
| Net income                                                     |       | $                                                       | 46,336     |   |   | 12.1 | % |   | $ | 51,291 |   |   | 12.6 | % |   | $ | 4,955 |   | 10.7 | % |

 

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| ** **                                                                                              | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                              | ** ** | **September 30,**          | ** ** |
| ** **                                                                                              | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| **Center Information:**                                                                                 |       |                            |       |   |   |
| Number of centers  open at beginning of period                                                          |       | 2,408                           |       | 2,604 |   |
| Opened                                                                                                  |       | 208                             |       | 179 |   |
| Acquired                                                                                                |       | 3                               |       | — |   |
| Closed (excluding Georgia)                                                                              |       | (21                             | )          | (38 | ) |
| Number of centers  open at end of period                                                                |       | 2,598                           |       | 2,745 |   |
| Weighted average  number of centers open during the period                                              |       | 2,461                           |       | 2,643 |   |
| Number of payday  cash advances provided and processed (in thousands)                                   |       | 8,674                           |       | 8,524 |   |
| Amount of average  payday cash advance provided and processed                                           |       | $                               | 336        |   | $ | 352 |   |
| Number of installment  loans provided and processed (in thousands)                                      |       | 45                              |       | — |   |
| Amount of average  installment loan provided and processed                                              |       | $                               | 494        |   | — |   |
| Number of lines  of credit outstanding at end of period (in thousands).                                 |       | —                          |       | 22 |   |
| Aggregate  principal amount of lines of credit outstanding at end of period (in thousands)         |       | —                          |       | $ | 10,208 |   |
| Average number of  lines of credit outstanding during the period (in thousands)                         |       | —                          |       | 16 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period (in  thousands) |       | —                          |       | $ | 7,549 |   |

 

| ** **                                                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                             | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| **Per Center (based on weighted average number of  centers open during the period):** |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net revenues                                                                   |       | $                                                       | 156.2      |   |   | 100.0 | % |   | $ | 153.9 |   |   | 100.0 | % |   |   | $ | (2.3 | ) |   | (1.5 | )% |
| Center expenses:                                                                      |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                                                   |       | 52.4                                                    |       |   | 33.5 | % |   | 52.7 |   |   | 34.3 | % |   |   | 0.3 |   |   | 0.6 | % |
| Occupancy costs                                                                       |       | 23.9                                                    |       |   | 15.3 | % |   | 24.3 |   |   | 15.8 | % |   |   | 0.4 |   |   | 1.7 | % |
| Center depreciation  expense                                                          |       | 4.5                                                     |       |   | 2.9 | % |   | 4.5 |   |   | 3.0 | % |   |   | - |   |   | - |   |
| Advertising expense                                                                   |       | 8.4                                                     |       |   | 5.4 | % |   | 5.0 |   |   | 3.2 | % |   |   | (3.4 | ) |   | (40.5 | )% |
| Other center expenses                                                                 |       | 15.9                                                    |       |   | 10.2 | % |   | 15.5 |   |   | 10.0 | % |   |   | (0.4 | ) |   | (2.5 | )% |
| Total center expenses                                                                 |       | 105.1                                                   |       |   | 67.3 | % |   | 102.0 |   |   | 66.3 | % |   |   | (3.1 | ) |   | (2.9 | )% |
| Center gross profit                                                                   |       | $                                                       | 51.1       |   |   | 32.7 | % |   | $ | 51.9 |   |   | 33.7 | % |   |   | $ | 0.8 |   |   | 1.6 | % |

 

***Revenue Analysis***

Total revenues increased approximately $25.3 millionduring the nine months ended September 30, 2006 compared to the sameperiod in 2005. The increase was primarilydue to the opening of new centers and revenue growth in existing centers. Totalrevenues for the 2,207 centers opened prior to January 1, 2005 and stillopen as of September 30, 2006 increased $27.2 million from $426.9 millionfor the nine months ended September 30, 2005 to $454.1 million for thesame period in 2006. Centers opened prior to January 1, 2005 were at leastnine months and twenty-one months old at the end of the nine-month periodsended September 30, 2005 and 2006, respectively. Total revenues for the538 centers opened after January 1, 2005 and still open as of September 30,2006 increased $27.8 million from $2.8 million for the nine months ended September 30,2005 to $30.6 million for the same period in 2006. Total revenues for theremaining 289 centers that closed represented a decrease of approximately $29.7million for the nine months ended September 30, 2006 compared to the sameperiod in 2005. This decrease is primarily due to the suspension and subsequentclosure of operations in North Carolina during the fourth quarter of 2005.

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In addition to theclosed centers mentioned in the preceding paragraph, the increase in totalrevenues during the nine months ended September 30, 2006 was partiallyoffset by:

·       theimplementation of the FDIC Revised Guidance in Pennsylvania and Arkansas beginningduring the third quarter of 2005 and the lending banks’ suspension oforiginations in the first half of 2006. Total revenues for the first ninemonths of 2006 in Pennsylvania and Arkansas were approximately $16.6 millionless than the same period in 2005;

·       theimplementation of material changes in enabling legislation in Illinois andIndiana. Total revenues for the first nine months of 2006 in Illinois andIndiana were approximately $12.9 million less than the same period in 2005; and

·       thecontinued impact of Hurricanes Katrina and Rita in Louisiana and Mississippi.Total revenues for the first nine months of 2006 in Louisiana and Mississippiwere approximately $4.0 million less than the same period in 2005.

As a percentage of total revenues, the provision fordoubtful accounts and agency bank losses decreased to 16.4% for the nine monthsended September 30, 2006 from 16.7% for the same period in 2005. Thedecrease in the provision is due in part to the inclusion in the 2005 provisionof an approximate $4.2 million net expense related to the contractual changesin Arkansas, Michigan, North Carolina and Texas. In addition, during the secondand third quarters of 2006, we sold certain customer accounts receivable to acollection agency, which generated proceeds of approximately $2.2 million whichwas recorded as a reduction in the 2006 provision. This decrease was partiallyoffset by increased loss rates.

