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**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****                              QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 

**o****                                 TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom              to              **

 

**COMMISSIONFILE NUMBER 001-32363**

 

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

(Exact name of registrant asspecified in its charter)

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

 

**135 North Church StreetSpartanburg, South Carolina 29306**(Address of principal executive offices) (Zip Code)

 

**864-342-5600**(Registrant’s telephone number, including area code)

 

**None**(Former name, former address and former fiscal year, if changed sincelast report)

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the ExchangeAct. (Check one):

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                              | ** ** | **Outstanding as of November 8, 2010** |
|----------------------------------------|------------|-----------------------------------------------------------------|
| Common Stock, par value $.01 per share |       |  62,149,251 shares                                         |

 

 

 

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

**Form 10-Q**

**For thethree months and nine months ended September 30, 2010**

 
| ** **                              | **Page**                                                                                                            |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------|
| **FORWARD-LOOKING STATEMENTS**          | 3                                                                                                                   |
| ** **                              |                                                                                                                |
| **PART I.  FINANCIAL INFORMATION** | 4                                                                                                                   |
| Item 1.                            | Financial Statements                                                                                                | 4 |
|                                    | Unaudited  Consolidated Balance Sheets December 31, 2009 and September 30, 2010                                | 4 |
|                                    | Interim Unaudited Consolidated Statements of Income  Three Months and Nine Months Ended September 30, 2009 and 2010 | 5 |
|                                    | Interim Unaudited Consolidated Statement of  Stockholders’ Equity Nine Months Ended September 30, 2010         | 6 |
|                                    | Interim Unaudited Consolidated Statements of Cash  Flows Nine Months Ended September 30, 2009 and 2010              | 7 |
|                                    | Notes to Interim Unaudited Consolidated Financial  Statements                                                       | 8 |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 24 |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 47 |
| Item 4.                            | Controls and  Procedures                                                                                            | 48 |
| ** **                              |                                                                                                                |
| **PART II. OTHER INFORMATION**     | 49                                                                                                                  |
| Item 1.                            | Legal Proceedings                                                                                                   | 49 |
| Item 1A.                           | Risk Factors                                                                                                        | 49 |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        | 49 |
| Item 5.                                 | Other Information                                                                                                   | 49 |
| Item 6.                            | Exhibits                                                                                                            | 50 |
| ** **                              |                                                                                                                |
| **SIGNATURES**                          | 51                                                                                                                  |
| ** **                              |                                                                                                                |
| **INDEX TO  EXHIBITS**                  | 52                                                                                                                  |
|                                         |                                                                                                                     |  |  |  |

 

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**FORWARD-LOOKING STATEMENTS**

 

The matters discussed in this Quarterly Report on Form 10-Q thatare forward-looking statements are based on current management expectationsthat involve substantial risks and uncertainties, which could cause actualresults to differ materially from the results expressed in, or implied by,these forward-looking statements. These statements can be identified by thefact that they do not relate strictly to historical or current facts. They usewords such as “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “may,”“will,” “should,” “would,” “could,” “estimate,” “continue,” and other words andterms of similar meaning in conjunction with a discussion of future operatingor financial performance. You should read statements that contain these wordscarefully because they discuss our future expectations, contain projections ofour future results of operations or of our financial position, or state other “forward-looking”information.

 

The matters described in “Part I. Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2009and in “Part II. Item 1A. Risk Factors” of our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2010, as well as any cautionary language in thisQuarterly Report, provide examples of risks, uncertainties and events that maycause our actual results to differ materially from the expectations we describein our forward-looking statements. Although we believe that our expectationsare based on reasonable assumptions, actual results may differ materially fromthose in the forward-looking statements as a result of various factors,including, but not limited to, the examples we provided.

 

Forward-looking statements speak only as of the date of this QuarterlyReport. Except as required under federal securities laws and the rules andregulations of the U.S. Securities and Exchange Commission, we do not haveany intention, and do not undertake, to update any forward-looking statementsto reflect events or circumstances arising after the date of this QuarterlyReport, whether as a result of new information, future events or otherwise. Asa result of these risks and uncertainties, readers are cautioned not to placeundue reliance on the forward-looking statements included in this QuarterlyReport or that may be made elsewhere from time to time by, or on behalf of, us.All forward-looking statements attributable to us are expressly qualified bythese cautionary statements.

