**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(**Mark One)

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

**Forthe quarterly period ended June 30, 2007**

**OR**

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

**Forthe transition period from            to            **

**COMMISSIONFILE NUMBER 001-32363**

**ADVANCE AMERICA,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, SouthCarolina  29306**

(Address of principalexecutive offices) (Zip Code)

**864-342-5600**

(Registrant’s telephonenumber, including area code)

**None**

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x  No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o |
|--------------------------------|--------------------------|------------------------------|

 

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

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

| Class                                   | ** ** | **Outstanding as of August 8, 2007** |
|-----------------------------------------|------------|-------------------------------------------|
| Common Stock, par  value $.01 per share |       | 78,975,242 shares                         |

 

 

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**ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.Form 10-QFor the three months and six months ended June 30, 2007**
|                                         | ** ** | ** **                                                                                                          | ** ** | **Page** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **FORWARD-LOOKING  STATEMENTS**         |       | 3                                                                                                                   |       |
| **PART I.  FINANCIAL INFORMATION** |       | 4                                                                                                                   |       |
| Item 1.                                 |       | Financial  Statements                                                                                               |       | 4        |   |
|                                    |       | Unaudited  Consolidated Balance Sheets December 31, 2006 and June 30, 2007                                |       | 4        |   |
|                                    |       | Interim  Unaudited Consolidated Statements of Income Three Months and Six Months Ended  June 30, 2006 and 2007 |       | 5        |   |
|                                    |       | Interim  Unaudited Consolidated Statement of Stockholders’ Equity Six Months Ended  June 30, 2007         |       | 6        |   |
|                                    |       | Interim  Unaudited Consolidated Statements of Cash Flows Six Months Ended  June 30, 2006 and 2007              |       | 7        |   |
|                                    |       | Notes  to Interim Unaudited Consolidated Financial Statements                                                       |       | 8        |   |
| Item  2.                                |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 23       |   |
| Item  3.                                |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 45       |   |
| Item  4.                                |       | Controls  and Procedures                                                                                            |       | 46       |   |
| **PART II.  OTHER INFORMATION**    |       | 47                                                                                                                  |       |
| Item 1.                                 |       | Legal  Proceedings                                                                                                  |       | 47       |   |
| Item 1A.                                |       | Risk Factors                                                                                                        |       | 47       |   |
| Item  2.                                |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        |       | 47       |   |
| Item  4.                                |       | Submission  of Matters to a Vote of Security Holders                                                                |       | 47       |   |
| Item 6.                                 |       | Exhibits                                                                                                            |       | 47       |   |
| **SIGNATURES**                          | ** ** | 48                                                                                                                  |       |
| **INDEX TO  EXHIBITS**                  |       | 49                                                                                                                  |       |
|                                         |            |                                                                                                                     |            |          |  |  |  |  |

 

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**FORWARD-LOOKINGSTATEMENTS**

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

The factors listed in “Part I. Item 1A. Risk Factors”in our Annual Report on Form 10-K for the year ended December 31, 2006, as wellas any cautionary language in this Quarterly Report, provide examples of risks,uncertainties and events that may cause our actual results to differ materiallyfrom the expectations we describe in our forward-looking statements. Althoughwe believe that our expectations are based on reasonable assumptions, actualresults may differ materially from those in the forward-looking statements as aresult of various factors, including, but not limited to, those described in “Part I. Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2006. 

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

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**PART I.   FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS.

**Advance America, Cash Advance Centers, Inc.Unaudited Consolidated Balance SheetsDecember 31, 2006 and June 30, 2007(in thousands, except per share data)**

| ** **                                                                                                                                                                                          | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                                                                          | ** ** |                        | ** ** | ** **              |       | ** ** | ** ** |
| Current assets                                                                                                                                                                                      |       |                        |       |                    |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                          |       |                        | $          | 67,245                  |       |   | $ | 36,898 |   |
| Advances and fees  receivable, net                                                                                                                                                                  |       |                        | 237,725    |                    |       | 226,742 |   |
| Deferred income taxes                                                                                                                                                                               |       |                        | 11,798     |                    |       | 10,084 |   |
| Other current assets                                                                                                                                                                                |       |                        | 11,664     |                    |       | 13,621 |   |
| Total current assets                                                                                                                                                                                |       |                        | 328,432    |                    |       | 287,345 |   |
| Restricted cash                                                                                                                                                                                     |       |                        | 5,446      |                    |       | 5,547 |   |
| Property and equipment,  net                                                                                                                                                                        |       |                        | 63,198     |                    |       | 59,659 |   |
| Goodwill                                                                                                                                                                                            |       |                        | 122,627    |                    |       | 122,627 |   |
| Other assets                                                                                                                                                                                        |       |                        | 5,389      |                    |       | 5,286 |   |
| Total assets                                                                                                                                                                                        |       |                        | $          | 525,092                 |       |   | $ | 480,464 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                       | ** ** |                        | ** ** | ** **              |       | ** ** | ** ** |
| Current liabilities                                                                                                                                                                                 |       |                        |       |                    |       |   |   |
| Accounts payable                                                                                                                                                                                    |       |                        | $          | 21,164                  |       |   | $ | 19,549 |   |
| Accrued liabilities                                                                                                                                                                                 |       |                        | 31,737     |                    |       | 29,222 |   |
| Income taxes payable                                                                                                                                                                                |       |                        | 14,983     |                    |       | 1,391 |   |
| Current portion of  long-term debt                                                                                                                                                                  |       |                        | 537        |                    |       | 524 |   |
| Total current  liabilities                                                                                                                                                                          |       |                        | 68,421     |                    |       | 50,686 |   |
| Revolving credit  facility                                                                                                                                                                          |       |                        | 104,835    |                    |       | 66,846 |   |
| Long-term debt                                                                                                                                                                                      |       |                        | 5,678      |                    |       | 5,411 |   |
| Deferred income taxes                                                                                                                                                                               |       |                        | 13,564     |                    |       | 10,223 |   |
| Other liabilities                                                                                                                                                                                   |       |                        | 157        |                    |       | 231 |   |
| Total liabilities                                                                                                                                                                                   |       |                        | 192,655    |                    |       | 133,397 |   |
| Non-controlling interest  in variable interest entity                                                                                                                                               |       |                        | 32,540     |                    |       | 28,618 |   |
| 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  79,534 and 79,544 outstanding as of December 31, 2006 and June 30,  2007, respectively |       |                        | 968        |                    |       | 968 |   |
| Paid in capital                                                                                                                                                                                     |       |                        | 285,382    |                    |       | 286,331 |   |
| Retained earnings                                                                                                                                                                                   |       |                        | 118,258    |                    |       | 135,529 |   |
| Common stock in treasury  (17,287 and 17,277 shares at cost at December 31, 2006 and  June 30, 2007, respectively)                                                                   |       |                        | (104,711   | )                       |       | (104,379 | ) |
| Total stockholders’  equity                                                                                                                                                                    |       |                        | 299,897    |                    |       | 318,449 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                     |       |                        | $          | 525,092                 |       |   | $ | 480,464 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statements of IncomeThree Months and Six Months Ended June 30, 2006 and 2007(in thousands, except per share data)**

| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                      | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Revenues:**                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fees and interest  charged to customers                         |       | $                                | 152,611    |                           | $          | 173,939 |   | $ | 295,703 |   | $ | 342,022 |   |
| Marketing,  processing and servicing fees                       |       | 3,310                            |       | —                         |       | 12,387 |   | — |   |
| Total revenues                                                  |       | 155,921                          |       | 173,939                        |       | 308,090 |   | 342,022 |   |
| Provision for  doubtful accounts and agency bank losses         |       | (27,435                          | )          | (30,824                        | )          | (39,311 | ) | (46,639 | ) |
| Net revenues                                                    |       | 128,486                          |       | 143,115                        |       | 268,779 |   | 295,383 |   |
| **Center Expenses:**                                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and related payroll costs                              |       | 46,171                           |       | 49,759                         |       | 92,718 |   | 98,956 |   |
| Occupancy costs                                                 |       | 21,081                           |       | 23,686                         |       | 42,129 |   | 47,219 |   |
| Center depreciation expense                                     |       | 4,000                            |       | 4,264                          |       | 7,953 |   | 8,533 |   |
| Advertising expense                                             |       | 6,111                            |       | 7,592                          |       | 9,430 |   | 12,901 |   |
| Other center expenses                                           |       | 12,635                           |       | 13,528                         |       | 27,925 |   | 27,686 |   |
| Total center expenses                                           |       | 89,998                           |       | 98,829                         |       | 180,155 |   | 195,295 |   |
| Center gross profit                                             |       | 38,488                           |       | 44,286                         |       | 88,624 |   | 100,088 |   |
| **Corporate and Other Expenses  (Income):**                     | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expenses                            |       | 13,766                           |       | 15,684                         |       | 26,777 |   | 28,963 |   |
| Corporate  depreciation expense                                 |       | 935                              |       | 812                            |       | 1,896 |   | 1,630 |   |
| Interest expense                                                |       | 919                              |       | 2,290                          |       | 1,826 |   | 4,603 |   |
| Interest income                                                 |       | (123                             | )          | (122                           | )          | (299 | ) | (198 | ) |
| Loss on disposal  of property and equipment                     |       | 283                              |       | 283                            |       | 491 |   | 535 |   |
| Loss on  impairment of assets                                   |       | —                           |       | —                         |       | — |   | 314 |   |
| Income before income taxes                                      |       | 22,708                           |       | 25,339                         |       | 57,933 |   | 64,241 |   |
| Income tax  expense                                             |       | 8,924                            |       | 10,186                         |       | 23,237 |   | 26,529 |   |
| Income before income of consolidated variable   interest entity |       | 13,784                           |       | 15,153                         |       | 34,696 |   | 37,712 |   |
| Income of  consolidated variable interest entity                |       | (888                             | )          | (317                           | )          | (1,373 | ) | (560 | ) |
| Net income                                                      |       | $                                | 12,896     |                           | $          | 14,836 |   | $ | 33,323 |   | $ | 37,152 |   |
| Net income per  common share:                                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                                           |       | $                                | 0.16       |                           | $          | 0.19 |   | $ | 0.41 |   | $ | 0.47 |   |
| Diluted                                                         |       | $                                | 0.16       |                           | $          | 0.19 |   | $ | 0.41 |   | $ | 0.47 |   |
| Dividends declared per common share                             |       | $                                | 0.11       |                           | $          | 0.125 |   | $ | 0.22 |   | $ | 0.25 |   |
| Weighted average  number of shares outstanding:                 |       |                             |       |                           |       |   |   |   |   |
| Basic                                                           |       | 81,829                           |       | 79,122                         |       | 81,828 |   | 79,120 |   |
| Diluted                                                         |       | 81,921                           |       | 79,286                         |       | 81,893 |   | 79,199 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statement of Stockholders’ EquitySix Months Ended June 30, 2007(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, 2006**                   |       | 96,821                |       |               | $          | 968          |       |                                    | $          | 285,382    |       | $ | 118,258 |   | (17,287 | ) | $ | (104,711 | ) | $ | 299,897 |   |
| Net income                                              |       | —                |       |               | —     |         |       | —                                  |       | 37,152     |       | — |   | — |   | 37,152 |   |
| Dividends paid  ($0.25 per share)                       |       | —                |       |               | —     |         |       | —                                  |       | (19,779    | )          | — |   | — |   | (19,779 | ) |
| Dividends payable                                       |       | —                |       |               | —     |         |       | —                                  |       | (102       | )          | — |   | — |   | (102 | ) |
| Purchases of  treasury stock                            |       | —                |       |               | —     |         |       | —                                  |       | —     |       | (3 | ) | (41 | ) | (41 | ) |
| Issuance of  restricted stock                           |       | —                |       |               | —     |         |       | —                                  |       | —     |       | 10 |   | — |   | — |   |
| Vesting of  restricted stock issued from treasury stock |       | —                |       |               | —     |         |       | (353                                    | )          | —     |       | — |   | 353 |   | — |   |
| Amortization of  restricted stock                       |       | —                |       |               | —     |         |       | 784                                     |       | —     |       | — |   | — |   | 784 |   |
| Stock option  expense                                   |       | —                |       |               | —     |         |       | 489                                     |       | —     |       | — |   | — |   | 489 |   |
| Issuance of  common stock to director in lieu of cash   |       | —                |       |               | —     |         |       | 29                                      |       | —     |       | 3 |   | 20 |   | 49 |   |
| **Balances, June 30, 2007**                        |       | 96,821                |       |               | $          | 968          |       |                                    | $          | 286,331    |       | $ | 135,529 |   | (17,277 | ) | $ | (104,379 | ) | $ | 318,449 |   |

 

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

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**Advance America, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statements of Cash FlowsSix Months Ended June 30, 2006 and 2007(in thousands)**

| ** **                                                                                            | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash flows from operating  activities**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                            |       | $          | 33,323     |       | $          | 37,152 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities, net of acquisition |       |       |       |       |       |
| Income of consolidated variable interest entity                                                       |       | 1,373      |       | 560        |       |
| Depreciation                                                                                          |       | 9,849      |       | 10,163     |       |
| Non-cash interest expense                                                                             |       | 493        |       | 495        |       |
| Provisions for doubtful accounts and agency bank  losses                                              |       | 39,311     |       | 46,639     |       |
| Agency bank charge-offs, net of recoveries                                                            |       | (1,783     | )          | —     |       |
| Deferred income taxes                                                                                 |       | 255        |       | (1,627     | )          |
| Loss on disposal of property and equipment                                                            |       | 491        |       | 535        |       |
| Loss on impairment of assets                                                                          |       | —     |       | 314        |       |
| Amortization of restricted stock                                                                      |       | 759        |       | 784        |       |
| Stock option expense                                                                                  |       | 467        |       | 489        |       |
| Common stock issued to director in lieu of cash                                                       |       | 18         |       | 49         |       |
| Changes  in operating assets and liabilities                                                          |       |       |       |       |       |
| Fees receivable, net                                                                                  |       | (6,004     | )          | (7,306     | )          |
| Other current assets                                                                                  |       | (9,078     | )          | (1,956     | )          |
| Other assets                                                                                          |       | 134        |       | (381       | )          |
| Accounts payable                                                                                      |       | (1,667     | )          | (1,713     | )          |
| Accrued liabilities                                                                                   |       | 607        |       | (3,005     | )          |
| Income taxes payable                                                                                  |       | (8,684     | )          | (13,592    | )          |
| Net cash provided by operating activities                                                             |       | 59,864     |       | 67,600     |       |
| **Cash  flows from investing activities**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Changes in advances receivable                                                                        |       | (40,417    | )          | (28,350    | )          |
| Changes in restricted cash                                                                            |       | (518       | )          | (101       | )          |
| Acquisition of business, net of cash acquired                                                         |       | (41        | )          | —     |       |
| Proceeds from sale of property and equipment                                                          |       | 32         |       | 34         |       |
| Purchases of property and equipment                                                                   |       | (6,266     | )          | (7,046     | )          |
| Net cash used in investing activities                                                                 |       | (47,210    | )          | (35,463    | )          |
| **Cash  flows from financing activities**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payments on revolving credit facility, net                                                            |       | (3,721     | )          | (37,989    | )          |
| Increase (decrease) in non-controlling interest of  variable interest entity                          |       | 13,397     |       | (4,482     | )          |
| Payments on mortgage payable                                                                          |       | (175       | )          | (188       | )          |
| Payments on note payable                                                                              |       | (86        | )          | (91        | )          |
| Payments of financing costs                                                                           |       | (4         | )          | (11        | )          |
| Purchases of treasury stock                                                                           |       | —     |       | (41        | )          |
| Payments of dividends                                                                                 |       | (18,001    | )          | (19,779    | )          |
| Changes in book overdrafts                                                                            |       | 3,019      |       | 97         |       |
| Net cash used in financing activities                                                                 |       | (5,571     | )          | (62,484    | )          |
| Net increase (decrease) in cash and cash equivalents                                                  |       | 7,083      |       | (30,347    | )          |
| Cash and cash equivalents, beginning of period                                                        |       | 27,259     |       | 67,245     |       |
| Cash and cash equivalents, end of period                                                              |       | $          | 34,342     |       | $          | 36,898 |   |
| Supplemental  disclosures of cash flow information:                                                   |       |       |       |       |       |
| Cash paid during the period for:                                                                      |       |       |       |       |       |
| Interest                                                                                              |       | $          | 1,439      |       | $          | 3,848 |   |
| Income taxes                                                                                          |       | 31,666     |       | 41,748     |       |
| Supplemental  schedule of non-cash investing and financing activity:                                  |       |       |       |       |       |
| Property and equipment purchases included in accounts  payable and accrued expenses                   |       | 885        |       | 460        |       |
| Restricted stock dividends payable                                                                    |       | 116        |       | 102        |       |
| Issuance of  restricted common stock                                                                  |       | 1,918      |       | 148        |       |