***Center ExpenseAnalysis***

*Salariesand related payroll costs.  **The increase in salaries and related payrollcosts for the nine months ended September 30, 2006 was due primarily tothe new centers opened in 2005 and 2006. We averaged approximately 2.14 and2.18 full-time equivalent field employees, including district directors, percenter during the nine months ended September 30, 2005 and 2006,respectively.*

*Occupancycosts, center depreciation expense and other center expenses.**  *The increases in occupancy costs,center depreciation expense and other center expenses in the nine months ended September 30,2006 were due primarily to the new centers opened in 2005 and 2006.

*Advertising expense.**  *Advertising expense decreased forthe nine months ended September 30, 2006 compared to the same period in2005 due primarily to a decision to conduct less advertising activities during2006.

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

*General and administrativeexpenses.**  *Theincrease in general and administrative expenses for the nine months ended September 30,2006 was due primarily to:

·       approximately$2.0 million of additional expense related to personnel, consulting and othercosts associated with new product development;

·       anincrease in stock-based compensation expense of approximately $1.0 million;

·       anincrease of approximately $0.4 million related to additional headcount in ourreal estate and construction departments;

·       higherexpenses of approximately $0.3 million for consultants and trade associationdues in our public and government relations department; offset by

·       adecrease in airplane operating expenses of approximately $1.7 million; and

·       a decrease in legal fees ofapproximately $0.8 million.

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**Liquidity andCapital Resources**

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

| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                      | ** ** | **2005**   | ** ** | **2006**   | ** ** | **Dollars**  | ** ** | **%** | ** ** |
| Cash flows  provided by (used in):              |       |       |       |       |       |         |       |   |   |
| Operating activities                            |       | $          | 122,062    |       | $          | 112,683      |       | $ | (9,379 | ) | (7.7 | )% |
| Investing activities                            |       | (96,583    | )          | (108,229   | )          | (11,646      | )          | (12.1 | )% |
| Financing activities                            |       | (17,989    | )          | 18,506     |       | 36,495       |       | 202.9 | % |
| Net increase in  cash and cash equivalents      |       | 7,490      |       | 22,960     |       | 15,470       |       | 206.5 | % |
| Cash and cash  equivalents, beginning of period |       | 18,224     |       | 27,259     |       | 9,035        |       | 49.6 | % |
| Cash and cash  equivalents, end of period       |       | $          | 25,714     |       | $          | 50,219       |       | $ | 24,505 |   | 95.3 | % |

 

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

We borrow under our $265.0 million revolvingcredit facility to fund our advances and our other liquidity needs. Ourday-to-day balances under our revolving credit facility, as well as our cashbalances, vary because of seasonal and day-to-day requirements resulting frommaking and collecting advances. For example, if a month ends on a Friday (atypical payday), our borrowings and our cash balances will be high compared toa month that does not end on a Friday. This is because a substantial portion ofthe advances will be repaid in cash on that day but sufficient time will notyet have passed for the cash to reduce the outstanding borrowings under ourrevolving credit facility. Our borrowings under our revolving credit facilitywill also increase as the demand for advances increases during our peak periodssuch as the back-to-school and holiday seasons. Conversely, our borrowingstypically decrease during the tax refund season when cash receipts fromcustomers peak or the customer demand for new advances decreases. Advances andfees receivable, net increased approximately $40.6 million, or 22.3% and $28.9million or 15.0%, respectively, to $222.4 million at September 30, 2006compared to $181.8 million at September 30, 2005 and $193.5 million at December 31,2005 due primarily to an increase in the number of centers and to theconversion of our operations in Pennsylvania and Arkansas to state-basedlegislation under the agency business model pursuant to which we fund theadvances.

On May 4, 2005, we announced that our Board ofDirectors had approved a program authorizing the repurchase of up to $50.0million of our outstanding common stock. Additionally, on August 16, 2006,we announced that our Board of Directors had approved an extension of our stockrepurchase program authorizing us to repurchase up to $100.0 million of ouroutstanding common stock on and after this date. Our Board of Directorsdetermined that the continuation and increase of the stock repurchase programserves the best interest of us and our stockholders by returning capital to ourstockholders, by providing an attractive investment opportunity for our fundsand by reducing the dilutive impact of employee stock incentive programs andpotential acquisitions.

Share repurchases will continue to be made from timeto time and will be effected on the open market, in block trades, or inprivately negotiated transactions, and in compliance with applicable laws, includingSecurities and Exchange Commission Rule 10b-18 and Regulation M. Theprogram does not generally require us to purchase any specific number ofshares, and any purchases under the program depend on market and otherconditions. Our Board of Directors may suspend or cancel the stock repurchaseprogram at any time.

During the three and nine months ended September 30,2006, we repurchased 2,292,000 shares of our common stock at a cost ofapproximately $32.4 million.

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

***Cash Flows fromOperating Activities***

The decrease in net cashprovided by operating activities for the nine months ended September 30,2006 compared to the same period in 2005 was due primarily to a net decrease inchanges in operating assets and liabilities of $25.4 million, partially offsetby a net increase in non-cash adjustments of $11.1 million and an increase innet income. The $25.4 million net decrease in changes in operating assets andliabilities is due primarily to a decrease in the change in income taxespayable of $8.3 million and a decrease in the change in other current assets of$13.8 million (due primarily to the timing of insurance and center rentpayments as well as the refund in 2005 of funds deposited with the IRS relatingto the period we were an S Corporation).

***Cash Flows fromInvesting Activities***

The increase in net cashused in investing activities for the nine months ended September 30, 2006compared to the same period in 2005 was primarily due to a $13.3 millionincrease in the change in cash invested in advances receivable, partiallyoffset by a $2.1 million decrease in purchases of property and equipment.

***Cash Flows fromFinancing Activities***

The increase in net cashfrom financing activities for the nine months ended September 30, 2006compared to the same period in 2005 was primarily due to a $54.7 millionincrease in borrowings under our revolving credit facility, a $4.4 millionincrease in the change in book overdrafts, partially offset by a $21.0 millionincrease in repurchases of our common stock.