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIALSTATEMENTS.**

 

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

 

**Unaudited Consolidated Balance Sheets**

 

**December 31,2009 and September 30, 2010**

 

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

 
| ** **                                                                                                                                                                                    | ** ** | **December 31,  2009** | ** ** | **September 30,  2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                                                                                                    |       |                        |       |                         |       |
| Current assets                                                                                                                                                                                |       |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                     |       | $                           | 38,189     |                         | $          | 18,757 |   |
| Advances and fees receivable, net                                                                                                                                                             |       | 204,234                     |       | 199,767                      |       |
| Deferred income taxes                                                                                                                                                                         |       | 19,145                      |       | 19,145                       |       |
| Other current assets                                                                                                                                                                          |       | 17,383                      |       | 29,959                       |       |
| Total current assets                                                                                                                                                                          |       | 278,951                     |       | 267,628                      |       |
| Restricted cash                                                                                                                                                                               |       | 4,366                       |       | 3,768                        |       |
| Property and equipment, net                                                                                                                                                                   |       | 31,839                      |       | 25,109                       |       |
| Goodwill                                                                                                                                                                                      |       | 127,031                     |       | 127,001                      |       |
| Other assets                                                                                                                                                                                  |       | 3,964                       |       | 3,294                        |       |
| Total assets                                                                                                                                                                                  |       | $                           | 446,151    |                         | $          | 426,800 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                |       |                        |       |                         |       |
| Current liabilities                                                                                                                                                                           |       |                        |       |                         |       |
| Accounts payable                                                                                                                                                                              |       | $                           | 13,562     |                         | $          | 10,922 |   |
| Accrued liabilities                                                                                                                                                                           |       | 31,432                      |       | 48,304                       |       |
| Income taxes payable                                                                                                                                                                          |       | 11,400                      |       | —                       |       |
| Accrual for third-party lender losses                                                                                                                                                         |       | 4,528                       |       | 4,395                        |       |
| Current portion of long-term debt                                                                                                                                                             |       | 851                         |       | 884                          |       |
| Total current liabilities                                                                                                                                                                     |       | 61,773                      |       | 64,505                       |       |
| Revolving credit facility                                                                                                                                                                     |       | 141,058                     |       | 110,968                      |       |
| Long-term debt                                                                                                                                                                                |       | 4,367                       |       | 3,732                        |       |
| Deferred income taxes                                                                                                                                                                         |       | 23,349                      |       | 23,349                       |       |
| Deferred revenue                                                                                                                                                                              |       | 2,717                       |       | 1,312                        |       |
| Other liabilities                                                                                                                                                                             |       | 274                         |       | 341                          |       |
| Total liabilities                                                                                                                                                                             |       | 233,538                     |       | 204,207                      |       |
| Commitments and contingencies (Note 6)                                                                                                                                                   |       |                        |       |                         |       |
| Stockholders’ equity                                                                                                                                                                     |       |                        |       |                         |       |
| Preferred stock, par value $.01 per share, 25,000  shares authorized; no shares issued and outstanding                                                                                        |       | —                      |       | —                       |       |
| Common stock, par value $.01 per share, 250,000  shares authorized; 96,821 shares issued and 61,614 and 62,159 outstanding as  of December 31, 2009 and September 30, 2010, respectively |       | 968                         |       | 968                          |       |
| Paid-in capital                                                                                                                                                                               |       | 290,146                     |       | 290,474                      |       |
| Retained earnings                                                                                                                                                                             |       | 182,765                     |       | 191,135                      |       |
| Accumulated other comprehensive loss                                                                                                                                                          |       | (1,934                      | )          | (1,943                       | )          |
| Common stock in treasury (35,207 and 34,662 shares  at cost at December 31, 2009 and September 30, 2010, respectively)                                                                   |       | (259,332                    | )          | (258,041                     | )          |
| Total stockholders’ equity                                                                                                                                                               |       | 212,613                     |       | 222,593                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |       | $                           | 446,151    |                         | $          | 426,800 |   |