 

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.**                 Summaryof Significant Accounting Policies

**Basis ofPresentation**

The accompanying interimunaudited consolidated financial statements of Advance America, Cash AdvanceCenters, Inc. (“AACACI”) and its wholly owned subsidiaries (collectively,the “Company”) have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andthe rules and regulations of the U.S. Securities and Exchange Commission(the “SEC”). They do not include all information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements. Although management believes that the disclosures areadequate to prevent the information from being misleading, the interimunaudited consolidated financial statements should be read in conjunction withthe Company’s audited financial statements in the Company’s Annual Report onForm 10-K for the year ended December 31, 2006 filed with theSEC. In the opinion of the Company’s management, all adjustments, consisting ofnormal recurring accruals considered necessary for a fair statement of theCompany’s financial condition, have been included. The results of operationsfor the three and six months ended June 30, 2007 are not necessarilyindicative of the results that may be expected for future interim periods orthe entire year ended December 31, 2007.

**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 previously conductedbusiness as a 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 Companyacted as an agent are referred to as the lending banks. The Company no longeroperates under the agency business model.

**Revenue Recognition**

Revenues can be characterizedas fees and/or interest depending upon various state laws. Revenue isrecognized under the standard business model on a constant-yield basisratably over the term of each advance. Under the former agency business model,the Company recognized revenue, which consisted of marketing, processing andservicing fees from the lending banks, on a constant-yield basis ratablyover the term of each advance and installment loan.

**Concentration ofRisk**

For the three months endedJune 30, 2006 and 2007, total revenues within the Company’s five largeststates (measured by total revenues) accounted for approximately 48% and 46%,respectively, of the Company’s total revenues. For the six months endedJune 30, 2006 and 2007, total revenues within the Company’s five largeststates (measured by total revenues) accounted for approximately 47% and 46%,respectively, of the Company’s total revenues.

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**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 outstanding stock options. For the three and six monthsended June 30, 2006, options to purchase 1,280,000 shares of common stockwere not included in the computation of diluted earnings per share since theeffect of including them would be anti-dilutive. For the three and six monthsended June 30, 2007, options to purchase 340,000 shares and 1,290,000shares, respectively, of common stock were not included in the computation ofdiluted earnings per share since the effect of including them would beanti-dilutive.

Thefollowing table presents the reconciliation of the denominator used in thecalculation of basic and diluted earnings per share for the three and sixmonths ended June 30, 2006 and 2007 (in thousands):

| ** **                                                         | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                         | ** ** | **June 30,**                                        | ** ** | **June 30,**                                        | ** ** |
| ** **                                                         | ** ** | **    2006    ** | ** ** | **    2007    ** | ** ** | **2006** | ** ** | **2007** | ** ** |
| Reconciliation of  denominator:                                    |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Weighted average number of common shares outstanding—basic    |       |                                                     | 81,829     |                                                     |       |   | 79,122 |   |   | 81,828 |   | 79,120 |   |
| Effect of dilutive unvested restricted stock                       |       |                                                     | 92         |                                                     |       |   | 105 |   |   | 65 |   | 79 |   |
| Effect of dilutive outstanding stock options                       |       |                                                     | —     |                                                     |       |   | 59 |   |   | — |   | — |   |
| Weighted average  number of common shares outstanding—diluted |       |                                                     | 81,921     |                                                     |       |   | 79,286 |   |   | 81,893 |   | 79,199 |   |

 

**Recently IssuedAccounting Pronouncement**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Financial InterpretationNo. 48, Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with FASB Statement No. 109, Accounting for Income Taxes. FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. EffectiveJanuary 1, 2007, the Company adopted FIN 48. As a result of the adoptionof FIN 48, the Company recognized no adjustments in the liability forunrecognized income tax benefits. At the adoption date, the Company did nothave any unrecognized tax benefits and did not have any interest or penaltiesaccrued. The Company is subject to U.S. income taxes as well as various otherstate and local jurisdictions. With few exceptions, the Company is no longersubject to U.S. federal, state and local income tax examinations by taxauthorities for years before the tax year ended September 30, 2002.

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**Revision to theConsolidated Statement of Cash Flows**

The Company has revisedthe consolidated statement of cash flows for the six months ended June 30,2006 to properly present the changes in fees receivable, net as an operatingactivity. The effect of the revision is to decrease net cash provided byoperating activities by $6.0 million and to decrease net cash used in investingactivities by the same amount. The revision does not affect the net change incash and cash equivalents for the six months ended June 30, 2006 and has noeffect on the Company’s consolidated statements of income or the relatedearnings per share amount for that period.

**Reclassifications**

Certain previouslyreported amounts have been reclassified to conform to the current presentation.

**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 six months ended June 30,2006, the Company was compensated under MP&S Agreements with the lendingbanks for Arkansas and Pennsylvania. Operations in Arkansas and Pennsylvaniawere converted to state-based legislation during June 2006. The Companynow only operates pursuant to enabling state statutes under its standardbusiness model.

Although the Companymarketed, processed and serviced payday cash advances and installment loansmade by the lending banks, each lending bank was responsible for evaluatingeach of its customers’ applications and determining whether to approve thepayday cash advance or installment loan. The Company was not involved in thelending banks’ payday cash advance or installment loan approval process or thedetermination of their approval procedures or criteria. The payday cashadvances and installment loans were repayable solely to the lending banks andwere assets of the lending banks; accordingly, they were never included in theCompany’s balance sheet. The aggregate amount of the outstanding balances ofthe lending banks’ advances, installment loans and fees receivable serviced bythe Company was approximately $2.1 million at June 30, 2006. There were nosuch outstanding balances at June 30, 2007.

**3.**                 Advancesand Fees Receivable, Net

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

| ** **                                                          | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Advances  receivable                                                |       |                        | $          | 195,011                 |       |   | $ | 186,507 |   |
| Fees and interest  receivable                                       |       |                        | 35,300     |                    |       | 33,335 |   |
| Returned items  receivable                                          |       |                        | 43,793     |                    |       | 48,601 |   |
| Loans and fees  receivable of consolidated variable interest entity |       |                        | 37,701     |                    |       | 30,987 |   |
| Other                                                               |       |                        | 2,975      |                    |       | 4,043 |   |
| Allowance for  doubtful accounts                                    |       |                        | (57,396    | )                       |       | (56,312 | ) |
| Unearned revenues                                                   |       |                        | (19,659    | )                       |       | (20,419 | ) |
| Advances and fees  receivable, net                                  |       |                        | $          | 237,725                 |       |   | $ | 226,742 |   |

 

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

Changesin the allowance for doubtful accounts for the three and six months endedJune 30, 2006 and 2007 were as follows (in thousands):

| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                       | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Beginning balance                |       | $                                | 35,558     |                           | $          | 47,417 |   | $ | 45,585 |   | $ | 57,396 |   |
| Provision for  doubtful accounts |       | 28,421                           |       | 30,824                         |       | 37,887 |   | 46,639 |   |
| Charge-offs                      |       | (23,731                          | )          | (30,459                        | )          | (54,362 | ) | (68,942 | ) |
| Recoveries                       |       | 5,948                            |       | 8,530                          |       | 17,086 |   | 21,219 |   |
| Ending balance                   |       | $                                | 46,196     |                           | $          | 56,312 |   | $ | 46,196 |   | $ | 56,312 |   |

 

Changesin the accrual for excess bank losses for the three and six months endedJune 30, 2006 and 2007 were as follows (in thousands):

| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                        | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Beginning balance                 |       | $                                | 2,920      |                           | $          | — |   | $ | 1,373 |   | $ | — |   |
| Provision for  agency bank losses |       | (986                             | )          | —                         |       | 1,424 |   | — |   |
| Charge-offs                       |       | (1,353                           | )          | —                         |       | (3,517 | ) | — |   |
| Recoveries                        |       | 433                              |       | —                         |       | 1,734 |   | — |   |
| Ending balance                    |       | $                                | 1,014      |                           | $          | — |   | $ | 1,014 |   | $ | — |   |

 

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 six months ended June 30, 2006 and 2007 wereas follows (in thousands):

| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Beginning balance                                       |       | $                                | 38,478     |                           | $          | 47,417 |   | $ | 46,958 |   | $ | 57,396 |   |
| Provision for  doubtful accounts and agency bank losses |       | 27,435                           |       | 30,824                         |       | 39,311 |   | 46,639 |   |
| Charge-offs                                             |       | (25,084                          | )          | (30,459                        | )          | (57,879 | ) | (68,942 | ) |
| Recoveries                                              |       | 6,381                            |       | 8,530                          |       | 18,820 |   | 21,219 |   |
| Ending balance                                          |       | $                                | 47,210     |                           | $          | 56,312 |   | $ | 47,210 |   | $ | 56,312 |   |

 

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**5.**                 AccruedLiabilities

Accruedliabilities consisted of the following (in thousands):

| ** **                           | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Employee  compensation               |       |                        | $          | 12,038                  |       |   | $ | 11,089 |   |
| Workers’  compensation          |       |                        | 3,754      |                    |       | 3,711 |   |
| Health and dental  insurance         |       |                        | 3,495      |                    |       | 3,374 |   |
| Lease smoothing                      |       |                        | 2,924      |                    |       | 2,853 |   |
| Advertising                          |       |                        | 2,001      |                    |       | 932 |   |
| Construction in  progress            |       |                        | 1,563      |                    |       | 460 |   |
| Center closing  costs                |       |                        | 618        |                    |       | 322 |   |
| Accounting and  tax                  |       |                        | 661        |                    |       | 935 |   |
| Property, sales  and franchise taxes |       |                        | 622        |                    |       | 841 |   |
| Legal                                |       |                        | 885        |                    |       | 1,429 |   |
| Other                                |       |                        | 3,176      |                    |       | 3,276 |   |
| Total                                |       |                        | $          | 31,737                  |       |   | $ | 29,222 |   |

 

**6.**                 IncomeTaxes

Incometax expense for the three and six months ended June 30, 2006 and 2007consisted of the following (in thousands):

| ** ** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** ** | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Current    |       |                             |       |                           |       |   |   |   |   |
| Federal    |       | $                                | 8,589      |                           | $          | 12,438 |   | $ | 19,173 |   | $ | 23,553 |   |
| State      |       | 1,707                            |       | 2,428                          |       | 3,809 |   | 4,603 |   |
|       |       | 10,296                           |       | 14,866                         |       | 22,982 |   | 28,156 |   |
| Deferred   |       | (1,372                           | )          | (4,680                         | )          | 255 |   | (1,627 | ) |
| Total      |       | $                                | 8,924      |                           | $          | 10,186 |   | $ | 23,237 |   | $ | 26,529 |   |

 

Areconciliation of the statutory federal income tax rate and the Company’seffective income tax rate for the three and six months ended June 30, 2006and 2007 follows:

| ** **                 | ** ** | **Three Months Ended**             | ** ** | **Six Months Ended**               | ** ** |
|----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **June 30,**                            | ** ** | **June 30,**                            | ** ** |
| ** **                 | ** ** | **   2006   ** | ** ** | **   2007   ** | ** ** | **   2006   ** | ** ** | **   2007   ** | ** ** |
| Statutory income  tax rate |       |                                         | 35.0       | %                                            |       |   | 35.0 | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State income  taxes, net   |       |                                         | 4.1        |                                         |       |   | 4.4 |   |   |   | 4.3 |   |   |   | 4.4 |   |   |
| Other                      |       |                                         | 0.2        |                                         |       |   | 0.8 |   |   |   | 0.8 |   |   |   | 1.9 |   |   |
| Effective income tax  rate |       |                                         | 39.3       | %                                            |       |   | 40.2 | % |   |   | 40.1 | % |   |   | 41.3 | % |   |

 

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

| ** **                                    | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Deferred tax assets                           |       |                        |       |                    |       |   |   |
| Accrued expenses                              |       |                        | $          | 4,764                   |       |   | $ | 4,940 |   |
| Bad debts                                     |       |                        | 7,684      |                    |       | 6,125 |   |
| Net operating loss carryforwards              |       |                        | 260        |                    |       | 260 |   |
| State credit carryforwards                    |       |                        | 1,012      |                    |       | 1,012 |   |
| Depreciation                                  |       |                        | 224        |                    |       | 4,585 |   |
| Other                                         |       |                        | 646        |                    |       | 953 |   |
| Valuation allowance                           |       |                        | (260       | )                       |       | (260 | ) |
| Total deferred tax assets                     |       |                        | 14,330     |                    |       | 17,615 |   |
| Deferred tax liabilities                      |       |                        |       |                    |       |   |   |
| Goodwill                                      |       |                        | (13,609    | )                       |       | (15,043 | ) |
| Prepaid expenses                              |       |                        | (1,822     | )                       |       | (2,046 | ) |
| Book versus tax basis difference for aircraft |       |                        | (665       | )                       |       | (665 | ) |
| Total deferred tax liabilities                |       |                        | (16,096    | )                       |       | (17,754 | ) |
| Net deferred tax  liability                   |       |                        | $          | (1,766                  | )          |   | $ | (139 | ) |

 

As of December 31, 2006 and June 30, 2007,the Company had net operating loss carryforwards for state income tax purposestotaling approximately $0.3 million, which will begin to expire in 2014. A valuationallowance of approximately $0.3 million has been recorded because managementbelieves it is more likely than not that the entire deferred tax asset relatedto state net operating loss carryforwards will not be realized. As ofDecember 31, 2006 and June 30 2007, the Company had creditcarryforwards for state income tax purposes totaling approximately $1.0million, which will begin to expire in 2010.