**CapitalExpenditures**

For the nine months ended September 30,2005 and 2006, we spent $13.0 million and $11.0 million, respectively, oncapital expenditures. Capital expenditures included expenditures for (1) newcenters opened, (2) center remodels and (3) computer equipment replacementsin our centers and at our corporate headquarters.

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

We previously operated as an agent for lending banksin Arkansas, Michigan, North Carolina, Pennsylvania and Texas pursuant toMP&S Agreements. Each lending bank was responsible for evaluating each ofits customers’ applications and determining whether the payday cash advance orinstallment loan was approved. The lending banks utilized an automatedthird-party credit scoring system to evaluate and approve each customerapplication. We were not involved in the lending banks’ approval process, wewere not involved in determining the approval procedures or criteria of thelending banks and, in the normal course of business, we generally did not fundor acquire any payday cash advances or installment loans from the lendingbanks. The payday cash advances and installment loans were repayable solely tothe lending banks and were assets of the lending banks. Consequently, thelending banks’ payday cash advances and installment loans have never beenincluded in our payday cash advance and installment loan portfolios nor havethey been reflected on our balance sheet within our advances and feesreceivable, net.

Under the MP&S Agreements, the lending banks werecontractually obligated for all or a specified percentage of the losses ontheir payday cash advances. Therefore, our marketing, processing and servicing 

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fee increased by thelending banks’ contractual obligation for losses. If actual payday cash advancelosses by a lending bank exceeded the percentage specified in its MP&SAgreement with us, we were potentially obligated to pay the lending bank theoutstanding amount of the advances and loans plus the lending bank’s feesand/or interest receivable on the advances, less the lending bank’scontractually obligated portion of the losses.

Because our economic exposure for excess bank lossesrelated to the lending banks’ payday cash advances and installment loans, weaccrued for excess bank losses, to reflect our probable losses related touncollected lending bank payday cash advances and installment loans. Theaccrual for excess bank losses was established on a basis similar to theallowance for doubtful accounts under the standard business model. 

As a result of the FDICRevised Guidance, and the conversion of our Texas and Michigan operations toour standard business model in July 2005, the discontinuation of our NorthCarolina operations in September 2005, and the conversion of our Pennsylvaniaand Arkansas operations to our standard business model in June 2006, theaccrual for excess bank losses and gross profit derived from the agencybusiness model has declined. The accrual for excess bank losses that wasreported in our balance sheet was $1.4 million as of December 31,2005. We had no accrual for excess bank losses as of September 30, 2006. Approximately15.4% of our total center gross profit in the three months endedSeptember 30, 2005 was derived from the agency business model.Approximately 22.5% and 0.6% of our total center gross profit, in the ninemonths ended September 30, 2005 and 2006, respectively, was derived fromthe agency business model.

**Certain ContractualCash Commitments**

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

| ** **                                 | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**                                           | ** ** | **2006** | ** ** | **2007 and  2008** | ** ** | **2009 and  2010** | ** ** | **2011 and  thereafter** | ** ** |
| Long-term debt  obligations:               |       |       |       |                                                |       |   |   |   |   |   |   |   |   |
| Revolving credit facility                  |       | $          | 96,838     |                                                | $          | — |   | $ | — |   | $ | 96,838 |   |   | $ | — |   |   |
| Mortgage payable.                          |       | 8,564      |       | 199                                                 |       | 1,594 |   | 1,594 |   |   | 5,177 |   |   |
| Note payable                               |       | 415        |       | 35                                                  |       | 276 |   | 104 |   |   | — |   |   |
| Operating lease  obligations  (1)          |       | 139,426    |       | 16,245                                              |       | 91,759 |   | 27,378 |   |   | 4,044 |   |   |
| Purchase  obligations                      |       | 2,148      |       | 1,912                                               |       | 236 |   | - |   |   | — |   |   |
| Total.                                     |       | $          | 247,391    |                                                | $          | 18,391 |   | $ | 93,865 |   | $ | 125,914 |   |   | $ | 9,221 |   |   |
|                                            |            |            |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

***Long-Term DebtObligations***

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

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As of September 30, 2006, we had $96.8 millionoutstanding on the revolving portion of our credit facility and approximately$3.9 million of letters of credit outstanding, leaving approximately$164.3 million available for future borrowings under our credit facility.

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

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

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

Weborrow under our $265.0 million revolving credit facility to fund ouradvances and other liquidity needs. Our day-to-day balances under our revolvingcredit facility, as well as our cash balances, vary because of seasonal andday-to-day requirements resulting from making and collecting advances. Forexample, if a month ends on a Friday (a typical payday), our borrowings and ourcash balances will be high compared to a month that does not end on a Friday.This is because a substantial portion of the advances will be repaid in cash onthat day but sufficient time will not yet have passed for the cash to reducethe outstanding borrowings under our revolving credit facility. Our borrowingsunder our revolving credit facility will also increase as the demand foradvances increases during our peak periods such as the back-to-school andholiday seasons. Conversely, our borrowings typically decrease during the taxrefund season when cash receipts from customers peak or the customer demand fornew advances decreases.

*Mortgage Payable.**  *Our corporate headquarters buildingand related land are subject to a mortgage, the principal amount of which wasapproximately $6.2 million and $5.9 million at December 31, 2005 and September 30, 2006, respectively. Themortgage is payable to an insurance company and is collateralized by ourcorporate headquarters building and related land. The mortgage is payable in180 monthly installments of approximately $66,400, including principal andinterest, and bears interest at a fixed rate of 7.30% over its term. Themortgage matures on June 10, 2017. The carrying amount of our corporateheadquarters (land, land improvements and building) was approximately$5.4 million and $5.2 million at December 31, 2005 and September 30, 2006, respectively.