 

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

 

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

 

**Interim Unaudited Consolidated Statements of Income**

 

**ThreeMonths and Nine Months Ended September 30, 2009 and 2010**

 

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

 
| ** **                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| **Total Revenues**                                |       | $                                                    | 167,920    |                                                | $          | 154,228 |   | $ | 474,437 |   | $ | 439,983 |   |
| **Center Expenses:**                              |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and related payroll costs                |       | 44,508                                               |       | 43,451                                              |       | 137,425 |   | 135,155 |   |
| Provision for doubtful accounts                   |       | 38,783                                               |       | 33,308                                              |       | 92,893 |   | 71,100 |   |
| Occupancy costs                                   |       | 23,399                                               |       | 21,740                                              |       | 71,419 |   | 67,204 |   |
| Center depreciation expense                       |       | 3,159                                                |       | 2,340                                               |       | 10,142 |   | 7,596 |   |
| Advertising expense                               |       | 4,235                                                |       | 5,530                                               |       | 15,351 |   | 15,732 |   |
| Other center expenses                             |       | 10,558                                               |       | 11,654                                              |       | 34,870 |   | 33,102 |   |
| Total center expenses                             |       | 124,642                                              |       | 118,023                                             |       | 362,100 |   | 329,889 |   |
| Center gross profit                               |       | 43,278                                               |       | 36,205                                              |       | 112,337 |   | 110,094 |   |
| **Corporate and Other Expenses  (Income):**       |       |                                                 |       |                                                |       |   |   |   |   |
| General and administrative expenses               |       | 14,259                                               |       | 14,358                                              |       | 42,128 |   | 47,622 |   |
| Legal settlements                                 |       | 6,399                                                |       | 16,196                                              |       | 6,399 |   | 18,584 |   |
| Corporate depreciation expense                    |       | 671                                                  |       | 447                                                 |       | 2,038 |   | 1,838 |   |
| Interest expense                                  |       | 1,556                                                |       | 1,291                                               |       | 4,850 |   | 3,565 |   |
| Interest income                                   |       | (126                                                 | )          | (49                                                 | )          | (160 | ) | (67 | ) |
| (Gain)/loss on disposal of property and equipment |       | (197                                                 | )          | 30                                                  |       | (244 | ) | 350 |   |
| Loss on impairment of assets                      |       | —                                               |       | —                                              |       | 2,209 |   | 654 |   |
| Income before income taxes                        |       | 20,716                                               |       | 3,932                                               |       | 55,117 |   | 37,548 |   |
| Income tax expense                                |       | 8,135                                                |       | 2,528                                               |       | 20,751 |   | 17,535 |   |
| Net income                                        |       | $                                                    | 12,581     |                                                | $          | 1,404 |   | $ | 34,366 |   | $ | 20,013 |   |
| Net income per common share:                      |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                             |       | $                                                    | 0.21       |                                                | $          | 0.02 |   | $ | 0.56 |   | $ | 0.33 |   |
| Diluted                                           |       | $                                                    | 0.20       |                                                | $          | 0.02 |   | $ | 0.56 |   | $ | 0.32 |   |
| Dividends declared per common share               |       | $                                                    | 0.0625     |                                                | $          | 0.0625 |   | $ | 0.1875 |   | $ | 0.1875 |   |
| Weighted average number of shares outstanding:    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                             |       | 60,866                                               |       | 61,078                                              |       | 60,863 |   | 61,039 |   |
| Diluted                                           |       | 61,712                                               |       | 61,626                                              |       | 61,613 |   | 61,626 |   |

 

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

 

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

 

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

 

**Nine MonthsEnded September 30, 2010**

 