Effective January 1,2007, the Company adopted FIN 48. As a result of the adoption of FIN 48, theCompany recognized no adjustments in the liability for unrecognized income taxbenefits. At the adoption date, the Company did not have any unrecognized taxbenefits and did not have any interest or penalties accrued.

**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. 

*Brenda McGinnis v. Advance America Servicing ofArkansas, Inc. et al.*

On February 27, 2007, Brenda McGinnis filed aputative class action in the Circuit Court of Clark County, Arkansas allegingviolations of the Arkansas usury law, the Arkansas Deceptive Trade PracticesAct and a 2001 class action settlement agreement entered into by the Company’sprior subsidiary in Arkansas. The complaint alleges that the Company’s currentsubsidiary made usurious loans under the Arkansas Check Cashers Act beginningon May 15, 2001. The complaint seeks compensatory damages in amount equalto twice the interest paid on the loans, a declaration that the contracts arevoid, enforcement of the 2001 class action settlement agreement, attorneys’fees and costs. Ms. McGinnis’ claims are subject to an arbitrationagreement and the Company intends to seek to compel arbitration of her claims.

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The Company filed acomplaint in the United States District Court for the Western District ofArkansas seeking to compel McGinnis to arbitrate her claims and stay the aboveidentified state court action. The United States District Court dismissed theCompany’s complaint based upon lack of subject matter jurisdiction. The Companyfiled an appeal with the United States Court of Appeals for the 8th Circuit in July 2007.

*Bettsand Reuter v. McKenzie Check Advance of Florida, 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 andMs. Reuter in February 2001 in the Circuit Court of Palm Beach Countyand alleges that McKenzie, by and through the actions of certain officers,directors and employees, engaged in unfair and deceptive trade practices and violatedFlorida’s criminal usury statute, the Florida Consumer Finance Act and theFlorida Racketeer Influenced and Corrupt Organizations Act. The suit seeksunspecified damages, and McKenzie or the other defendants could be required torefund fees and/or interest collected, refund the principal amount of paydaycash advances, pay multiple 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. Reuter’s claimswere subject to an arbitration agreement contained in the contract; defendants’motion to compel arbitration was granted by the state trial court, upheld bythe state appeals court and affirmed by the Florida Supreme Court declining toaccept certiorari. Thus, the order to compel arbitration is final as toMs. Reuter. The arbitration and litigation will likely proceed inparallel.

The Circuit Court recentlypermitted Tiffany Kelly to join as a plaintiff and the Company is seeking tocompel arbitration of her claims. Oral argument for class certification hasbeen postponed.

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

A second Florida lawsuitwas filed in August 2004 in the Circuit Court of Palm Beach County by formercustomers 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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*PennsylvaniaDepartment of Banking v. NCAS of Delaware, LLC*

*In September 2006, thePennsylvania Department of Banking filed a lawsuit in the Commonwealth Court ofPennsylvania alleging that the Company’s Delaware subsidiary is providing linesof credit to borrowers in Pennsylvania without a license required underPennsylvania law and with interest and fees in excess of the amounts permittedby Pennsylvania law. The Pennsylvania Department of Banking has filed a motionfor judgment on the pleadings for declaratory relief and permanent injunction,seeking: (1) a declaration as a matter of law that the Company’s Delawaresubsidiary is violating Pennsylvania lending laws and (2) a permanentinjunction enjoining the Delaware subsidiary from operating in violation of Pennsylvanialaw and collecting monthly participation fees. In July 2007, the courtdetermined that certain aspects of the Company’s Choice Line of Credit requiredthe Company to be licensed under the Consumer Discount Company Act (“CDCA”).Accordingly, the court permanently enjoined the Company from continuing itslending activities in Pennsylvania for so long as the CDCA violations continuedand from collecting monthly participation fees. The Company filed a notice ofappeal with the Pennsylvania Supreme Court and filed an application for staywith the Commonwealth Court seeking to suspend the effectiveness of its rulingduring appeal.*

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

*In August 2007, Sharlene Johnson,Helena Love and Bonny Bleacher filed a putative class action lawsuit in theUnited States District Court, Eastern District of Pennsylvania against the Companyand two of its subsidiaries alleging that they provided lines of credit toborrowers in Pennsylvania without a license required under Pennsylvania law andwith interest and fees in excess of the amounts permitted by Pennsylvania law.The complaint seeks, among other things, a declaratory judgment that themonthly participation fee charged to customers with a line of credit isillegal, an injunction prohibiting the collection of the monthly participationfee and damages equal to three times the monthly participation fees paid bycustomers since June 2006. The Company intends to seek to compel each of theplaintiffs to arbitrate their respective claims.*

*Raymond King andSandra Coates v. Advance America, Cash Advance Centers of Pennsylvania, LLC*

In January 2007,Raymond King and Sandra Coates, who were customers of BankWest, the lendingbank for which the Company marketed, processed and serviced payday cashadvances in Pennsylvania, filed a putative class action lawsuit in the UnitedStates District Court, Eastern District of Pennsylvania alleging various causesof action, including that the Pennsylvania subsidiary made illegal payday loansin Pennsylvania in violation of Pennsylvania’s usury law, the PennsylvaniaConsumer Discount Company Act, the Pennsylvania Unfair Trade Practices andConsumer Protection Law, the Pennsylvania Fair Credit Extension Uniformity Actand the Pennsylvania Credit Services Act. The complaint alleges that BankWestwas not the “true lender” and that the Company was the “lender in fact.” Thecomplaint seeks compensatory damages, attorneys’ fees, punitive damages and thetrebling of any compensatory damages. The Company filed a motion to compelarbitration in March 2007 and the court permitted a limited amount ofdiscovery before it rules on the motion.

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

In August 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 Georgiasubsidiary made illegal payday loans in Georgia in violation of Georgia’s usurylaw, the Georgia Industrial Loan Act and Georgia’s Racketeer Influenced andCorrupt Organizations Act. The complaint alleges that BankWest was not the“true lender” and that the Company was the “de facto” lender. The complaintseeks compensatory damages, attorneys’ fees, punitive damages and the treblingof any compensatory damages. The Company 

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and theother defendants denied the plaintiffs’ claims and asserted that all of theclaims are subject to mandatory and binding individual arbitration pursuant toarbitration agreements signed by each plaintiff.

In April 2006, theState Court of Cobb County entered a consent order, which was jointly submittedby the parties, whereby the parties agreed and consented to arbitration of allclaims raised by plaintiffs in this action and to stay all proceedings pendingthe outcome of arbitration on plaintiffs’ claims. The plaintiffs filed a demandfor arbitration seeking to arbitrate their claims in a class action orrepresentative status. In March 2007, the appointed arbitrator issued an interimorder holding that payday loans are not subject to Georgia law, that federalpreemption applies and that the mere existence of a contractual prohibition onclass actions does not violate Georgia public policy. However, the arbitratordid not believe there was sufficient evidence to determine if the arbitrationagreements were procedurally or substantively unconscionable and orderedadditional discovery on that issue. Both parties have filed pleadings seekingreconsideration of the interim order. The Company intends to continue to denyplaintiffs’ claims and resist plaintiffs’ efforts to conduct class arbitration.

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

The Company’s Georgiasubsidiary is involved in another case in Georgia that, although not a classaction lawsuit, contains essentially the same allegations as the King andStrong case. In March 2003, Angela Glasscock, a customer of BankWest,filed an adversary proceeding in the U.S. Bankruptcy Court for the Southern Districtof Georgia alleging that the Georgia subsidiary was making payday cash advancesin Georgia in violation of the Georgia Industrial Loan Act. BankWest intervenedinto the case and subsequently both the subsidiary and BankWest filed a motionfor summary judgment, which was granted in September 2005. In its holding,the court ruled that BankWest was the “true lender.” In April 2007, theUnited States District Court overturned the U.S. Bankruptcy Court’s grant ofsummary judgment to the Company. Although the amount in controversy in the caseis only $350, the underlying claims of Ms. Glasscock, if validated by theappellate court, could serve as a basis for future claims against the Company.

*Cynthia Williams v.Advance America, Cash Advance Centers of Missouri, Inc.*

On August 6, 2007, CynthiaWilliams filed a class action lawsuit against the Company’s Missouri subsidiaryin the Circuit Court of St. Louis County alleging violations of certainMissouri loan laws and the Missouri Merchandising Practices Act.  The complaint alleges the Company’ssubsidiary in Missouri exceeded the maximum lawful interest rate, illegallylimited the number of loan renewals, and failed to adequately reduce theprincipal amount of the loan when a customer obtained a loan renewal.  The complaint seeks compensatory and punitivedamages, attorneys fees, interest, costs and a constructive trust and equitablelien on all money paid by the class.  TheCompany has not yet been served with the lawsuit.

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

In July 2004, JohnKucan, 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 the relationshipbetween the Company’s North Carolina subsidiary and Republic was a “rent acharter” relationship and therefore Republic was not the “true lender” on thepayday cash advances it offered. The lawsuit also claims that the payday cashadvances were made, administered and collected in violation of numerous NorthCarolina consumer protection laws. The lawsuit seeks an injunction barring thesubsidiary from continuing to do business in North Carolina, the return of theprincipal amount of the payday cash advances made to the plaintiff class sinceAugust 2001, the return of any interest or fees associated with thoseadvances, treble damages, attorneys’ fees and other unspecified costs. InDecember 2005, the court issued an order granting defendants’ motion forarbitration, 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 

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NorthCarolina cases currently before the Court of Appeals filed a petition, whichthe Company has opposed, for discretionary review and consolidation of thecases. The Court of Appeals heard oral argument on the consolidated cases inJanuary 2007. The Company is awaiting a ruling from the Court of Appeals.

*North CarolinaCommissioner of Banks Order*

In August 2004, theNorth Carolina Attorney General’s Office, in conjunction with the Commissionerof Banks for North Carolina, issued a subpoena to the Company to producedocuments, respond to written questions and have a corporate representativeappear for a deposition regarding the relationship between the Company’s NorthCarolina subsidiary and the lending bank in North Carolina, Republic, todetermine whether the Company’s 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. InDecember 2005, at the conclusion of the contested case, the Commissionerof Banks ordered that the Company’s North Carolina subsidiary immediately ceaseand desist operating. In accordance with the Commissioner of Banks’ order, theCompany’s North Carolina subsidiary ceased all business operations onDecember 22, 2005. The full North Carolina State Banking Commission hassince affirmed the Commissioner of Banks’ order and the Company filed an appealwith the North Carolina Superior Court. The appeal was dismissed and theCompany has appealed the dismissal to the North Carolina Court of Appeals. Theparties have submitted briefs to the North Carolina Court of Appeals and theCourt scheduled oral arguments for late August 2007.

*NewMexico Proposed Rules and Regulations Governing the Extension of CreditFor Small Loans*

In February 2006, theCompany joined four other payday lenders in a lawsuit against the New MexicoAttorney General requesting immediate injunctive relief from the enforcement ofthe Attorney General’s Proposed Rules and Regulations Governing theExtension of Credit for Small Loans, which would have severely limited thepayday loan industry in New Mexico. The parties mutually agreed to stay anyfurther proceedings pending the adoption of new proposed regulations publishedby the Financial Institutions Division of the New Mexico Regulation andLicensing Department (“FID”) in June 2006. In August 2006, in alawsuit filed by several other payday loan companies, the second judicial districtcourt of New Mexico issued a preliminary injunction enjoining the enforcementof the FID proposed regulations. In response to the new payday lendinglegislation that becomes effective November 1, 2007, the FID voluntarilywithdrew its proposed regulations. Following the withdrawal of the FID’sproposed regulations, the Company and the four other payday lenders voluntarilydismissed their lawsuit against the New Mexico Attorney General.

*OregonLegislation Changes*

In July 2007, newlegislation went into effect in Oregon that severely restricts payday lending andtitle lending. Litigation challenging the constitutionality of the titlelending bill has been filed by a participant in that industry. The Company maysupport a similar challenge of the payday lending bill. The Company iscurrently operating in Oregon under the new legislation and is assessing theeconomic viability of continuing its operations in Oregon. 

*Other Matters*

The Company is also involvedin other litigation and administrative proceedings. This litigation includescontractual disputes, employee claims for workers’ compensation, wrongfultermination, harassment, discrimination, payment of wages due and customerclaims relating to collection practices and violations of state and/or federalconsumer protections laws.

The amount of lossesand/or the probability of an unfavorable outcome, if any, cannot be reasonablyestimated for the above legal proceedings. Accordingly, no accrual has beenrecorded for any of the above matters as of June 30, 2007.

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**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 outstanding common stock. OnAugust 16, 2006, the Company announced that its Board of Directors hadapproved an extension of the Company’s stock repurchase program authorizing theCompany to repurchase up to $100.0 million of its outstanding common stock onand after that date. The Company did not repurchase any shares pursuant to itsstock repurchase program during the six months ended June 30, 2006 and2007. However, during the six months ended June 30, 2007, 2,826 shares ofcommon stock were surrendered by employees to satisfy their tax obligationswith respect to the vesting of shares of restricted stock awarded pursuant tothe Company’s 2004 Omnibus Stock Plan.

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 on the grant date andrecognizes such cost in the financial statements on a straight-line basis overthe requisite service period of the awards, which is generally the vestingperiod.

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. Additionally,during 2005, the Company granted stock options and shares of restricted stockto its President and Chief Executive Officer under a Nonqualified Stock OptionAgreement and a Restricted Stock Agreement, respectively. Both of theseagreements are separate from the Company’s 2004 Omnibus Stock Plan.

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

The grant date fairvalue of all shares of restricted stock was based on the market value of theCompany’s common stock on the dates of grant. These amounts are being expensedratably over each award’s respective vesting period.

All stock optionswere granted with an exercise price equal to the market value of the Company’scommon stock on the dates of grant. The Company estimated the fair value ofstock options on the date of grant using the Black-Scholes option pricing modelusing the following assumptions:

·       *Expected term*—The expected term representsthe period during which the Company’s stock options are expected to beoutstanding. The Company based its determination of the expected term by givingconsideration to the contractual terms of the stock options awards, vestingschedules, expectations of future employee behavior and published academicresearch regarding exercise behavior.

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

·       *Expected dividends*—The Company used itsexpected dividend yield as of each stock option grant date as its expecteddividends over the expected term of the options.

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

Toestimate each stock option’s weighted-average fair value on the grant dates,the following weighted-average assumptions were used in the Black-Scholesoption pricing model for all stock options granted during the six months ended June 30,2006 and 2007:

| ** **                  | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Expected term  (years)      |       | 4.41     |       | 4.41     |       |
| Expected  volatility        |       | 47       | %          | 46       | %          |
| Expected  dividends (yield) |       | 3.6      | %          | 3.0      | %          |
| Risk-free rate              |       | 4.63     | %          | 4.42     | %          |

 

The weighted-average grant-date fair values of optionsgranted during the six months ended June 30, 2006 and 2007 were $4.85 peroption and $4.51 per option, respectively, and are being expensed ratably overeach award’s respective vesting period.