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***Operating Lease Obligations***

Welease all but three of our centers from third-party lessors underoperating leases. These leases typically have initial terms of three to fiveyears and may contain provisions for renewal options, additional rental chargesbased on revenue and payment of real estate taxes and common area charges. Inaddition, we lease aircraft hangar space and have certain other leases forsecurity and office equipment. The lessor under three center leases, theaircraft hanger space lease and other office and warehouse space leases arecompanies controlled by our Chairman.

Our Chairman and ViceChairman have used our aircraft for private purposes in exchange for our use ofan identical aircraft owned by our Chairman and Vice Chairman. For the threeand nine months ended September 30, 2006, our Chairman and Vice Chairmanused our aircraft for 10.8 and 33.5 hours, respectively. For the nine monthsended September 30, 2006, we used the aircraft owned by the Chairman andVice Chairman for 1.3 hours. As a result, we are owed for approximately 43.0hours of aircraft use time. That credit is not reflected in our balance sheetas of September 30, 2006.

***PurchaseObligations***

Weenter into agreements with vendors to purchase furniture, fixtures and otheritems used to open new centers. These purchase commitments typically extend fora period of two to three months after the opening of a new center. As of September 30,2006, our purchase obligations totaled approximately $2.1 million.

**Critical Estimates,Uncertainties or Assessments 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.

Actualresults related to the estimates and assumptions made in preparing ourconsolidated financial statements will emerge over periods of time, such asestimates and assumptions underlying the determination of allowance fordoubtful accounts. These estimates and assumptions are monitored andperiodically adjusted as circumstances warrant. These amounts may be adjustedbased on higher or lower actual loss experience. Although there is greater riskwith respect to the accuracy of these estimates and assumptions because of theperiod over which actual results may emerge, this risk is mitigated by theability to make changes to these estimates and assumptions over the sameperiod.

We periodically review the carrying value of goodwilland other intangible assets when events and circumstances warrant such areview. One of the methods used for this review is performed using estimates offuture cash flows. If the carrying value of goodwill or other intangible assetsis considered impaired, an impairment charge is recorded for the amount by whichthe carrying value of the goodwill or intangible assets exceeds its fair value.We believe that the estimates of future cash flows and fair value arereasonable. Changes in estimates of those cash flows and fair value, however,could affect the evaluation.

**Impact of Inflation**

Webelieve our results of operations are not dependent upon the levels ofinflation.

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**FORWARD-LOOKINGSTATEMENTS**

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

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

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

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

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

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

·       theaccuracy of our estimates of losses;

·       theftand employee errors;

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

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

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

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

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

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

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

***Interest Rate Risk***

We are exposed to interest rate risk on our revolvingcredit facility. Our variable interest expense is sensitive to changes in thegeneral level of interest rates. We may from time to time enter into interestrate swaps, collars or similar instruments with the objective of reducing ourvolatility in borrowing costs. We do not use derivative financial instrumentsfor speculative or trading purposes. We had no derivative financial instrumentsoutstanding as of December 31, 2005 or September 30, 2006. Theweighted average interest rate on our $37.9 million of variable interestdebt as of December 31, 2005 was approximately 7.38%. The weighted averageinterest rate on our $96.8 million of variable interest debt as of September 30,2006 was approximately 7.97%.

We had total interestexpense of $1.4 million and $2.2 million for the three months ended September 30,2005 and 2006, respectively. We had total interest expense of $2.9 million and$4.0 million for the nine months ended September 30, 2005 and 2006,respectively. The estimated change in interest expense from a hypothetical 200basis-point change in applicable variable interest rates would have beenapproximately $0.2 million and $0.3 million for the three months ended September 30,2005 and 2006, respectively, and approximately $0.2 million and $0.4 millionfor the nine months ended September 30, 2005 and 2006, respectively.

**ITEM 4.**                CONTROLSAND PROCEDURES.

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

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**PART II.OTHER INFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS.

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

**ITEM 1A.**     RISKFACTORS.

**Risks Related toOur Business and Industry**

***Our business ishighly regulated. Changes in applicable laws and regulations, or our failure tocomply with such laws and regulations, could have a material adverse effect onour business, results of operations and financial condition.***

Our business is subject tonumerous federal, state and local laws and regulations, which are subject tochange and which may impose significant costs or limitations on the way weconduct or expand our business. These regulations govern or affect, among otherthings, interest rates and other fees, check cashing fees, lending practices,recording and reporting of certain financial transactions, privacy of personalconsumer information and collection practices. As we develop new product andservice offerings, we may become subject to additional federal, state and localregulations. State and local governments may also seek to impose new licensingrequirements or interpret or enforce existing requirements in new ways. In addition,changes in current laws and future laws or regulations may restrict our abilityto continue our current methods of operation or expand our operations. Changesin laws or regulations, or our failure to comply with such laws andregulations, may have a material adverse effect on our business, results ofoperations and financial condition.

***Our industry ishighly regulated under state law. Changes in state laws and regulations, or ourfailure to comply with such laws and regulations, could have a material adverseeffect on our business, results of operations and financial condition.***

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

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

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unprofitable could bepassed in any other state at any time or existing payday cash advance lawscould expire or be amended, any of which would have a material adverse effecton our business, results of operations and financial condition.

Statutes authorizing payday cash advance servicestypically provide the state agencies that regulate banks and financialinstitutions with significant regulatory powers to administer and enforce thelaw. In most states, we are required to apply for a license, file periodicwritten reports regarding business operations and undergo comprehensive stateexaminations to ensure that we comply with applicable laws. Under statutoryauthority, state regulators have broad discretionary power and may impose newlicensing requirements, interpret or enforce existing regulatory requirementsin different ways or issue new administrative rules, even if not contained instate statutes, that impact the way we do business and may force us toterminate or modify our operations in particular states. They may also impose rules thatare generally adverse to our industry. Any new licensing requirements or rules couldhave a material adverse effect on our business, results of operations andfinancial condition.