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

 
| ** **                                              | ** ** | ** **            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**       | ** ** | ** **           | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|------------|------------|-------------|------------|--------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| ** **                                              | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **  | ** ** | **Other**    | ** ** | **Common Stock** | ** ** | ** **           | ** ** |
| ** **                                              | ** ** | ** **            | ** ** | **Par**    | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Comprehensive**     | ** ** | **In Treasury** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Shares**            | ** ** | **Value**  | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Loss**              | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Total** | ** ** |
| **Balances, December 31, 2009**                    |       | 96,821                |       | $          | 968        |        | $          | 290,146      |       | $                     | 182,765    |                 | $          | (1,934     | )          | (35,207 | ) | $ | (259,332 | ) | $ | 212,613 |   |
| Comprehensive  income:                                  |       |                  |       |       |       |        |       |         |       |                  |       |                 |       |       |       |   |   |
| Net  income                                             |       | —                |       | —     |       | —      |       | 20,013       |       | —                |       | —               |       | —     |       | 20,013 |   |
| Foreign  currency translation                           |       | —                |       | —     |       | —      |       | —       |       | (9                    | )          | —               |       | —     |       | (9 | ) |
| Total  comprehensive income                             |       |                  |       |       |       |        |       |         |       |                  |       |                 |       |       |       | 20,004 |   |
| Dividends  paid ($0.1875 per share)                     |       | —                |       | —     |       | —      |       | (11,508      | )          | —                |       | —               |       | —     |       | (11,508 | ) |
| Dividends  payable                                      |       | —                |       | —     |       | —      |       | (135         | )          | —                |       | —               |       | —     |       | (135 | ) |
| Purchases  of treasury stock                            |       | —                |       | —     |       | —      |       | —       |       | —                |       | (53                  | )          | (408       | )          | (408 | ) |
| Issuance  of restricted stock                           |       | —                |       | —     |       | —      |       | —       |       | —                |       | 595                  |       | —     |       | — |   |
| Vesting  of restricted stock issued from treasury stock |       | —                |       | —     |       | (1,461      | )          | —       |       | —                |       | —               |       | 1,461      |       | — |   |
| Forfeitures  of restricted stock                        |       | —                |       | —     |       | —      |       | —       |       | —                |       | (42                  | )          | —     |       | — |   |
| Amortization  of restricted stock                       |       | —                |       | —     |       | 1,204       |       | —       |       | —                |       | —               |       | —     |       | 1,204 |   |
| Stock  option expense                                   |       | —                |       | —     |       | 823         |       | —       |       | —                |       | —               |       | —     |       | 823 |   |
| Stock  option exercises                                 |       | —                |       | —     |       | (238        | )          | —       |       | —                |       | 45                   |       | 238        |       | — |   |
| **Balances, September 30, 2010**                        |       | 96,821                |       | $          | 968        |        | $          | 290,474      |       | $                     | 191,135    |                 | $          | (1,943     | )          | (34,662 | ) | $ | (258,041 | ) | $ | 222,593 |   |

 

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

 

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

 

**Interim Unaudited Consolidated Statements of Cash Flows**

 

**Nine MonthsEnded September 30, 2009 and 2010**

 