Thefollowing table provides certain information with respect to stock optionsoutstanding and exercisable at June 30, 2007 under the Company’sstock-based compensation plans:

| ** **                                           | ** ** | **Outstanding** | ** **     | **Exercisable** | ** ** |
|------------------------------------------------------|------------|-----------------|----------------|-----------------|------------|
| Number of stock  options                             |       | 1,290,000       |           | 195,417         |       |
| Range of exercise  prices                            |       | $               | 12.11 - $14.70 |            | $          | 12.11 - $14.70 |   |
| Weighted-average  exercise price                     |       | $               | 12.61          |            | $          | 12.90 |   |
| Aggregate  intrinsic value (in thousands)            |       | $               | 6,614          |            | $          | 945 |   |
| Weighted-average  remaining contractual term (years) |       | 8.3             |           | 8.3             |       |

 

Asummary of the Company’s authorized and available shares, activity for the sixmonths ended June 30, 2007, and the weighted average stock option exerciseprices under its stock-based compensation plans follows:

| ** **                 | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|----------------------------|------------|----------------|------------|-----------------|------------|-------------|------------|--------------------|------------|--------------|------------|
| ** **                 | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Average**  | ** ** |
| ** **                 | ** ** | ** **     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **         | ** ** | **Stock**    | ** ** |
| ** **                 | ** ** | ** **     | ** ** | **Outstanding** | ** ** | ** **  | ** ** | **Option**         | ** ** |
| ** **                 | ** ** | ** **     | ** ** | **Restricted**  | ** ** | **Stock**   | ** ** | **Available**      | ** ** | **Exercise** | ** ** |
| ** **                 | ** ** | **Authorized** | ** ** | **Stock**       | ** ** | **Options** | ** ** | **For Grant** | ** ** | **Price**    | ** ** |
| At  December 31, 2006 |       | 5,200,000      |       |            | 589,044    |        |       | 1,280,000          |       | 3,330,956    |       |   | $ | 12.61 |   |   |
| Authorized                 |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Granted                    |       | —         |       |            | 10,000     |        |       | 10,000             |       | (20,000      | )          |   | 13.24 |   |   |
| Exercised                  |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| Canceled                   |       | —         |       |            | —     |        |       | —             |       | —       |       |   | — |   |   |
| At June 30, 2007      |       | 5,200,000      |       |            | 599,044    |        |       | 1,290,000          |       | 3,310,956    |       |   | $ | 12.61 |   |   |

 

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Asummary of the Company’s restricted stock activity for the six months ended June 30,2007 and the weighted average grant-date fair values follows:

| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Nonvested at  December 31, 2006 |       | 420,800    |       |                                   | $          | 12.99 |   |   |
| Granted                              |       | 10,000     |       |                                   | 14.76      |   |   |
| Vested                               |       | (8,444     | )          |                                   | 14.65      |   |   |
| Forfeited                            |       | —     |       |                                   | —     |   |   |
| Nonvested at  June 30, 2007     |       | 422,356    |       |                                   | $          | 13.00 |   |   |

 

No restricted shares vested during the six monthsended June 30, 2006. The total grant date fair value of restricted sharesvested during the six months ended June 30, 2007 was approximately $0.1million and the total market value of these shares on the dates vested wasapproximately $0.1 million.

Asummary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three and six months ended June 30, 2006 and 2007 follows (inthousands):

| ** **                              | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                                        | ** ** | **June 30,**                                        | ** ** |
| ** **                              | ** ** | **    2006    ** | ** ** | **    2007    ** | ** ** | **2006** | ** ** | **2007** | ** ** |
| Restricted stock                        |       |                                                     | $          | 396                                                      |       |   |   | $ | 392 |   |   | $ | 759 |   | $ | 784 |   |
| Stock options                           |       |                                                     | 248        |                                                     |       |   | 246 |   |   | 467 |   | 489 |   |
| Total stock-based  compensation expense |       |                                                     | $          | 644                                                      |       |   |   | $ | 638 |   |   | $ | 1,226 |   | $ | 1,273 |   |

 

As of June 30, 2007,the total compensation cost not yet recognized related to nonvested stockawards under the Company’s plans is approximately $9.3 million. The weightedaverage period over which this expense is expected to be recognized isapproximately 5.4 years.

**9.**                 Transactions withVariable InterestEntity

The Company conductsbusiness in Texas through a wholly owned subsidiary registered as a CreditServices Organization (“CSO”) under Texas law. In connection with operating asa CSO, the Company is a party to 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 determinedthat the lender is a variable interest entity (“VIE”) under FinancialAccounting Standards Board Financial Interpretation No. 46 (Revised) (“FIN46(R)”). The Company has neither an equity interest nor voting rights in thelender and has no input into the management of the lender. However, the Companyhas determined that it is the primary beneficiary of the VIE because theCompany has committed to reimburse the lender for the full amount of the loansand all related fees that are not paid by the customers for all loans that areprocessed under the CSO Agreement. As a result, the Company has consolidatedthe lender into the Company’s financial statements.

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Theimpact of the consolidation of this VIE on the Company’s June 30, 2006 and2007 consolidated balance sheets was to increase (decrease) the followingbalance sheet accounts as follows (in thousands):

| ** **                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash and cash  equivalents                            |       | $        | 5,267      |     | $          | 8 |   |
| Advances and fees  receivable, net                    |       | 30,543   |       | 30,885   |       |
| Accounts payable                                      |       | —   |       | 5,762    |       |
| Accrued  liabilities                                  |       | —   |       | (3,871   | )          |
| Income taxes  payable                                 |       | —   |       | 384      |       |
| Non-controlling interest  in variable interest entity |       | 35,810   |       | 28,618   |       |
|                                                       |            |          |            |          |            |  |  |

 

Theimpact of the consolidation of this VIE on the Company’s consolidatedstatements of income for the three and six months ended June 30, 2006 and2007 was to increase the following income statement accounts as follows (inthousands):

| ** **                                       | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                                        | ** ** | **June 30,**                                        | ** ** |
| ** **                                       | ** ** | **    2006    ** | ** ** | **    2007    ** | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net revenues                                     |       |                                                     | $          | 1,218                                                    |       |   |   | $ | 1,416 |   |   | $ | 1,913 |   | $ | 2,777 |   |
| Other center  expenses                           |       |                                                     | 330        |                                                     |       |   | 228 |   |   | 540 |   | 454 |   |
| Interest expense                                 |       |                                                     | —     |                                                     |       |   | 656 |   |   | — |   | 1,379 |   |
| Income tax  expense                              |       |                                                     | —     |                                                     |       |   | 215 |   |   | — |   | 384 |   |
| Income of consolidated  variable interest entity |       |                                                     | 888        |                                                     |       |   | 317 |   |   | 1,373 |   | 560 |   |
|                                                  |            |                                                          |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**10.**          RelatedParty Transactions

Included in center expenses are expenses for centerleases with related parties of approximately $9,000 and $13,000 for the threemonths ended June 30, 2006 and 2007, respectively, and approximately$27,000 and $23,000 for the six months ended June 30, 2006 and 2007,respectively. Included in general and administrative expenses are expenses withrelated parties, relating primarily to aircraft operating expenses andoperating leases for office and warehouse space, of approximately $161,000 and$154,000 for the three months ended June 30, 2006 and 2007, respectively,and approximately $324,000 and $153,000 for the six months ended June 30,2006 and 2007, respectively.

In addition, under atime-share arrangement, the Company’s Chairman and Vice Chairman have used theCompany’s aircraft for private purposes in exchange for the Company’s use of anidentical aircraft owned by the Company’s Chairman and formerly owned, in part,by the Company’s Vice Chairman. Included in accrued liabilities at June 30,2007 is a $15,000 liability related to this arrangement.

**11.**          SubsequentEvents

On July 25, 2007, the Company announced that itsBoard of Directors declared a cash dividend of $0.125 per share of commonstock, payable on September 7, 2007 to shareholders of record on August 28,2007.

On July 31, 2007, the Company announced that anunfavorable ruling was issued by the Commonwealth Court of Pennsylvaniadirecting the Company’s subsidiary operating in Pennsylvania to immediatelysuspend its operations that the court found to violate Pennsylvania law andcease collecting monthly participation fees. The Company intends to appeal theruling and ask the court to stay implementation of its order until the appealhas been decided. The Company has no current plans to shut down its centers inPennsylvania and is actively exploring other options and product lines formeeting customer demand in the state.

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Thefollowing is a summary of financial information for the Company’s operations inPennsylvania for the three and six months ended June 30, 2006 and 2007 (inthousands):

| ** **                  | ** ** | **Three Months Ended**                         | ** ** | **Six Months Ended**                           | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                                        | ** ** | **June 30,**                                        | ** ** |
| ** **                  | ** ** | **    2006    ** | ** ** | **    2007    ** | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net revenues                |       |                                                     | $          | 1,770                                                    |       |   |   | $ | 8,917 |   |   | $ | 8,670 |   | $ | 17,775 |   |
| Total center  expenses      |       |                                                     | 3,301      |                                                     |       |   | 3,450 |   |   | 7,313 |   | 7,282 |   |
| Center gross  profit/(loss) |       |                                                     | $          | (1,531                                                   | )          |   |   | $ | 5,467 |   |   | $ | 1,357 |   | $ | 10,493 |   |

 

The Company estimates that its net revenues will bereduced by approximately $3.0 million for each month that the Company is not ableto operate in Pennsylvania. Furthermore, total center expenses averageapproximately $1.2 million per month in Pennsylvania. Some of these expenseswill continue to be incurred while the Company appeals the court’s ruling andexplores alternative methods for conducting business. The Company estimatesthat severance, lease cancellation, write-down of the undepreciated costs offixed assets and the cost to vacate the premises will approximate $2.3 millionif it becomes necessary to shut down operations in Pennsylvania. The Companydoes not believe that the changes in its Pennsylvania operations as a result ofthe court’s ruling will result in any impairment of goodwill.

On August 1, 2007, Sharlene Johnson, Helena Love andBonny Bleacher filed a putative class action lawsuit in the United StatesDistrict Court, Eastern District of Pennsylvania against the Company and two ofits subsidiaries.  The complaint seeks adeclaratory judgment that the monthly participation fee charged to customerswith a line of credit is illegal under Pennsylvania law, an injunctionprohibiting collection of the monthly participation fee and damages equal tothree times the monthly participation fees paid by customers since June2006.  The Company intends to seek tocompel plaintiffs to arbitrate these claims.

On August 6, 2007, Cynthia Williams filed a classaction lawsuit against the Company’s Missouri subsidiary in the Circuit Courtof St. Louis County alleging violations of certain Missouri loan laws and theMissouri Merchandising Practices Act. The complaint alleges the Company’ssubsidiary in Missouri exceeded the maximum lawful interest rate, illegallylimited the number of loan renewals, and failed to adequately reduce theprincipal amount of the loan when a customer obtained a loan renewal. Thecomplaint seeks compensatory and punitive damages, attorneys fees, interest,costs and a constructive trust and equitable lien on all money paid by theclass. The Company has not yet been served with the lawsuit.

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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 I. Item1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2006 and “Forward-Looking Statements” for discussionsof the uncertainties, risks and assumptions associated with these statements.*

**Overview**

Headquartered in Spartanburg, South Carolina, we arethe largest provider of payday cash advance services in the United States asmeasured by the number of centers operated. Our centers provide short-term,unsecured cash advances that are typically due on the customers’ next payday.As of June 30, 2007, we operated 2,908 centers in 37 states in the UnitedStates and one center in the United Kingdom.

Historically, we have conducted our business in moststates under the authority of a variety of enabling state statutes including paydayadvance, 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 a marketing,processing and servicing agent for FDIC supervised, state-chartered banksthat made payday cash advances and installment loans to their customerspursuant to the authority of the laws of the states in which they were locatedand federal interstate banking laws, regulations and guidelines (which we referto as the agency business model). We refer to the banks for which we acted asan agent under the agency business model as lending banks. We currently operateall of our centers under the standard business model. During 2006, we beganoffering the Advance America Choice-Line of Credit to customers in Pennsylvaniaand installment loans to customers in Illinois.

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 a payday cashadvance. Fees and interest for the line of credit product consist of a monthlyservice fee for the line of credit plus interest on the average outstandingbalance. Fees and interest for installment loans are larger relative to thesize of the advance because of the longer term of this product.

Additional fees that we may collect include fees forreturned checks and late fees. The returned check fee varies by state andranges up to $30. We charge a customer this fee if a deposited check isreturned due to non-sufficient funds (“NSF”) in the customer’s account or otherreasons. In three states, we are also permitted to charge a late fee, theamount of which varies by state. In Texas, where we provide credit services asa Credit Services Organization (“CSO”), the third-party lender charges a latefee on its loan in accordance with state law.

Although there are numerous differences under thevarious enabling regulations, the application and approval process,underwriting criteria, delivery method, repayment and collection practices,customer and market characteristics and underlying economics are substantiallysimilar under the standard and agency business models.

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 

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of ouragreement with this lender, we process customer applications and arecontractually obligated for all losses.

***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:

·       completesan application and presents the required documentation: usually proof ofidentification, a pay stub or other evidence of income and a bank statement;

·       entersinto an agreement governing the terms of the advance, including the customer’sagreement to repay the advance in full on or before a specified due date(usually the customer’s next payday), and our agreement to defer thepresentment or deposit of the customer’s check until the due date of theadvance;

·       writesa personal check to cover the amount of the advance plus charges for applicablefees and/or interest; and

·       makesan appointment to return on the specified due date of the advance to repay theadvance plus the applicable charges and to reclaim his or her check.

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. We also may permit a customer to enter into an extended paymentplan if the customer is unable to meet his or her current repayment obligation.

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 31,2006, approximately 5.7% of total customer checks were deposited. Additionalcollection efforts are not required if the customer’s deposited check clears.For the year ended December 31, 2006, approximately 22% 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 thecustomer’s account or because of a closed account or a stop-payment order,additional collection efforts begin. These additional collection efforts arecarried out by center employees and typically include contacting the customerby telephone or in person to obtain payment or a promise to pay and attemptingto exchange the customer’s check for a cashier’s check, if funds become available.We also send out a series of collection letters, which are automaticallydistributed from a central location based on a set of pre-determined criteria.