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

Additionally, stateattorneys general and banking regulators have begun to scrutinize payday cashadvances and other alternative financial products and take actions that couldrequire us to modify, suspend or cease operations in their respective states.In December 2005, after the conclusion of a contested case, theCommissioner of Banks for North Carolina ordered that our North Carolinasubsidiary immediately cease all business operations. See “Part I. Item 1. Financial Statements—Notes to InterimUnaudited Financial Statements—Note 7. Commitments and Contingencies.” As aresult, we closed 118 centers in North Carolina. The lost revenues from suchclosures may have a material adverse effect on our results of operations andfinancial condition. In addition, the newly introduced Advance AmericaChoice-Line of Credit is being challenged by the Office of the PennsylvaniaSecretary of Banking in a lawsuit filed in the Commonwealth Court ofPennsylvania. See “Part I. Item 1. Financial Statements—Notes to InterimUnaudited Financial Statements—Note 7. Commitments and Contingencies.” An adverseruling in this case could significantly impair our business or force us tocease offering that new product in Pennsylvania.

***Our industry isregulated under federal law and subject to federal and state unfair anddeceptive practices statutes. Our failure to comply with such regulations orchanges in federal laws and regulations, or changes to such laws, could have amaterial adverse effect on our business, results of operations and financialcondition.***

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

Additionally, since 1999, various anti-payday cashadvance legislation has been introduced in the U.S. Congress. Congressionalmembers continue to receive pressure from consumer advocates and other industryopposition groups to adopt such legislation. Recent attention has focused onthe use of short term 

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lending and payday cashadvances by military personnel. On September 29, 2006, the John WarnerNational Defense Authorization Act for Fiscal Year 2007 (the “Act”) conferencereport was filed and the Act was signed into law on October 17, 2006. TheAct places, among other restrictions, a federal limit of 36% on extensions ofcredit, including payday cash advances, to active members of the military andtheir dependents. Any federal legislative or regulatory action that restrictsor prohibits payday cash advance services could have a material adverse impacton our business, results of operations and financial condition. OnOctober 15, 2006, the Company voluntarily ceased offering its services toactive, full-time military personnel by no longer qualifying customers foradvances based on income from military service.

Our marketing efforts andthe representations we make about our payday cash advances also are subject tofederal and state unfair and deceptive practices statutes. The Federal TradeCommission (“FTC”) enforces the Federal Trade Commission Act and the stateattorneys general and private plaintiffs enforce the analogous state statutes.If we are found to have violated any of these statutes, that violation couldhave a material adverse effect on our business, results of operations and financialcondition.

***Our industry issubject to various local rules and regulations. Changes in these localregulations could have a material adverse effect on our business, results ofoperations and financial condition.***

In addition to state and federal laws and regulations,our business can be subject to various local rules and regulations such aslocal zoning regulations. For example, several cities in Oregon have recentlyadopted local ordinances that have the effect of limiting our business. Anyactions taken in the future by local zoning boards or other local governingbodies to require special use permits for, or impose other restrictions on,payday cash advance service providers could have a material adverse effect onour business, results of operations and financial condition.

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

***Current and futurelitigation and regulatory proceedings against us could have a material adverseeffect on our business, results of operations and financial condition.***

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

We are likely to besubject to further litigation and proceedings in the future. The consequencesof an adverse ruling in any current or future litigation or proceeding couldcause us to have to refund fees and/or interest collected, refund the principalamount of payday cash advances or other forms of credit, pay treble or othermultiple damages, pay monetary penalties and/or modify or terminate ouroperations in particular states. We may also be subject to adverse publicity.Defense of any lawsuits or proceedings, even if successful, requiressubstantial time and attention of our senior officers and other managementpersonnel that would otherwise be spent on other aspects of our business andrequires the expenditure of significant amounts for legal fees and otherrelated costs. Any of these events could have a material adverse effect on ourbusiness, results of operations and financial condition.

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***Competition in theretail financial services industry could cause us to lose market share orreduce our interest and fees, possibly resulting in a decline in our futurerevenues and earnings.***

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

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

Our centers currently operatein 36 states and, for the three months ended September 30, 2005 and 2006,our five largest states (measured by total revenues) accounted forapproximately 40% and 48%, respectively, of our total revenues. For the ninemonths ended September 30, 2005 and 2006, our five largest states(measured by total revenues) accounted for approximately 41% and 47%,respectively, of our total revenues. While we believe we have a diversegeographic presence, for the near term we expect that significant revenues willcontinue to be generated by certain states, largely due to the currentlyprevailing economic, demographic, regulatory, competitive and other conditionsin those states. Furthermore, our five largest states, as measured by revenues,are not in all instances our five largest states as measured by the number ofcenters operated. Changes to prevailing economic, demographic, regulatory orany other conditions in the markets in which we operate could lead to a reductionin demand for our products and services, a decline in our revenues or anincrease in our provision for doubtful accounts that could result in adeterioration of our financial condition.

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

Over the past few years,consumer advocacy groups and certain media reports have advocated withincreasing frequency governmental and regulatory action to prohibit or severelyrestrict payday cash advances. The consumer groups and media reports typicallyfocus on the cost to a consumer for an advance. The consumer groups and mediareports typically characterize these advances as predatory or abusive towardconsumers. If this negative characterization of advances becomes widelyaccepted by consumers, demand for advance services could significantlydecrease, which could materially adversely affect our business, results ofoperations and financial condition. Negative perception of advances or otheractivities could also result in increased regulatory scrutiny and increasedlitigation, and encourage restrictive local zoning rules and make it moredifficult to obtain government approvals necessary to open new centers. Thesetrends could materially adversely affect our business, results of operationsand financial condition.