**(in thousands)**

 
| ** **                                                                                             | ** ** | **2009** | ** ** | **2010** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating  activities**                                                              |       |     |       |     |       |
| Net income                                                                                             |       | $        | 34,366     |     | $          | 20,013 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisitions |       |     |       |     |       |
| Depreciation and amortization                                                                          |       | 12,223   |       | 9,434    |       |
| Non-cash interest expense                                                                              |       | 483      |       | 475      |       |
| Provision for doubtful accounts                                                                        |       | 92,893   |       | 71,100   |       |
| (Gain)/loss on disposal of property and equipment                                                      |       | (244     | )          | 350      |       |
| Loss on impairment of assets                                                                           |       | 2,209    |       | 654      |       |
| Amortization of restricted stock                                                                       |       | 558      |       | 1,204    |       |
| Stock option expense                                                                                   |       | 909      |       | 823      |       |
| Common stock issued to director in lieu of cash                                                        |       | 7        |       | —   |       |
| Changes in operating assets and liabilities                                                            |       |     |       |     |       |
| Fees receivable, net                                                                                   |       | (17,858  | )          | (11,194  | )          |
| Other current assets                                                                                   |       | (517     | )          | (12,565  | )          |
| Other assets                                                                                           |       | 65       |       | 196      |       |
| Accounts payable                                                                                       |       | 441      |       | (2,414   | )          |
| Accrued liabilities                                                                                    |       | (1,335   | )          | 16,682   |       |
| Income taxes payable                                                                                   |       | (1,625   | )          | (11,400  | )          |
| Deferred revenue                                                                                       |       | (1,569   | )          | (1,405   | )          |
| Net cash provided by operating activities                                                              |       | 121,006  |       | 81,953   |       |
| **Cash flows from investing  activities**                                                              |       |     |       |     |       |
| Changes in advances receivable                                                                         |       | (66,564  | )          | (55,508  | )          |
| Changes in restricted cash                                                                             |       | 123      |       | 598      |       |
| Proceeds from sale of property and equipment                                                           |       | 472      |       | 4        |       |
| Purchases of property and equipment                                                                    |       | (3,042   | )          | (3,588   | )          |
| Net cash used in investing activities                                                                  |       | (69,011  | )          | (58,494  | )          |
| **Cash flows from financing  activities**                                                              |       |     |       |     |       |
| Payments on revolving credit facility, net                                                             |       | (40,778  | )          | (30,090  | )          |
| Payments on mortgage payable                                                                           |       | (330     | )          | (354     | )          |
| Payments on note payable                                                                               |       | (101     | )          | (248     | )          |
| Purchases of treasury stock                                                                            |       | (11      | )          | (408     | )          |
| Payments of dividends                                                                                  |       | (11,429  | )          | (11,508  | )          |
| Changes in book overdrafts                                                                             |       | (2,459   | )          | (226     | )          |
| Net cash used in financing activities                                                                  |       | (55,108  | )          | (42,834  | )          |
| Effect of exchange rate changes on cash and cash  equivalents                                          |       | 6        |       | (57      | )          |
| Net decrease in cash and cash equivalents                                                              |       | (3,107   | )          | (19,432  | )          |
| Cash and cash equivalents, beginning of period                                                         |       | 16,017   |       | 38,189   |       |
| Cash and cash equivalents, end of period                                                               |       | $        | 12,910     |     | $          | 18,757 |   |
|                                                                                                   |       |     |       |     |       |
| Supplemental disclosures of cash flow information:                                                     |       |     |       |     |       |
| Cash paid during the period for:                                                                       |       |     |       |     |       |
| Interest                                                                                               |       | $        | 4,726      |     | $          | 3,550 |   |
| Income taxes                                                                                           |       | 22,177   |       | 39,933   |       |
| Supplemental schedule of non-cash investing and  financing activity:                                   |       |     |       |     |       |
| Property and equipment purchases included in  accounts payable and accrued expenses                    |       | 3        |       | 122      |       |
| Restricted stock dividends payable                                                                     |       | 118      |       | 135      |       |

 

The accompanying notes arean 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 interim unaudited consolidated financial statements ofAdvance America, Cash Advance Centers, Inc. (“AACACI”) and its whollyowned subsidiaries (collectively, the “Company”) have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and the rules and regulations of theU.S. Securities and Exchange Commission (the “SEC”). They do not include allinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. Although managementbelieves that the disclosures are adequate to prevent the information frombeing misleading, the interim unaudited consolidated financial statementsshould be read in conjunction with the Company’s audited financial statementsin the Company’s Annual Report on Form 10-K for the year ended December 31,2009 filed with the SEC. In the opinion of the Company’s management, alladjustments, consisting of normal recurring accruals considered necessary for afair statement of the Company’s financial condition, have been included. Theresults of operations for the nine months ended September 30, 2010 are notnecessarily indicative of the results that may be expected for future interimperiods or the entire year ending December 31, 2010.

 

**Descriptionof Business**

 

The Company conducts business in most states under the authority of avariety of enabling state statutes including cash advance, deferredpresentment, check-cashing, small loan, credit service organization and otherstate laws whereby cash advances are made directly to customers. The Company’soperations in the United Kingdom are conducted in accordance with applicableEnglish law. The Company’s operations in Canada are conducted in accordancewith applicable Canadian federal and provincial law.