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***Selected Operating Data***

Thefollowing table presents key operating data for our business:

| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                           | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Number of centers open  at end of period                                                             |       | 2,670                            |       | 2,909                          |       | 2,670 |   | 2,909 |   |
| Number of customers  served—all credit products (thousands)                                     |       | 830                              |       | 881                            |       | 1,051 |   | 1,097 |   |
| Number of payday cash  advances originated (thousands)                                               |       | 2,841                            |       | 2,936                          |       | 5,406 |   | 5,640 |   |
| Aggregate principal  amount of payday cash advances originated (thousands)                           |       | $                                | 997,890    |                           | $          | 1,045,306 |   | $ | 1,897,323 |   | $ | 2,013,534 |   |
| Average amount of payday  cash advance originated                                                    |       | $                                | 351        |                           | $          | 356 |   | $ | 351 |   | $ | 357 |   |
| Average charge to  customers for providing and processing a payday cash advance                 |       | $                                | 55         |                           | $          | 56 |   | $ | 56 |   | $ | 55 |   |
| Average duration of a  payday cash advance (days)                                                    |       | 16.1                             |       | 16.4                           |       | 16.0 |   | 16.4 |   |
| Average number of lines  of credit outstanding  during the period (thousands)                        |       | 4                                |       | 24                             |       | 4 |   | 24 |   |
| Average amount of  aggregate principal on lines of  credit outstanding during the period (thousands) |       | $                                | 1,977      |                           | $          | 10,185 |   | $ | 1,977 |   | $ | 10,193 |   |
| Average principal amount  on lines of credit outstanding during the period                      |       | $                                | 466        |                           | $          | 433 |   | $ | 466 |   | $ | 428 |   |
| Number of installment  loans originated (thousands)                                                  |       | —                           |       | 9                              |       | 17 |   | 15 |   |
| Aggregate principal  amount of installment loans originated (thousands)                              |       | $                                | 188        |                           | $          | 3,812 |   | $ | 8,865 |   | $ | 6,157 |   |
| Average amount of  installment loan originated                                                       |       | $                                | 487        |                           | $          | 410 |   | $ | 518 |   | $ | 412 |   |
| Average charge to customers for providing and  processing an installment loan(1)                |       | $                                | 320        |                           | $          | 562 |   | $ | 357 |   | $ | 565 |   |

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(1)          Forthe three and six months ended June 30, 2006, the installment loanactivity reflects only loans originated by us as an agent for the lending banksin Pennsylvania and Arkansas. Those loans contained no discounts for earlyrepayment, resulting in a readily determinable average fee charged to thecustomer. For the three and six months ended June 30, 2007, the installmentloan activity reflects loans originated directly by us. These loans have astated term of five months but with certain rebate provisions for eachrepayment. The average fee for these loans is estimated based on historicalaverages regarding repayments.

***Revenues and Expenses***

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 lendingbanks under the former agency business model. Ourtotal revenues for the three and six months ended June 30, 2006 and 2007consisted of (dollars in millions):

| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | **Dollars**                      | ** ** | **%**                          | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest charged to customers    |       | $                                | 152.6      |                           | 97.9       |   | $ | 173.9 |   | 100.0 |   | $ | 295.7 |   | 96.0 |   | $ | 342.0 |   | 100.0 |   |
| Marketing, processing and servicing  fees |       | 3.3                              |       | 2.1                            |       | — |   | — |   | 12.4 |   | 4.0 |   | — |   | — |   |
| Total revenues                            |       | $                                | 155.9      |                           | 100.0      |   | $ | 173.9 |   | 100.0 |   | $ | 308.1 |   | 100.0 |   | $ | 342.0 |   | 100.0 |   |

 

25

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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.

***Conversion ofOperations in Michigan***

Because of the adoption ofa new affirmative payday lending law in Michigan, in June 2006, we beganoffering payday cash advances in Michigan where we previously offered checkcashing services. Due to the limits on fees and charges included in that law,we expect that our revenues in Michigan will be lower, at least initially, thanour historical experience under the standard business model.

***Conversion ofOperations in Pennsylvania and Arkansas***

In February 2006, the FDIC instructed the lendingbanks, including those for which we still acted as a marketing, processing andservicing agent in Pennsylvania and Arkansas, to discontinue offering advancesand installment loans if they could not adequately address the FDIC’s continuedconcerns. In response, the lending banks in Pennsylvania and Arkansas stoppedoriginating payday cash advances and installment loans.

As a result of the lending bank for Pennsylvaniaceasing to originate advances and loans, our revenues and center gross profitsfrom Pennsylvania significantly decreased during the second quarter of 2006.Through August 28, 2006, we continued to service all of this lendingbank’s advances and installment loans that were outstanding as ofMarch 27, 2006.****InJune 2006, we began offering the Advance America Choice-Line of Credit(“Choice-Line”) in Pennsylvania. The Choice-Line product allows customersaccess to up to $500 in credit for a monthly participation fee plus interest onoutstanding loan balances.

Thefollowing is a summary of financial information for our operations inPennsylvania for the three and six months ended June 30, 2006 and 2007 (inthousands):

| ** **                  | ** ** | **Three Months Ended**             | ** ** | **Six Months Ended**               | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                            | ** ** | **June 30,**                            | ** ** |
| ** **                  | ** ** | **   2006   ** | ** ** | **   2007   ** | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net revenues                |       | $                                            | 1,770      |                                         |       | $ | 8,917 |   |   | $ | 8,670 |   | $ | 17,775 |   |
| Total center  expenses      |       | 3,301                                        |       |                                         | 3,450      |   |   | 7,313 |   | 7,282 |   |
| Center gross  profit/(loss) |       | $                                            | (1,531     | )                                            |       | $ | 5,467 |   |   | $ | 1,357 |   | $ | 10,493 |   |

 

In September 2006, the Pennsylvania Department ofBanking filed a lawsuit in the Commonwealth Court of Pennsylvania alleging thatwe are providing lines of credit to borrowers in Pennsylvania without a licenserequired under Pennsylvania law and with interest and fees in excess of theamounts permitted by Pennsylvania law. On July 31, 2007, we announced thatan unfavorable ruling was issued by the Commonwealth Court of Pennsylvaniadirecting our subsidiary operating in Pennsylvania to immediately suspend itsoperations that the court found to violate Pennsylvania law and ceasecollecting monthly participation fees. See “Item 1. Financial Statements—Notesto Interim Unaudited Consolidated Financial Statements—Note 7. Commitments andContingencies.” We plan to appeal the ruling and ask the court to stayimplementation of its order until the appeal has been decided. We have nocurrent plans to shut down our centers in Pennsylvania and are activelyexploring other options and product lines for meeting customer demand in thestate.

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We estimate that our net revenues will be reduced byapproximately $3.0 million for each month that we are not able to operate inPennsylvania. Furthermore, total center expenses average approximately $1.2million per month in Pennsylvania. Some of these expenses will continue to beincurred while we appeal the court’s ruling and explore alternative methods forconducting business. We estimate that severance, lease cancellation, write-downof the undepreciated costs of fixed assets and the cost to vacate the premiseswill approximate $2.3 million if it becomes necessary to shut down operationsin Pennsylvania. We do not believe that the changes in our Pennsylvaniaoperations as a result of the court’s ruling will result in any impairment ofgoodwill.

As a result of the lending bank for Arkansas ceasingto originate advances and loans, our revenues and center gross profits inArkansas also deteriorated significantly during the second quarter of 2006. Wecontinued, through September 8, 2006, to service all of this lendingbank’s installment loans and payday cash advances that were outstanding as ofApril 8, 2006 and June 24, 2006, respectively. In June 2006, webegan operating in Arkansas under existing state-based legislation and directlyproviding check-cashing services to customers in Arkansas.

Thefollowing is a summary of financial information for our operations in Arkansasfor the three and six months ended June 30, 2006 and 2007 (in thousands):

| ** **                  | ** ** | **Three Months Ended**             | ** ** | **Six Months Ended**               | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **June 30,**                            | ** ** | **June 30,**                            | ** ** |
| ** **                  | ** ** | **   2006   ** | ** ** | **   2007   ** | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net revenues                |       |                                         | $          | 883                                          |       |   |   | $ | 1,247 |   |   | $ | 2,231 |   | $ | 2,364 |   |
| Total center  expenses      |       |                                         | 907        |                                         |       |   | 843 |   |   | 1,905 |   | 1,791 |   |
| Center gross  profit/(loss) |       |                                         | $          | (24                                          | )          |   |   | $ | 404 |   |   | $ | 326 |   | $ | 573 |   |

 

***Centers***

Thefollowing table lists the number of centers by state at December 31, 2006and June 30, 2007: 

| **State**     | ** ** | ** ** | ** ** | **December 31,   2006** | ** ** | **June 30,   2007** | ** ** |
|---------------|------------|------------|------------|------------------------------|------------|--------------------------|------------|
| Alabama       |       |       | 140        |                         |       |                     | 142        |   |   |
| Arizona       |       |       | 60         |                         |       |                     | 60         |   |   |
| Arkansas      |       |       | 30         |                         |       |                     | 30         |   |   |
| California    |       |       | 302        |                         |       |                     | 297        |   |   |
| Colorado      |       |       | 67         |                         |       |                     | 68         |   |   |
| Delaware      |       |       | 14         |                         |       |                     | 14         |   |   |
| Florida       |       |       | 248        |                         |       |                     | 252        |   |   |
| Idaho         |       |       | 15         |                         |       |                     | 12         |   |   |
| Illinois      |       |       | 72         |                         |       |                     | 74         |   |   |
| Indiana       |       |       | 123        |                         |       |                     | 122        |   |   |
| Iowa          |       |       | 37         |                         |       |                     | 36         |   |   |
| Kansas        |       |       | 56         |                         |       |                     | 56         |   |   |
| Kentucky      |       |       | 43         |                         |       |                     | 42         |   |   |
| Louisiana     |       |       | 76         |                         |       |                     | 84         |   |   |
| Michigan      |       |       | 137        |                         |       |                     | 143        |   |   |
| Mississippi   |       |       | 53         |                         |       |                     | 58         |   |   |
| Missouri      |       |       | 84         |                         |       |                     | 88         |   |   |
| Montana       |       |       | 8          |                         |       |                     | 7          |   |   |
| Nebraska      |       |       | 24         |                         |       |                     | 23         |   |   |
| Nevada        |       |       | 11         |                         |       |                     | 15         |   |   |
| New Hampshire |       |       | 20         |                         |       |                     | 21         |   |   |

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| New Mexico          |   |   | 12     |   |   |   | 12    |   |   |
|---------------------|--------|--------|--------|--------|--------|--------|-------|--------|--------|
| North Dakota        |   |   | 8      |   |   |   | 8     |   |   |
| Ohio                |   |   | 231    |   |   |   | 237   |   |   |
| Oklahoma            |   |   | 67     |   |   |   | 66    |   |   |
| Oregon              |   |   | 53     |   |   |   | 45    |   |   |
| Pennsylvania        |   |   | 99     |   |   |   | 98    |   |   |
| Rhode Island        |   |   | 15     |   |   |   | 16    |   |   |
| South Carolina      |   |   | 129    |   |   |   | 132   |   |   |
| South Dakota        |   |   | 12     |   |   |   | 12    |   |   |
| Tennessee           |   |   | 65     |   |   |   | 65    |   |   |
| Texas               |   |   | 231    |   |   |   | 252   |   |   |
| Utah                |   |   | — |   |   |   | 2     |   |   |
| Virginia            |   |   | 142    |   |   |   | 143   |   |   |
| Washington          |   |   | 110    |   |   |   | 109   |   |   |
| Wisconsin           |   |   | 52     |   |   |   | 58    |   |   |
| Wyoming             |   |   | 7      |   |   |   | 9     |   |   |
| Total United States |   |   | 2,853  |   |   |   | 2,908 |   |   |
| United Kingdom      |   |   | — |   |   |   | 1     |   |   |
| Total               |   |   | 2,853  |   |   |   | 2,909 |   |   |

 

***New centers***

We opened 46 and 67 newcenters during the three months ended June 30, 2006 and 2007,respectively. We opened 88 and 106 new centers during the six months endedJune 30, 2006 and 2007, respectively.

***Closed centers***

We closed 16 and 30centers during the three months ended June 30, 2006 and 2007,respectively. We closed 22 and 51 centers during the six months endedJune 30, 2006 and 2007, respectively. The expenses related to closingcenters typically include the undepreciated costs of fixtures and signage thatcannot be moved and reused at another center, moving costs, severance paymentsand any lease cancellation costs. We recorded expenses related to center closuresof approximately $0.4 million and $0.3 million in the three months endedJune 30, 2006 and 2007, respectively. We recorded expenses related tocenter closures, including loss on impairment of assets, of approximately $1.0million and $0.9 million in the six months ended June 30, 2006 and 2007,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.

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Webelieve that the following critical accounting policies affect the moresignificant estimates and assumptions used in the preparation of our financialstatements:

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

We believe the most significant estimates made in thepreparation of our accompanying consolidated financial statements relate to thedetermination of an allowance for doubtful accounts for estimated probablelosses under the standard business model (and the amount we historicallyaccrued for probable excess bank losses under the former agency businessmodel).

The allowance for doubtful accounts is (and accrualfor excess bank losses was) 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 in statelaws, center closings, length of time centers have been open in a state,relative mix of new centers within a state and other relevant factors are alsoevaluated to determine whether the results from the analytical models should berevised.

For those states where we operate under the standardbusiness model, we record this estimate of probable losses on receivables as areduction of advances and receivables, net on our balance sheet. For thosestates where we previously operated as a marketing, processing and servicingagent for a lending bank under the former agency business model, the estimateof probable losses was reduced by the lending bank’s contractual obligation forsuch losses to arrive at an estimate of excess loan losses. We recorded this asan accrual for excess bank losses, a current liability on our balance sheet.

We have charged the portion of advances and feesdeemed to be uncollectible against the allowance for doubtful accounts (or theaccrual for excess bank losses) and credited any subsequent recoveries(including sales of debt) to the allowance for doubtful accounts (or theaccrual for excess bank losses).

Under the standard business model, unpaid advances andthe related fees and/or interest are generally charged off 60 days after thedate the check was returned by the customer’s bank for non-sufficient funds orother reasons, unless the customer has paid at least 15% of the total of his orher loan plus the original fee. Under the agency business model, unpaid paydaycash advances and the related fees and/or interest generally were charged off60 days from the due date and unpaid installment loans and the related feesand/or interest generally were charged off 60 days from the deposit date if thecheck was returned by the customer’s bank for non-sufficient funds or otherreasons. Under either model, unpaid advances of customers who file forbankruptcy are charged off upon receipt of the bankruptcy notice. Althoughmanagement uses the best information available to make evaluations, futureadjustments to the allowance for doubtful accounts may be necessary ifconditions differ substantially from our assumptions used in assessing theiradequacy.

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 theseasonal fluctuations, the receivable balances can fluctuate throughout a week,generally being at their highest levels on a Wednesday or Thursday and at theirlowest levels on a Friday. In general, receivable balances decreaseapproximately 4% to 7% from a typical Thursday to a typical Friday. The secondquarter of 2006 began on a Saturday (a relative low point in weekly receivablebalances) and ended on a Friday (a relative low point in weekly receivablebalances). The second quarter 

29

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of 2007began on a Sunday (a relative low point in weekly receivable balances) andended on a Saturday (a relative low point in weekly receivable balances).