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***The provision fordoubtful accounts may increase and net income may decrease if we are unable tocollect customers’ personal checks that are returned due to non-sufficientfunds (“NSF”) in the customers’ accounts or other reasons.***

For the three months endedSeptember 30, 2005 and 2006, we deposited approximately 6.4% and 6.2%,respectively, of all the customer checks we received and approximately 80% and75%, respectively, of these deposited customer checks were returned unpaidbecause of non-sufficient funds in the customers’ bank accounts or because ofclosed accounts or stop-payment orders. For the nine months ended September 30,2005 and 2006, we deposited approximately 5.5% and 5.7%, respectively, of allthe customer checks we received and approximately 79% and 77%, respectively, ofthese deposited customer checks were returned unpaid because of non-sufficientfunds in the customers’ bank accounts or because of closed accounts orstop-payment orders. Total charge-offs, net of recoveries, for the three monthsended September 30, 2005 and 2006 were approximately $31.8 million and$34.3 million, respectively. Total charge-offs, net of recoveries, for the ninemonths ended September 30, 2005 and 2006 were approximately $65.7 millionand $73.4 million, respectively. If the number of customer checks that wedeposit increases or the percent of the customers’ returned checks that wecharge-off increases, our provision for doubtful accounts will increase and ournet income will decrease.

***If our estimates oflosses are not adequate, our provision for doubtful accounts would increase.This would result in a decline in our future revenues and earnings, which couldhave a material adverse effect on our stock price.***

We maintain an allowance for doubtful accounts forestimated losses for advances we make directly to consumers and check-cashing,deferred-presentment and other credit services we offer under the standardbusiness model. To estimate the appropriate allowance for doubtful accounts, weconsider the amount of outstanding advances owed to us, historical charge-offs,our current collection patterns and the current economic trends in the marketswe serve.

As of September 30, 2006, our allowance fordoubtful accounts was $53.4 million. This amount, however, is an estimate, andwe have less experience upon which to base our estimates of losses fromcheck-cashing, deferred-presentment or credit services than with payday cashadvances. If our actual advance, check-cashing, deferred-presentment or creditservices losses are greater than our allowance for doubtful accounts, ourprovision for doubtful accounts would increase. This would result in a declinein our future revenues and earnings, which could have a material adverse effecton our stock price.

***We currently lackproduct and business diversification; as a result, our future revenues andearnings may be disproportionately negatively impacted by external factors andmay be more susceptible to fluctuations than more diversified companies.***

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

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***Our inability to efficiently and profitably introduceor manage new products or alternative methods for conducting business couldhave a material adverse effect on our business, results of operations andfinancial condition.***

In July 2005, we began offering credit servicesas a CSO to customers in Texas. In June 2006, we began offering consumersin Pennsylvania a new financial service called the Advance America Choice-Lineof Credit, operating under an existing state check cashing law in Arkansas, andoffering advances under a deferred presentment service transactions act inMichigan. In October 2006, we began offering installment loans in Illinoisand selling a prepaid debit card called the CashVantage Card in select states.Further, we intend to introduce additional new products and services in thefuture. In order to offer such new products, we will need to comply withadditional regulatory and licensing requirements. Each of these changes,alternative methods of conducting business and new products are subject to riskand uncertainty and require significant investment in time and capital. Due toour lack of experience in offering some of these alternative services andproducts, we cannot assure you that we will be able to successfully implementany of these changes or successfully introduce any new products, or to do so ina timely manner. Furthermore, we cannot predict the demand for any of these newservices or products, nor do we know if we will be able to offer these newservices or products in an efficient manner or on a profitable basis. Ourfailure to do so, or low customer demand for any of these new services orproducts, could have a material adverse effect on our business, results ofoperations and financial condition.

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

We have experienced substantial growth in recentyears. Our growth strategy, which is based on opening centers in existing andnew markets, is subject to significant risks. We cannot assure you that we willbe able to expand our market presence in our current markets or successfullyenter new markets through the opening of new centers or acquisitions. Moreover,the start-up costs and the losses from initial operations attributable to eachnewly opened center place demands upon our liquidity and cash flow, and wecannot assure you that we will be able to satisfy these demands.

In addition, ourability to execute our growth strategy will depend on a number of other factors,some of which may be beyond our control, including:

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

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

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

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

·       ourability to compete for expansion opportunities in suitable locations;

·       ourability to recruit, train and retain qualified personnel;

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

·       ourability to obtain adequate financing for our expansion plans.

We cannot assure you thatour systems, procedures, controls and existing space will be adequate tosupport expansion of our operations. Our growth has placed significant demandson all aspects of our business, including our administrative, technical andfinancial personnel and systems. Additional growth or 

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expansionmay further strain our management, financial and other resources. Our futureresults of operations will substantially depend on the ability of our officersand key employees to manage changing business conditions and to implement andimprove our technical, administrative, financial control and reporting systems.In addition, we cannot assure you that we will be able to implement ourbusiness strategy profitably in geographic areas or product lines we do notcurrently serve.

***We may incursubstantial additional debt, which could adversely affect our business, resultsof operations and financial condition by limiting our ability to obtainfinancing in the future and react to changes in our business.***

We may incursubstantial additional debt in the future. As of September 30, 2006, ourtotal debt was approximately $103.1 million and our stockholders’ equity wasapproximately $296.8 million. The total availability under our current creditfacility is $265.0 million, which we may borrow at any time, subject tocompliance with certain covenants and conditions. Due to the seasonal nature ofour business, our total debt is historically the lowest during the firstcalendar quarter and then increases during the remainder of the year. If weincur substantial additional debt, it could have important consequences to ourbusiness. For example, it could:

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

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

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

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

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

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

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

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

***We depend on loansand cash management services from banks to operate our business. If banksdecide to stop making loans and/or providing cash management services tocompanies in our industry, it could have a material adverse affect on ourbusiness, results of operations and financial condition.***

We depend on borrowingsunder our revolving credit facility to fund advances, capital expenditures tobuild new centers and other needs. One major regional bank announced that ithad revised its credit policies to prohibit future loans to companies engagedin the payday cash advance services or car title lending industries in a letterthat the bank filed with the Federal Reserve Board in connection with the bank’sapplication for approval of an acquisition. The bank’s letter referred tocomments filed by certain consumer advocacy organizations in connection withthe bank’s application, and stated that it had revised its credit policies “afterconsidering the potential reputational risks and consumer harm” that couldresult from lending to companies in these industries. While this bank is notone of our existing lenders under our 

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revolvingcredit facility, if our current or potential credit banks decided not to lendmoney to companies in our industry, we could face higher borrowing costs,limitations on our ability to grow our business as well as possible cashshortages, any of which could have a material adverse effect on our business,results of operations and financial condition. This bank also no longerprovides cash management services, including operating depository accounts, topayday advance companies. There are other banks that have notified us and othercompanies in the payday cash advance and check-cashing industries, that theywill no longer maintain bank accounts for these companies due to reputationalrisks and increased compliance costs of servicing money services businesses andother cash intensive industries. While none of our larger depository banks hasrequested that we close our bank accounts or put other restrictions on how weuse their services, if any of our larger current or future depository bankswere to take such action, we could face higher costs of managing our cash andlimitations on our ability to grow our business, both of which could have amaterial adverse effect on our business, results of operations and financialcondition.