To the extent historicalcredit experience is not indicative of future performance or other assumptionsused by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts. As of June 30, 2007, if average default rates were 5%higher or lower, the allowance for doubtful accounts would change byapproximately $2.8 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 Healthcare and Workers’ Compensation Expenses***

Accrued liabilities in ourDecember 31, 2006 and June 30, 2007 financial statements includeaccruals of approximately $3.5 million and $3.4 million, respectively, forthe self-insured portion of our health and dental insurance andapproximately $3.8 million and $3.7 million, respectively, for workers’compensation. We recognize our obligations associated with those benefits inthe period the claim is incurred. The costs of both reported claims and claimsincurred but not reported, up to specified deductible limits, are estimatedbased on historical data, current enrollment, employee statistics and otherinformation. We review estimates and periodically update our estimates and theresulting reserves and any necessary adjustments are reflected in earningscurrently. In 2007, revisions to our estimated claims lag for our health anddental insurance resulted in an increase in salaries and related payroll costs ofapproximately $0.2 million for the three months ended June 30, 2007 andresulted in reductions in salaries and related payroll costs and general andadministrative expenses of approximately $0.7 million and $0.1 million,respectively, for the six months ended June 30, 2007. To the extenthistorical claims are not indicative of future claims, there are changes inenrollment or employee history, workers’ compensation loss development factorschange or other assumptions used by management do not prevail, our expense andrelated accrued liabilities could increase or decrease.

***Consolidation of Variable Interest Entity***

In 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. As aresult, we have consolidated the lender as of June 30, 2006 and 2007. See“Item 1. Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 9. Transactions with Variable Interest Entity” for the impactof adopting FIN 46(R) on our results of operations and financialcondition.

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***Accounting forStock-Based Employee Compensation***

In 2004, we adoptedStatement of Financial Accounting Standards No. 123 (Revised), Share-BasedPayment (“SFAS 123(R)”). Accordingly, we measure the cost of our 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 June 30, 2007, the total compensation cost not yet recognized relatedto nonvested stock awards under our stock-based employee compensation plans isapproximately $9.3 million. The weighted average period over which this expenseis expected to be recognized is approximately 5.4 years. See “Item 1. FinancialStatements—Notes to Interim Unaudited Consolidated 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 Pronouncement***

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(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. Effective January 1, 2007,we adopted FIN 48. As a result of the adoption of FIN 48, we recognized noadjustments in the liability for unrecognized income tax benefits. At theadoption date, we did not have any unrecognized tax benefits and did not haveany interest or penalties accrued. We are subject to U.S. income taxes as wellas various other state and local jurisdictions. With few exceptions, we are nolonger subject to U.S. federal, state and local income tax examinations by taxauthorities for years before the tax year ended September 30, 2002.

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**Results ofOperations**

***Three Months EndedJune 30, 2006 Compared to Three Months Ended June 30, 2007***

Thefollowing tables set forth our results of operations for the three months endedJune 30, 2006 compared to the three months ended June 30, 2007:

| ** **                                                     | ** ** | **Three Months Ended June 30,**                            | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                                       | ** ** | **2007** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                                                    | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Revenues:**                                                  |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                                              | 152,611    |   |   | 118.8 | % |   | $ | 173,939 |   |   | 121.5 | % |   | $ | 21,328 |   | 14.0 | % |
| Marketing,  processing and servicing fees                      |       | 3,310                                                                          |       |   | 2.6 | % |   | — |   |   | — |   |   | (3,310 | ) | (100.0 | )% |
| Total revenues                                                 |       | 155,921                                                                        |       |   | 121.4 | % |   | 173,939 |   |   | 121.5 | % |   | 18,018 |   | 11.6 | % |
| Provision for  doubtful accounts and agency bank losses        |       | (27,435                                                                        | )          |   | (21.4 | )% |   | (30,824 | ) |   | (21.5 | )% |   | (3,389 | ) | (12.4 | )% |
| Net revenues                                                   |       | 128,486                                                                        |       |   | 100.0 | % |   | 143,115 |   |   | 100.0 | % |   | 14,629 |   | 11.4 | % |
| **Center Expenses:**                                           |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                             |       | 46,171                                                                         |       |   | 35.9 | % |   | 49,759 |   |   | 34.8 | % |   | (3,588 | ) | (7.8 | )% |
| Occupancy costs                                                |       | 21,081                                                                         |       |   | 16.4 | % |   | 23,686 |   |   | 16.6 | % |   | (2,605 | ) | (12.4 | )% |
| Center depreciation expense                                    |       | 4,000                                                                          |       |   | 3.1 | % |   | 4,264 |   |   | 3.0 | % |   | (264 | ) | (6.6 | )% |
| Advertising expense                                            |       | 6,111                                                                          |       |   | 4.8 | % |   | 7,592 |   |   | 5.3 | % |   | (1,481 | ) | (24.2 | )% |
| Other center expenses                                          |       | 12,635                                                                         |       |   | 9.8 | % |   | 13,528 |   |   | 9.4 | % |   | (893 | ) | (7.1 | )% |
| Total center expenses                                          |       | 89,998                                                                         |       |   | 70.0 | % |   | 98,829 |   |   | 69.1 | % |   | (8,831 | ) | (9.8 | )% |
| Center gross profit                                            |       | 38,488                                                                         |       |   | 30.0 | % |   | 44,286 |   |   | 30.9 | % |   | 5,798 |   | 15.1 | % |
| **Corporate and Other Expenses  (Income):**                    | ** ** | ** **                                                                     | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expenses                           |       | 13,766                                                                         |       |   | 10.8 | % |   | 15,684 |   |   | 11.0 | % |   | (1,918 | ) | (13.9 | )% |
| Corporate  depreciation expense                                |       | 935                                                                            |       |   | 0.7 | % |   | 812 |   |   | 0.6 | % |   | 123 |   | 13.2 | % |
| Interest expense                                               |       | 919                                                                            |       |   | 0.7 | % |   | 2,290 |   |   | 1.5 | % |   | (1,371 | ) | (149.2 | )% |
| Interest income                                                |       | (123                                                                           | )          |   | (0.1 | )% |   | (122 | ) |   | (0.1 | )% |   | (1 | ) | (0.8 | )% |
| Loss on disposal  of property and equipment                    |       | 283                                                                            |       |   | 0.2 | % |   | 283 |   |   | 0.2 | % |   | — |   | — |   |
| Total corporate and other expenses                             |       | 15,780                                                                         |       |   | 12.3 | % |   | 18,947 |   |   | 13.2 | % |   | (3,167 | ) | (20.1 | )% |
| Income before  income taxes                                    |       | 22,708                                                                         |       |   | 17.7 | % |   | 25,339 |   |   | 17.7 | % |   | 2,631 |   | 11.6 | % |
| Income tax  expense                                            |       | 8,924                                                                          |       |   | 7.0 | % |   | 10,186 |   |   | 7.1 | % |   | (1,262 | ) | (14.1 | )% |
| Income before  income of consolidated variable interest entity |       | 13,784                                                                         |       |   | 10.7 | % |   | 15,153 |   |   | 10.6 | % |   | 1,369 |   | 9.9 | % |
| Income of  consolidated variable interest entity               |       | (888                                                                           | )          |   | (0.7 | )% |   | (317 | ) |   | (0.2 | )% |   | 571 |   | 64.3 | % |
| Net income                                                     |       | $                                                                              | 12,896     |   |   | 10.0 | % |   | $ | 14,836 |   |   | 10.4 | % |   | $ | 1,940 |   | 15.0 | % |

 

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| ** **                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                                        | ** ** | **2007** | ** ** |
| **Center Information:**                                                                                   |       |                                            |       |   |   |
| Number of centers  open at beginning of period                                                            |       | 2,640                                           |       | 2,871 |   |
| Opened                                                                                                    |       | 46                                              |       | 67 |   |
| Acquired                                                                                                  |       | —                                          |       | 1 |   |
| Closed                                                                                                    |       | (16                                             | )          | (30 | ) |
| Number of centers  open at end of period                                                                  |       | 2,670                                           |       | 2,909 |   |
| Weighted average number of centers open during the  period                                                |       | 2,649                                           |       | 2,888 |   |
| Number of customers served—all credit products  (thousands)                                          |       | 830                                             |       | 881 |   |
| Number of payday cash advances originated  (thousands)                                                    |       | 2,841                                           |       | 2,936 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)                                |       | $                                               | 997,890    |   | $ | 1,045,306 |   |
| Average amount of  payday cash advance originated                                                         |       | $                                               | 351        |   | $ | 356 |   |
| Average charge to  customers for providing and processing a payday cash advance                           |       | $                                               | 55         |   | $ | 56 |   |
| Average duration  of a payday cash advance (days)                                                         |       | 16.1                                            |       | 16.4 |   |
| Average number of lines of credit outstanding during  the period (thousands)                              |       | 4                                               |       | 24 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) |       | $                                               | 1,977      |   | $ | 10,185 |   |
| Average principal  amount on lines of credit outstanding during the period                                |       | $                                               | 466        |   | $ | 433 |   |
| Number of installment loans originated (thousands)                                                        |       | —                                          |       | 9 |   |
| Aggregate  principal amount of installment loans originated (thousands)                                   |       | $                                               | 188        |   | $ | 3,812 |   |
| Average amount of  installment loan originated                                                            |       | $                                               | 487        |   | $ | 410 |   |
| Average charge to  customers for providing and processing an installment loan(1)                          |       | $                                               | 320        |   | $ | 562 |   |

----

(1)          For the three monthsended June 30, 2006, the installment loan activity reflects only loansoriginated by us as an agent for the lending banks in Pennsylvania andArkansas. Those loans contained no discounts for early repayment, resulting ina readily determinable average fee charged to the customer. For the three monthsended June 30, 2007, the installment loan activity reflects loansoriginated directly by us. These loans have a stated term of five months butwith certain rebate provisions for each repayment. The average fee for theseloans is estimated based on historical averages regarding repayments.

33

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| ** **                                                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                         | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net revenues                                                                   |       |                                                | $          | 48.5 |   |   |   | 100.0 | % |   |   | $ | 49.6 |   |   |   | 100.0 | % |   |   | $ | 1.1 |   |   | 2.3 | % |
| Center expenses:                                                                      |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                                                   |       |                                                | 17.4       |   |   |   | 35.9 | % |   |   | 17.2 |   |   |   | 34.8 | % |   |   | 0.2 |   |   | 1.1 | % |
| Occupancy costs                                                                       |       |                                                | 8.0        |   |   |   | 16.4 | % |   |   | 8.2 |   |   |   | 16.6 | % |   |   | (0.2 | ) |   | (2.5 | )% |
| Center depreciation  expense                                                          |       |                                                | 1.5        |   |   |   | 3.1 | % |   |   | 1.5 |   |   |   | 3.0 | % |   |   | — |   |   | — |   |
| Advertising expense                                                                   |       |                                                | 2.3        |   |   |   | 4.8 | % |   |   | 2.6 |   |   |   | 5.3 | % |   |   | (0.3 | ) |   | (13.0 | )% |
| Other center expenses                                                                 |       |                                                | 4.8        |   |   |   | 9.8 | % |   |   | 4.7 |   |   |   | 9.4 | % |   |   | 0.1 |   |   | 2.1 | % |
| Total center expenses                                                                 |       |                                                | 34.0       |   |   |   | 70.0 | % |   |   | 34.2 |   |   |   | 69.1 | % |   |   | (0.2 | ) |   | (0.6 | )% |
| Center gross profit                                                                   |       |                                                | $          | 14.5 |   |   |   | 30.0 | % |   |   | $ | 15.4 |   |   |   | 30.9 | % |   |   | $ | 0.9 |   |   | 6.2 | % |

 

***Revenue Analysis***

Total revenues increased approximately $18.0 millionduring the three months ended June 30, 2007 compared to the same period in2006. The increase was primarily due to theopening of new centers and revenue growth in existing centers. Total revenuesfor the 2,542 centers opened prior to April 1, 2006 and still open as ofJune 30, 2007 increased $12.6 million from $153.6 million for the threemonths ended June 30, 2006 to $166.2 million for the same period in 2007.Centers opened prior to April 1, 2006 were at least three months andfifteen months old as of June 30, 2006 and 2007, respectively. Totalrevenues for the 367 centers opened after April 1, 2006 and still open asof June 30, 2007 increased $7.4 million from $0.1 million for the three monthsended June 30, 2006 to $7.5 million for the same period in 2007. Totalrevenues for the remaining 98 centers that closed represented a decrease ofapproximately $2.0 million for the three months ended June 30, 2007compared to the same period in 2006.

As a percentage of totalrevenues, the provision for doubtful accounts and agency bank losses increasedto 17.7% for the three months ended June 30, 2007 from 17.6% for the sameperiod in 2006. In both periods, the provision was reduced by the sales of certaincustomer debt, the proceeds of which were approximately $3.0 million for thethree months ended June 30, 2007 compared to $1.2 million for the sameperiod in 2006. Excluding the sales of debt in both periods, the provision as apercentage of total revenues increased from 18.4% in 2006 to 19.5% in 2007.This increase was primarily due to increased loss rates.

***Center ExpenseAnalysis***

*Salariesand related payroll costs.**   The increase in salaries andrelated payroll costs for the three months ended June 30, 2007 was dueprimarily to the new centers opened in 2006 and 2007 as well as higher medicalclaims costs of approximately $2.4 million in 2007 for our self-insured healthand dental insurance, of which approximately $0.2 million was due to therevision in 2007 of our estimated claims lag. Despite higher costs for healthand dental insurance, salaries and related payroll costs per center decreasedslightly in 2007 due primarily to lower bonus expenses and lower salaries percenter. We averaged approximately 2.23 and 2.05 full-time equivalent fieldemployees, including district directors, per center during the three monthsended June 30, 2006 and 2007, respectively.*

*Occupancycosts, center depreciation and other center expenses.*   The increases in occupancycosts and center depreciation expense for the three months ended June 30,2007 were due primarily to the new centers opened in 2006 and 2007.

34

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*Advertising expense.*   Advertising expense increasedfor the three months ended June 30, 2007 compared to the same period in2006 due primarily to a change in marketing strategy. During the third quarterof 2006, we launched a new advertising campaign with new center merchandisingmaterials, direct mail and television and radio commercials. Going forward, weexpect increased marketing expenditures tied to the introduction of newproducts and a more aggressive overall marketing strategy.

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

*General and administrativeexpenses.*   Theincrease in general and administrative expenses for the three months endedJune 30, 2007 was due primarily to:

·       approximately$0.5 million of additional expenses related to personnel, consulting and othercosts (excluding legal fees) associated with new product development andmanagement;

·       higherexpenses of approximately $0.4 million for consultants, contributions and tradeassociation dues in our public and government relations department;

·       anincrease in health and dental insurance costs of approximately $0.3 million;

·       anincrease in legal fees of approximately $0.3 million; and

·       approximately$0.2 million of expenses related to personnel, accounting and other costs(excluding legal fees) associated with the expansion of our operations to theUnited Kingdom.