***We depend to asubstantial extent on borrowings under our revolving credit facility to fundour liquidity needs.***

We have an existingrevolving credit facility that allows us to borrow up to $265.0 million,assuming we are in compliance with a number of covenants and conditions.Because we typically use substantially all of our available cash generated fromour operations to repay borrowings on our revolving credit facility on acurrent basis, we have limited cash balances and we expect that a substantialportion of our liquidity needs, including any amounts to pay any future cashdividends on our common stock, will be funded primarily from borrowings underour revolving credit facility. As of September 30, 2006, we had approximately$164.3 million available for future borrowings under this facility. Due to theseasonal nature of our business, our borrowings are historically the lowestduring the first calendar quarter and increase during the remainder of theyear. If our existing sources of liquidity are insufficient to satisfy ourfinancial needs, we may need to raise additional debt or equity in the future.

***Our revolvingcredit facility contains restrictions and limitations that could significantlyaffect our ability to operate our business.***

Our revolvingcredit facility contains a number of significant covenants that could adverselyaffect our business. These covenants restrict our ability, and the ability ofour subsidiaries to, among other things:

·       incuradditional debt;

·       createliens;

·       effectmergers or consolidations;

·       makeinvestments, acquisitions or dispositions;

·       paydividends, repurchase stock or make other payments;

·       enterinto certain sale and leaseback transactions;

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

·       haveforeign subsidiaries.

The breach of any covenantor obligation in our revolving credit facility will result in a default. Ifthere is an event of default under our revolving credit facility, the lendersunder the revolving credit facility could cause all amounts outstandingthereunder to be due and payable, subject to applicable grace periods. Thiscould trigger cross-defaults under our other existing or future debtinstruments. As a result, our ability to respond to changing business andeconomic conditions and to secure additional financing, if needed, may besignificantly restricted, and we may be prevented from engaging in transactionsthat might further our 

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growthstrategy. If we are unable to repay, refinance or restructure our indebtednessunder our revolving credit facility, the lenders under that facility couldproceed against the collateral securing that indebtedness. Our obligationsunder the revolving credit facility are guaranteed by each of our existing andfuture subsidiaries. The borrowings under the revolving credit facility and thesubsidiary guarantees are secured by substantially all of our assets and theassets of the subsidiary guarantors. In addition, borrowings under therevolving credit facility are secured by a pledge of substantially all of thecapital stock, or similar equity interests, of the subsidiary guarantors. Inthe event of our insolvency, liquidation, dissolution or reorganization, thelenders under our revolving credit facility and any other existing or futuredebt of ours would be entitled to payment in full from our assets beforedistributions, if any, were made to our stockholders.

***Our business isseasonal in nature, which causes our revenues, collection rates and earnings tofluctuate. These fluctuations could have a material adverse effect on ourresults of operations and stock price.***

Our business is seasonal due to the impact offluctuating demand for advances and fluctuating collection rates throughout theyear. Demand has historically been highest in the third and fourth quarters ofeach year, corresponding to the back-to-school and holiday seasons, and lowestin the first quarter of each year, corresponding to our customers’ receipt ofincome tax refunds. Our provision for doubtful accounts and allowance fordoubtful accounts are historically lowest as a percentage of revenues in thefirst quarter of each year, corresponding to our customers’ receipt of incometax refunds, and increase as a percentage of revenues for the remainder of eachyear. This seasonality requires us to manage our cash flows over the course ofthe year. If our revenues or collections were to fall substantially below whatwe would normally expect during certain periods, our ability to service ourdebt, pay dividends on our common stock and meet our other liquidityrequirements may be adversely affected, which could have a material adverseeffect on our results of operations and stock price.

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

***Because we maintaina significant supply of cash in our centers, we may be subject to cashshortages due to employee and third-party theft and errors. We also may besubject to liability as a result of crimes at our centers.***

Because our businessrequires us to maintain a significant supply of cash in each of our centers, weare subject to the risk of cash shortages resulting from employee andthird-party theft and errors. Although we have implemented various programs toreduce these risks, maintain insurance coverage for theft and provide securityfor our employees and facilities, we cannot assure you that employee andthird-party theft and errors will not occur. Cash shortages from employee andthird-party theft and errors were approximately $0.5 million (0.27% of totalrevenues) and $0.7 million (0.40% of total revenues) in the three months ended September 30,2005 and 2006, respectively. Cash shortages from employee and third-party theftand errors were approximately $1.0 million (0.23% of total revenues) and $1.4million (0.30% of total revenues) in the nine months ended September 30,2005 and 2006, respectively. Theft and errors could lead to cash shortages andcould adversely affect our business, results of operations and financialcondition. It is also possible that crimes such as armed robberies may becommitted at our centers. We could experience liability or adverse publicityarising from such crimes. For example, we may be liable if an employee,customer or bystander suffers bodily injury, emotional distress or death. Anysuch event may have a material adverse effect on our business, results ofoperations and financial condition.