35

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**Results ofOperations**

***Six Months EndedJune 30, 2006 Compared to Six Months Ended June 30, 2007***

Thefollowing tables set forth our results of operations for the six months endedJune 30, 2006 compared to the six months ended June 30, 2007:

| ** **                                                     | ** ** | **Six Months Ended June 30,**                              | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                                       | ** ** | **2007** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                                                    | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Revenues:**                                                  |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                                              | 295,703    |   |   | 110.0 | % |   | $ | 342,022 |   |   | 115.8 | % |   | $ | 46,319 |   | 15.7 | % |
| Marketing, processing  and servicing fees                      |       | 12,387                                                                         |       |   | 4.6 | % |   | — |   |   | — |   |   | (12,387 | ) | (100.0 | )% |
| Total revenues                                                 |       | 308,090                                                                        |       |   | 114.6 | % |   | 342,022 |   |   | 115.8 | % |   | 33,932 |   | 11.0 | % |
| Provision for doubtful  accounts and agency bank losses        |       | (39,311                                                                        | )          |   | (14.6 | )% |   | (46,639 | ) |   | (15.8 | )% |   | (7,328 | ) | (18.6 | )% |
| Net revenues                                                   |       | 268,779                                                                        |       |   | 100.0 | % |   | 295,383 |   |   | 100.0 | % |   | 26,604 |   | 9.9 | % |
| **Center Expenses:**                                           |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                            |       | 92,718                                                                         |       |   | 34.5 | % |   | 98,956 |   |   | 33.5 | % |   | (6,238 | ) | (6.7 | )% |
| Occupancy costs                                                |       | 42,129                                                                         |       |   | 15.7 | % |   | 47,219 |   |   | 16.0 | % |   | (5,090 | ) | (12.1 | )% |
| Center depreciation  expense                                   |       | 7,953                                                                          |       |   | 2.9 | % |   | 8,533 |   |   | 2.9 | % |   | (580 | ) | (7.3 | )% |
| Advertising expense                                            |       | 9,430                                                                          |       |   | 3.5 | % |   | 12,901 |   |   | 4.3 | % |   | (3,471 | ) | (36.8 | )% |
| Other center expenses                                          |       | 27,925                                                                         |       |   | 10.4 | % |   | 27,686 |   |   | 9.4 | % |   | 239 |   | 0.9 | % |
| Total center expenses                                          |       | 180,155                                                                        |       |   | 67.0 | % |   | 195,295 |   |   | 66.1 | % |   | (15,140 | ) | (8.4 | )% |
| Center gross profit                                            |       | 88,624                                                                         |       |   | 33.0 | % |   | 100,088 |   |   | 33.9 | % |   | 11,464 |   | 12.9 | % |
| **Corporate and Other Expenses   (Income):**                   | ** ** | ** **                                                                     | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expenses                           |       | 26,777                                                                         |       |   | 9.9 | % |   | 28,963 |   |   | 9.8 | % |   | (2,186 | ) | (8.2 | )% |
| Corporate depreciation  expense                                |       | 1,896                                                                          |       |   | 0.7 | % |   | 1,630 |   |   | 0.5 | % |   | 266 |   | 14.0 | % |
| Interest expense                                               |       | 1,826                                                                          |       |   | 0.7 | % |   | 4,603 |   |   | 1.6 | % |   | (2,777 | ) | (152.1 | )% |
| Interest income                                                |       | (299                                                                           | )          |   | (0.1 | )% |   | (198 | ) |   | (0.1 | )% |   | (101 | ) | (33.8 | )% |
| Loss on disposal of  property and equipment                    |       | 491                                                                            |       |   | 0.2 | % |   | 535 |   |   | 0.2 | % |   | (44 | ) | (9.0 | )% |
| Loss on impairment of  assets                                  |       | —                                                                         |       |   | — |   |   | 314 |   |   | 0.1 | % |   | (314 | ) | (100.0 | )% |
| Total corporate and  other expenses                            |       | 30,691                                                                         |       |   | 11.4 | % |   | 35,847 |   |   | 12.1 | % |   | (5,156 | ) | (16.8 | )% |
| Income before income  taxes                                    |       | 57,933                                                                         |       |   | 21.6 | % |   | 64,241 |   |   | 21.8 | % |   | 6,308 |   | 10.9 | % |
| Income tax expense                                             |       | 23,237                                                                         |       |   | 8.7 | % |   | 26,529 |   |   | 9.0 | % |   | (3,292 | ) | (14.2 | )% |
| Income before income of  consolidated variable interest entity |       | 34,696                                                                         |       |   | 12.9 | % |   | 37,712 |   |   | 12.8 | % |   | 3,016 |   | 8.7 | % |
| Income of consolidated  variable interest entity               |       | (1,373                                                                         | )          |   | (0.5 | )% |   | (560 | ) |   | (0.2 | )% |   | 813 |   | 59.2 | % |
| Net income                                                     |       | $                                                                              | 33,323     |   |   | 12.4 | % |   | $ | 37,152 |   |   | 12.6 | % |   | $ | 3,829 |   | 11.5 | % |

 

36

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| ** **                                                                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                      | ** ** | **2007** | ** ** |
| **Center Information:**                                                                              |       |                                          |       |   |   |
| Number of centers open  at beginning of period                                                       |       | 2,604                                         |       | 2,853 |   |
| Opened                                                                                               |       | 88                                            |       | 106 |   |
| Acquired                                                                                             |       | —                                        |       | 1 |   |
| Closed                                                                                               |       | (22                                           | )          | (51 | ) |
| Number of centers open  at end of period                                                             |       | 2,670                                         |       | 2,909 |   |
| Weighted average number  of centers open during the period                                           |       | 2,628                                         |       | 2,870 |   |
| Number of customers  served—all credit products (thousands)                                     |       | 1,051                                         |       | 1,097 |   |
| Number of payday cash  advances originated (thousands)                                               |       | 5,406                                         |       | 5,640 |   |
| Aggregate principal  amount of payday cash advances originated (thousands)                           |       | $                                             | 1,897,323  |   | $ | 2,013,534 |   |
| Average amount of payday  cash advance originated                                                    |       | $                                             | 351        |   | $ | 357 |   |
| Average charge to  customers for providing and processing a payday cash advance                      |       | $                                             | 56         |   | $ | 55 |   |
| Average duration of a  payday cash advance (days)                                                    |       | 16.0                                          |       | 16.4 |   |
| Average number of lines  of credit outstanding during the period (thousands)                         |       | 4                                             |       | 24 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) |       | $                                             | 1,977      |   | $ | 10,193 |   |
| Average principal amount  on lines of credit outstanding during the period                           |       | $                                             | 466        |   | $ | 428 |   |
| Number of installment  loans originated (thousands)                                                  |       | 17                                            |       | 15 |   |
| Aggregate principal  amount of installment loans originated (thousands)                              |       | $                                             | 8,865      |   | $ | 6,157 |   |
| Average amount of  installment loan originated                                                       |       | $                                             | 518        |   | $ | 412 |   |
| Average charge to  customers for providing and processing an installment loan(1)                     |       | $                                             | 357        |   | $ | 565 |   |

----

(1)          For the six months endedJune 30, 2006, the installment loan activity reflects only loansoriginated by us as an agent for the lending banks in Pennsylvania andArkansas. Those loans contained no discounts for early repayment, resulting ina readily determinable average fee charged to the customer. For the six monthsended June 30, 2007, the installment loan activity reflects loansoriginated directly by us. These loans have a stated term of five months butwith certain rebate provisions for each repayment. The average fee for theseloans is estimated based on historical averages regarding repayments.

37

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| ** **                                                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                       | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **% Net  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**              | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** | ** ** | ** **                                        | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Center net  revenues                                                                  |       | $                                                 | 102.3      |   |   | 100.0 | % |   | $ | 102.9 |   |   | 100.0 | % |   |   | $ | 0.6 |   |   | 0.6 | % |
| Center expenses:                                                                      |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 35.3                                              |       |   | 34.5 | % |   | 34.5 |   |   | 33.5 | % |   |   | 0.8 |   |   | 2.3 | % |
| Occupancy costs                                                                       |       | 16.0                                              |       |   | 15.7 | % |   | 16.5 |   |   | 16.0 | % |   |   | (0.5 | ) |   | (3.1 | )% |
| Center depreciation expense                                                           |       | 3.0                                               |       |   | 2.9 | % |   | 3.0 |   |   | 2.9 | % |   |   | — |   |   | — |   |
| Advertising expense                                                                   |       | 3.6                                               |       |   | 3.5 | % |   | 4.5 |   |   | 4.3 | % |   |   | (0.9 | ) |   | (25.0 | )% |
| Other center expenses                                                                 |       | 10.6                                              |       |   | 10.4 | % |   | 9.6 |   |   | 9.4 | % |   |   | 1.0 |   |   | 9.4 | % |
| Total center expenses                                                                 |       | 68.5                                              |       |   | 67.0 | % |   | 68.1 |   |   | 66.1 | % |   |   | 0.4 |   |   | 0.6 | % |
| Center gross profit                                                                   |       | $                                                 | 33.8       |   |   | 33.0 | % |   | $ | 34.8 |   |   | 33.9 | % |   |   | $ | 1.0 |   |   | 3.0 | % |

 

***Revenue Analysis***

Total revenues increased approximately $33.9 millionduring the six months ended June 30, 2007 compared to the same period in2006. The increase was primarily due to theopening of new centers and revenue growth in existing centers. Totalrevenues for the 2,500 centers opened prior to January 1, 2006 and stillopen as of June 30, 2007 increased $23.0 million from $302.6 million forthe six months ended June 30, 2006 to $325.6 million for the same periodin 2007. Centers opened prior to January 1, 2006 were at least six monthsand eighteen months old as of June 30, 2006 and 2007, respectively. Totalrevenues for the 409 centers opened after January 1, 2006 and still openas of June 30, 2007 increased $14.4 million from $0.6 million for the sixmonths ended June 30, 2006 to $15.0 million for the same period in 2007.Total revenues for the remaining 104 centers that closed represented a decreaseof approximately $3.5 million for the six months ended June 30, 2007compared to the same period in 2006.

As a percentage of totalrevenues, the provision for doubtful accounts and agency bank losses increasedto 13.6% for the six months ended June 30, 2007 from 12.8% for the sameperiod in 2006. In both periods, the provision was reduced by the sales ofcertain customer debt, the proceeds of which were approximately $3.5 millionfor the six months ended June 30, 2007 compared to $1.2 million for thesame period in 2006. Excluding the sales of debt in both periods, the provisionas a percentage of total revenues increased from 13.2% in 2006 to 14.6% in2007. This increase was primarily due to increased loss rates.

***Center ExpenseAnalysis***

*Salariesand related payroll costs.**  *The increase in salaries and related payroll costsfor the six months ended June 30, 2007 was due primarily to the newcenters opened in 2006 and 2007 as well as higher medical claims costs ofapproximately $2.4 million in 2007 for our self-insured health and dentalinsurance. This increase in medical claims costs is net of an approximate $0.7million reduction in expense due to the revision in 2007 of our estimatedclaims lag. Despite higher costs for health and dental insurance, salaries andrelated payroll costs per center decreased slightly in 2007 due primarily tolower bonus expenses and lower salaries per center. We averaged approximately2.17 and 2.12 full-time equivalent field employees, including districtdirectors, per center during the six months ended June 30, 2006 and 2007,respectively.

*Occupancycosts and center depreciation expense.**  *The increases in occupancy costsand center depreciation expense for the six months ended June 30, 2007were due primarily to the new centers opened in 2006 and 2007.

38

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*Advertisingexpense.**  *Advertisingexpense increased for the six months ended June 30, 2007 compared to thesame period in 2006 due primarily to a change in marketing strategy. During thethird quarter of 2006, we launched a new advertising campaign with new centermerchandising materials, direct mail and television and radio commercials.Going forward, we expect increased marketing expenditures tied to theintroduction of new products and a more aggressive overall marketing strategy.

*Other center expenses.**  *Other center expenses decreasedslightly for the six months ended June 30, 2007 compared to the sameperiod in 2006.

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

*General and administrativeexpenses.**  *Theincrease in general and administrative expenses for the six months endedJune 30, 2007 was due primarily to:

·       anincrease in legal fees of approximately $0.8 million;

·       increasesin our human resources department expenses of approximately $0.6 millionrelated to additional department headcount, consulting and employee relocationcosts;

·       higherexpenses of approximately $0.5 million for consultants, contributions and tradeassociation dues in our public and government relations department;

·       anincrease in health and dental insurance costs of approximately $0.4 million;

·       approximately$0.2 million of additional expenses related to personnel, consulting and othercosts (excluding legal fees) associated with new product development andmanagement;

·       approximately$0.2 million of expenses related to personnel, accounting and other costs(excluding legal fees) associated with the expansion of our operations to theUnited Kingdom; offset by

·       adecrease in payroll expense of approximately $0.9 million for the SouthCarolina Job Development Credit related to employees in our corporateheadquarters (of which approximately $0.7 million represents a catchup creditfor the years 2003 – 2006).

*Loss on impairment ofassets.**  *Losson impairment of assets in 2007 represents the write-down of the undepreciatedcosts of certain fixed assets in our centers identified for closure.

**Liquidity and Capital Resources**

Thefollowing table presents a summary of cash flows for the six months endedJune 30, 2006 and 2007 (dollars in thousands):

| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                            | ** ** | **2006**   | ** ** | **2007**   | ** ** | **Dollars**  | ** ** | **%** | ** ** |
| Cash flows provided by  (used in):                    |       |       |       |       |       |         |       |   |   |
| Operating activities                                  |       | $          | 59,864     |       | $          | 67,600       |       | $ | 7,736 |   | 12.9 | % |
| Investing activities                                  |       | (47,210    | )          | (35,463    | )          | 11,747       |       | 24.9 | % |
| Financing activities                                  |       | (5,571     | )          | (62,484    | )          | (56,913      | )          | (1,021.6 | )% |
| Net increase  (decrease) in cash and cash equivalents |       | 7,083      |       | (30,347    | )          | (37,430      | )          | (528.4 | )% |
| Cash and cash  equivalents, beginning of period       |       | 27,259     |       | 67,245     |       | 39,986       |       | 146.7 | % |
| Cash and cash  equivalents, end of period             |       | $          | 34,342     |       | $          | 36,898       |       | $ | 2,556 |   | 7.4 | % |

 

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 center growth,pay dividends on our common stock and repurchase shares of our outstandingcommon stock.

39

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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 $24.7 million, or 12.2% to $226.7million at June 30, 2007 compared to $202.0 million at June 30, 2006due primarily to an increase in the number of centers. Advances and feesreceivable, net decreased approximately $11.0 million, or 4.6% to $226.7million at June 30, 2007 compared to $237.7 million at December 31,2006.

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 that 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.

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

During the six months ended June 30, 2006, we didnot repurchase any shares of our outstanding common stock. During the sixmonths ended June 30, 2007, 2,826 shares of our common stock weresurrendered by employees to satisfy their tax obligations with respect to thevesting of restricted stock awarded pursuant to our 2004 Omnibus Stock Plan.Based on the average of the high and low stock price on the day of surrender,those shares had an aggregate value of approximately $41,000.

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 increase in net cashprovided by operating activities for the six months ended June 30, 2007compared to the same period in 2006 was due primarily to an increase innon-cash adjustments of $7.2 million and an increase in net income of $3.8million, partially offset by a net decrease in changes in operating assets andliabilities of $3.3 million.