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

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

***Our centralizedheadquarters functions are susceptible to disruption by catastrophic events,which could have a material adverse effect on our business, results ofoperations and financial condition.***

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

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

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

·       difficultiesin integrating operations, technologies, accounting and personnel;

·       difficultiesin supporting and transitioning customers of our acquired companies;

·       diversionof financial and management resources from existing operations;

·       risksof entering new markets;

·       potentialloss of key employees; and

·       inabilityto generate sufficient revenues to offset acquisition costs.

Acquisitions also frequently result in the recordingof goodwill and other intangible assets that are subject to potentialimpairments in the future that could harm our financial results. In addition,if we finance acquisitions by issuing convertible debt or equity securities,our existing stockholders may be diluted, which could affect the market priceof our stock. As a result, if we fail to properly evaluate acquisitions orinvestments, we may not achieve the anticipated benefits of any suchacquisitions, and we may incur costs in excess of what we anticipate, either ofwhich could have a material adverse effect on our business, results ofoperations and financial condition.

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

The annual turnover as of September 30,2006, among our center managers was approximately 52% and among our othercenter employees was approximately 103%. Approximately 50% of the turnover hastraditionally occurred in the first six months following the hire date of ourcenter managers and employees. This turnover increases our cost of operationsand makes it more difficult to operate our centers. If we are unable to retainour employees in the future, our business, results of operations and financialcondition could be adversely affected.

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

Between October 1, 2001, and the closing of ourinitial public offering (“IPO”) on December 21, 2004, we were taxed as a “pass-through”entity under Subchapter S of the Internal Revenue Code. Currently, we are taxedas a C corporation under Subchapter C of the Internal Revenue Code, which is applicableto most corporations and treats the corporation as an entity that is separateand distinct from its stockholders. If our tax returns for the years in whichwe were an S corporation were to be audited by the Internal Revenue Service oranother taxing authority and we were determined not to have qualified for, orto have violated, our S corporation status, we could be obligated to pay backtaxes, interest and penalties. These amounts could include taxes on all of ournet income while we were an S corporation. Taxable income during the period wewere an S corporation was $211.0 million. Any such claims could result inadditional costs to us and could have a material adverse effect on ourbusiness, results of operations and financial condition.

Following the filing ofour final S corporation tax returns, we recorded an additional $0.6 million ofdeferred income tax liability that resulted in a $0.6 million increase in taxexpense for the quarter ended September 30, 2006.

**Risks Related toOur Common Stock**

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

Our executive officers anddirectors together with certain trusts for the benefit of some of the familymembers of certain directors, control approximately 25%****ofour outstanding common stock. As a result, these stockholders, if they acttogether, may be able to influence any matter requiring our stockholders’approval, including the election of directors and approval of significantcorporate transactions. As a result, this concentration of ownership may delay,prevent or deter a change in control, could deprive our stockholders of anopportunity to receive a premium for their common stock as part of a sale ofour company or its assets and might reduce the market price of our commonstock.

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

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

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

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

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

·       prohibitstockholders from filling vacancies on our Board of Directors;

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

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

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

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

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

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

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

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

Thefollowing table sets forth information about our stock repurchases for thethree months ended September 30, 2006:

| **Period (1)**                    | ** ** | ** ** | ** ** | **Total  Number of  Shares  Purchased (1)** | ** ** | **Average  Price Paid  per Share (2)** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs (2)** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Plans or  Programs (2)** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1 to  July 31           |       |       | 116,800    |                                                  |       |                                                  | $          | 13.15                                                                                                                                     |       |                                                                                                                                                        |       | 116,800 |   |   |   | $ | 22,859,599 |   |   |
| August 1 to  August 31       |       |       | 1,734,200  |                                                  |       |                                                  | $          | 14.00                                                                                                                                     |       |                                                                                                                                                        |       | 1,734,200 |   |   |   | $ | 94,613,772 |   |   |
| September 1  to September 30 |       |       | 641,200    |                                                  |       |                                                  | $          | 14.65                                                                                                                                     |       |                                                                                                                                                        |       | 641,200 |   |   |   | $ | 85,221,417 |   |   |
| Total                                  |       |       | 2,492,200  |                                                  |       |                                                  | $          | 14.13                                                                                                                                     |       |                                                                                                                                                        |       | 2,492,200 |   |   |   | $ | 85,221,417 |   |   |

 

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(1)          Based on trade date.

(2)          OnMay 4, 2005, we announced a stock repurchase program pursuant to which wewere authorized to repurchase up to $50.0 million of our outstanding commonstock. On August 16, 2006, we announced an extension of our stockrepurchase program pursuant to which we were authorized to repurchase up to$100.0 million of our outstanding common stock beginning on that date.

**ITEM 6.**                EXHIBITS.

| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                             |
| 10.1       |       | Fifth Amendment, dated August 16, 2006, to the  Amended and Restated Credit Agreement dated as of July 16, 2004  (incorporated herein by reference to Exhibit 10.1 to Advance America,  Cash Advance Centers, Inc.’s Current Report on Form 8-K dated  August 14, 2006). |
| 31.1       |       | Certification of  Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                                                                                                              |
| 31.2       |       | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                                                                                                              |
| 32.1       |       | Certification of Chief  Executive Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002).                                                                                                |
| 32.2       |       | Certification of Chief  Financial Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002).                                                                                                |

 

 

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**SIGNATURES**

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

|                       | **ADVANCE  AMERICA, CASH ADVANCE CENTERS, INC.** |
|-----------------------|--------------------------------------------------|
| ** **            | ** **                                       | ** ** |
| November 9, 2006 | By:                                              | /s/ JOHN I. HILL |
| ** **            | ** **                                       | *Executive Vice President and Chief Financial  Officer* |
| ** **            | ** **                                       | *(Duly authorized officer and principal financial  officer)* |

 

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**INDEXTO EXHIBITS**

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                        |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Fifth Amendment, dated August 16, 2006, to the Amended and  Restated Credit Agreement dated as of July 16, 2004 (incorporated herein  by reference to Exhibit 10.1 to Advance America, Cash Advance  Centers, Inc.’s Current Report on Form 8-K dated  August 14, 2006). |
| 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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