***Cash Flows fromInvesting Activities***

The decrease in net cashused in investing activities for the six months ended June 30, 2007compared to the same period in 2006 was primarily due to a $12.1 milliondecrease in the change in cash invested in 

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advancesand fees receivable, partially offset by a $0.8 million increase in purchasesof property and equipment.

***Cash Flows fromFinancing Activities***

The increase in net cashused in financing activities for the six months ended June 30, 2007compared to the same period in 2006 was primarily due to a $34.3 millionincrease in payments on our revolving credit facility, a $17.9 million decreasein the non-controlling interest of the variable interest entity, a$2.9 million decrease in the change in book overdrafts and a $1.8 millionincrease in dividend payments.

**CapitalExpenditures**

For the six months endedJune 30, 2006 and 2007, we spent $6.3 million and $7.0 million,respectively, on capital expenditures. Capital expenditures includedexpenditures for (1) new centers opened, (2) center remodels and(3) computer equipment replacements in our centers and at our corporateheadquarters.

**Prior Off-BalanceSheet Arrangements with the Lending Banks**

During the first six months of 2006, we operated as anagent for lending banks in Arkansas and Pennsylvania pursuant to MP&SAgreements. Each lending bank was responsible for evaluating each of itscustomers’ 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 or indetermining their approval procedures or criteria and, in the normal course ofbusiness, we generally did not fund or acquire any payday cash advances orinstallment loans from the lending banks. The payday cash advances andinstallment loans were repayable solely to the lending banks and were assets ofthe lending banks. Consequently, the lending banks’ payday cash advances andinstallment loans have never been included in our balance sheet within ouradvances and fees receivable, net.

Under the MP&S Agreements, the lending banks werecontractually obligated for all or a specified percentage of the losses ontheir advances and loans. Therefore, our MP&S fee increased by the lendingbanks’ contractual obligation for losses. If actual losses by a lending bankexceeded the percentage specified in its MP&S Agreement, we werepotentially obligated to pay the lending bank the outstanding amount of theadvances and loans plus the lending bank’s fees and/or interest receivable onthe advances and loans, less the lending bank’s contractually obligated portionof the losses.

Because of our economic exposure for excess banklosses related to the lending banks’ payday cash advances and installmentloans, we accrued for excess bank losses to reflect our probable losses relatedto uncollected lending bank advances and loans. The accrual for excess banklosses was established on a basis similar to the allowance for doubtfulaccounts under the standard business model.

As a result of theconversion of our Pennsylvania and Arkansas operations to our standard businessmodel in June 2006, the accrual for excess bank losses and gross profitderived from the agency business model has declined to zero. The accrual forexcess bank losses that was reported in our balance sheet was $1.0 million asof June 30, 2006. We had no accrual for excess bank losses as ofDecember 31, 2006 and June 30, 2007. Approximately 0.9% of our totalcenter gross profit, in the six months ended June 30, 2006, was derivedfrom the agency business model.

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**Certain ContractualCash Commitments**

Ourprincipal future contractual obligations and commitments as of June 30,2007, including periodic interest payments, included the following (dollars inthousands):

| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** | ** **                                                              | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**  | ** ** | **2007**                                            | ** ** | **    2008 and      2009** | ** ** | **    2010 and      2011** | ** ** | **2012 and  thereafter** | ** ** |
| Long-term debt  obligations:               |       |       |       |       |       |                                                |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Revolving credit  facility                 |       | $          | 66,846     |       | $          | —                                              |       |                                                                    | $          | 66,846 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Mortgage payable                           |       | 7,966      |       | 398        |       |                                                | 1,593      |                                                                    |       |   | 1,593 |   |   |   | 4,382 |   |   |
| Note payable                               |       | 312        |       | 69         |       |                                                | 243        |                                                                    |       |   | — |   |   |   | — |   |   |
| Operating lease  obligations(1)            |       | 152,178    |       | 32,739     |       |                                                | 91,522     |                                                                    |       |   | 25,012 |   |   |   | 2,905 |   |   |
| Purchase obligations                       |       | 1,395      |       | 1,395      |       |                                                | —     |                                                                    |       |   | — |   |   |   | — |   |   |
| Total                                      |       | $          | 228,697    |       | $          | 34,601                                              |       |                                                                    | $          | 160,204 |   |   |   | $ | 26,605 |   |   |   | $ | 7,287 |   |   |
|                                            |            |            |            |            |            |                                                     |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includesleases for centers, aircraft hangar space, 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. InJune 2005, we further amended our revolving credit facility to permit usto operate as a CSO in Texas. In August 2006, we amended our revolvingcredit facility to allow the repurchase of up to $100.0 million of ouroutstanding common stock on and after the date of that amendment. InJanuary 2007, we further amended our credit facility to permit foreignsubsidiaries.

As of June 30, 2007, we had $66.8 millionoutstanding on the revolving portion of our credit facility and $14.6 millionof letters of credit outstanding, leaving approximately $183.6 millionavailable for future borrowings under our credit facility.

In general, our borrowings under our revolving creditfacility bear interest, at our option, at either a base rate plus an applicablemargin or a LIBOR-based rate plus an applicable margin. The base rateequals the greater of (i) the prime rate announced by Bank of America, theadministrative agent under the revolving credit facility, and (ii) the sumof the federal funds rate plus 0.50%. The applicable margin is determined eachquarter by a pricing grid based on our senior leverage ratio of ourconsolidated senior debt to consolidated EBITDA. The base rate applicablemargin ranges from 0.75% to 1.50% based upon our senior leverage ratio. TheLIBOR-based applicable margin ranges from 2.50% to 3.25% based upon oursenior leverage ratio. As of June 30, 2007, the applicable margin for theprime-based rate was 0.75% and the applicable margin for the LIBOR-basedrate was 2.50%.

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

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the underlying ratechanges. LIBOR-based loans bear interest for the term of the loan at therate set at the time of borrowing for that loan.

Our obligations under the revolving credit facilityare guaranteed by each of our domestic subsidiaries. Our borrowings under therevolving credit facility are secured by substantially all of our assets andthe assets of our subsidiaries. In addition, our borrowings under the revolvingcredit facility are secured by a pledge of all of the capital stock, or similarequity interests, of our domestic subsidiaries and 65% of the voting capitalstock, or similar equity interest, of our foreign subsidiaries. Our revolvingcredit facility contains various financial covenants that require, among otherthings, the maintenance of a minimum net worth and leverage and fixed chargecoverage ratios. The revolving credit facility contains customary covenants andevents of default, including covenants that restrict our ability to encumberassets, to create indebtedness and to declare and pay dividends. The revolvingcredit facility also includes cross default provisions where an event ofdefault with respect to any other indebtedness in excess of $1.0 millionin the aggregate could cause all amounts outstanding under the revolving creditfacility to become due and payable. We were in compliance with all financialcovenants at June 30, 2007.

We borrow under our $265.0 million revolvingcredit facility to fund our advances and other liquidity needs. Our day-to-daybalances under our revolving credit facility, as well as our cash balances,vary because of seasonal and day-to-day requirements resulting from making andcollecting advances. For example, if a month ends on a Friday (a typicalpayday), our borrowings and our cash balances will be high compared to a monththat does not end on a Friday. This is because a substantial portion of theadvances will be repaid in cash on that day but sufficient time will not yethave passed for the cash to reduce the outstanding borrowings under ourrevolving credit facility. Our borrowings under our revolving credit facilitywill also increase as the demand for advances increases during our peak periodssuch as the back-to-school and holiday seasons. Conversely, our borrowingstypically decrease during the tax refund season when cash receipts fromcustomers peak or the customer demand for new advances decreases.

*Mortgage Payable.**  *Our corporate headquarters buildingand related land are subject to a mortgage, the principal amount of which wasapproximately $5.8 million and $5.6 million at December 31, 2006 and June 30, 2007, 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$5.2 million and $5.0 million at December 31, 2006 and June 30, 2007, respectively.

***Operating LeaseObligations***

We lease all but three ofour centers from third-party lessors under operating leases. These leasestypically have initial terms of three to five years and may contain provisionsfor renewal options, additional rental charges based on revenue and payment ofreal estate taxes and common area charges. In addition, we lease aircrafthangar space and certain security and office equipment. The lessor under threecenter leases, the aircraft hanger space lease and other office and warehousespace leases are companies controlled by or affiliated with our Chairman. See“Item 1. Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 10. Related Party Transactions.”

***PurchaseObligations***

We enter into agreementswith vendors to purchase furniture, fixtures and other items used to open newcenters. These purchase commitments typically extend for a period of two tothree months after the opening of a new center. As of June 30, 2007, ourpurchase obligations totaled approximately $1.4 million.

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

The preparation of our financial statements inconformity with GAAP requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. In applying theaccounting principles, we must often make individual estimates and assumptionsregarding expected outcomes or uncertainties. As might be expected, the actualresults or outcomes are generally different than the estimated or assumedamounts. These differences are usually minor and are included in ourconsolidated financial statements as soon as they are known. Estimates,judgments and assumptions are continually evaluated based on availableinformation and experience. Because of the use of estimates inherent in thefinancial reporting process, actual results could differ from those estimates.

Actual results related to the estimates andassumptions made in preparing our consolidated financial statements will emergeover periods of time, such as estimates and assumptions underlying thedetermination of allowance for doubtful accounts. These estimates andassumptions are monitored and periodically adjusted as circumstances warrant.These amounts may be adjusted based on higher or lower actual loss experience.Although there is greater risk with respect to the accuracy of these estimatesand assumptions because of the period over which actual results may emerge,this risk is mitigated by the ability to make changes to these estimates andassumptions over the same period.

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

**Impact of Inflation**

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

**FORWARD-LOOKINGSTATEMENTS**

This Quarterly Report on Form 10-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 similarexpressions are intended 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;

·       theaccuracy of our determination of the allowance for doubtful accounts and of ourestimates of losses;

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

·       ourability to identify and enter new markets and to successfully manage ourgrowth;

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

·       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;

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

·       theftand employee errors; and

·       theother matters set forth under “Part I. Item 1A. Risk Factors” in ourAnnual Report on Form 10-K for the year ended December 31,2006.

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 and in ourAnnual Report on Form 10-K for the year ended December 31, 2006under “Part I. Item 1A. Risk Factors.”

**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, 2006 or June 30, 2007. The weightedaverage interest rate on our $104.8 million of variable interest debt asof December 31, 2006 was approximately 8.15%. The weighted averageinterest rate on our $66.8 million of variable interest debt as ofJune 30, 2007 was approximately 8.24%.

We had total interestexpense of $0.9 million and $2.3 million for the three months endedJune 30, 2006 and 2007, respectively. We had total interest expense of$1.8 million and $4.6 million for the six months ended June 30, 2006 and2007, respectively. The estimated change in interest expense from ahypothetical 200 basis-point change in applicable variable interest rateswould have been approximately $45.0 thousand and $0.2 million for the threemonths ended June 30, 2006 and 2007, respectively, and approximately $0.1million and $0.4 million for the six months ended June 30, 2006 and 2007,respectively.

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**ITEM 4.**                CONTROLSAND PROCEDURES.

Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, andour internal control over financial reporting, as of the end of the periodcovered by this Report. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that those disclosure controls andprocedures are effective. There were no changes in our internal control overfinancial reporting during the quarter ended June 30, 2007, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II.   OTHERINFORMATION**

**ITEM1.**                LEGAL PROCEEDINGS.

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

**ITEM1A.**        RISK FACTORS.

In addition to the otherinformation set forth in this Quarterly Report, you should carefully considerthe factors discussed in “Part I. Item 1A. Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2006, whichcould materially affect our business, results of operations, financialcondition and future results.

**ITEM2.**                UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS.

We made no stockrepurchases during the three months ended June 30, 2007. As ofJune 30, 2007, the approximate dollar value of shares that may yet bepurchased under our stock repurchase program was $80.4 million.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS.

Thefollowing table summarizes the votes at the Annual Meeting of our stockholdersheld on May 24, 2007:

| **Matter**                                                                                                       | ** ** | ** ** | ** ** | **For** | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------|------------|-------------|------------|--------------|------------|-------------|------------|--------------|------------|
| Election of  Directors:                                                                                          |       |       |       |    |       |        |       |         |       |        |       |         |       |
| George D. Johnson, Jr.                                                                                      |       | 76,565,059 |       | —  |       | 1,331,924   |       | —       |       |        | —     |         |       |
| William M. Webster IV                                                                                            |       | 77,167,927 |       | —  |       | 729,056     |       | —       |       |        | —     |         |       |
| Stephen K. Benjamin                                                                                              |       | 77,510,305 |       | —  |       | 386,678     |       | —       |       |        | —     |         |       |
| Robert H. Chapman III                                                                                            |       | 77,479,454 |       | —  |       | 417,529     |       | —       |       |        | —     |         |       |
| Kenneth E. Compton                                                                                               |       | 77,208,284 |       | —  |       | 688,699     |       | —       |       |        | —     |         |       |
| Thomas E. Hannah                                                                                                 |       | 77,510,159 |       | —  |       | 386,824     |       | —       |       |        | —     |         |       |
| Donovan A. Langford III                                                                                          |       | 77,476,957 |       | —  |       | 420,026     |       | —       |       |        | —     |         |       |
| W. Olin Nisbet                                                                                                   |       | 77,479,554 |       | —  |       | 417,429     |       | —       |       |        | —     |         |       |
| Ratification of the  appointment of PricewaterhouseCoopers LLP As Independent Auditors for the  Company for 2007 |       | 77,510,558 |       | 374,376 |       | —      |       | 12,050       |       |        | —     |         |       |

 

**ITEM6.**                EXHIBITS.

| Exhibit  Number | ** ** | ** **                                                                                                                                                                                                   | ** ** | **Description** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 31.1            |       | Certification of Principal Executive Officer  pursuant to Rules 13a-14(a) and 15d-14(a) under  the Securities Exchange Act of 1934, as amended.                                               |
| 31.2            |       | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                               |
| 32.1            |       | Certification of Chief  Executive Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002). |
| 32.2            |       | Certification of Chief  Financial Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002). |
|                 |            |                                                                                                                                                                                                              |            |                 |  |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                     | **ADVANCE AMERICA, CASH ADVANCE CENTERS,  INC.** |
|---------------------|--------------------------------------------------|
| August 8, 2007 | By:                                              | /s/ JOHN I. HILL |
|                | ** **                                       | John I. Hill |
| * *            | * *                                         | *Executive Vice President and   Chief Financial Officer   (Duly authorized officer and   principal financial officer)* |

 

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**INDEXTO EXHIBITS**

| Exhibit  Number | ** ** | ** **                                                                                                                                                                                                   | ** ** | **Description** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 31.1            |       | Certification of  Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                               |
| 31.2            |       | Certification of  Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                               |
| 32.1            |       | Certification of  Chief Executive Officer of Advance America, Cash Advance Centers, Inc.  pursuant to 18 U.S.C. Section 1350 (Adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002). |
| 32.2            |       | Certification of Chief  Financial Officer of Advance America, Cash Advance Centers, Inc. pursuant to  18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002). |

 

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