 

**RevenueRecognition**

 

Revenues can be characterized as fees and/or interest depending on theCompany’s business operations and product offerings under enabling regulations.Revenue is generally recognized on a constant-yield basis ratably over the termof each cash advance.

 

Between November 2008 and February 2010, the Company offereda line of credit product in Virginia with a 25-day billing cycle. In March 2010,the Company discontinued offering new open-ended lines of credit but continuedto service existing lines of credit in Virginia. The Company stopped providingnew draws on existing lines of credit on September 30, 2010. Customers arenot charged interest on any outstanding borrowings during a billing cycle ifthey have a zero balance at the close of business on their billing cycle enddate. Revenue for this product is recorded when fees and interest are chargedto the customer’s account and therefore revenue is not recognized on a ratablebasis.

 

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

 

**Concentrationof Risk**

 

For the three months ended September 30, 2009 and 2010, totalrevenues within the Company’s five largest states (measured by total revenues)accounted for approximately 47% and 52%, respectively, of the Company’s totalrevenues. For the nine months ended September 30, 2009 and 2010, totalrevenues within the Company’s five largest states accounted for approximately48% and 50%, respectively, of the Company’s total revenues. The states thatrepresent the Company’s five largest states change from time to time.

 

**FinancialInstrument Assets and Liabilities for Which Carrying Values Equal orApproximate Fair Value**

 

Financialassets and liabilities for which carrying values equal or approximate fairvalue include cash and cash equivalents, advances, fees, interest, installmentloans, lines of credit receivable, certain other assets, accounts payable, 

 

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accruedliabilities, and certain other liabilities. For these assets and liabilities,the carrying values approximate fair value due to their short-term nature.

 

**CenterClosing Costs**

 

Centerclosing costs represent management’s estimate of severance payments, costs toclean and vacate the premises, losses related to the write-off of leaseholdimprovements and signage, and lease cancellation expenses related to closing acenter. Additionally, closing or consolidating centers could result in theimpairment of receivables, long-lived assets, or goodwill. A liability forseverance payments is recognized when management: (i) decides to close acenter and this plan is unlikely to change; (ii) determines that an employeecannot be relocated to another center; and (iii) informs the employee ofthe termination and the benefits that will be paid. Costs to terminate thelease are recorded at the earlier of the date the lease is terminated or thedate the leased property is no longer used. All other expenses are recordedwhen incurred.

 

**IncomeTaxes**

 

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

 

**Allowance for Doubtful Accounts and Accrual for Third-PartyLender Losses**

 

Theallowance for doubtful accounts represents management’s estimated probablelosses for advances made directly to customers and is recorded as a reductionof advances and fees receivable, net, on the Company’s balance sheet. Theaccrual for third-party lender losses represents management’s estimatedprobable losses for loans and certain related fees for loans that are processedby the Company for its current third-party lender in Texas (see Note 8)and is recorded as a current liability on the Company’s balance sheet.

 

Theallowance for doubtful accounts and the accrual for third-party lender lossesare primarily based upon models that analyze specific portfolio statistics andalso reflect, to a lesser extent, management’s judgment regarding overallaccuracy. The analytical models take into account several factors, includingthe number of transactions customers complete and charge-off and recoveryrates. Additional factors such as changes in state laws, center closings,length of time centers have been open in a state, and the relative mix of newcenters within a state, are also evaluated to determine whether the resultsfrom the analytical models should be revised.

 

TheCompany has charged the portion of advances and fees deemed to be uncollectibleagainst the allowance for doubtful accounts and credited any subsequent recoveries,including sales of debt, to the allowance for doubtful accounts.

 

Unpaidadvances and the related fees and/or interest are generally charged off60 days after the date a customer’s check was returned, the AutomatedClearing House (“ACH”) authorization was rejected by the customer’s bank, orthe default date, unless the customer has paid at least 15% of the total of hisor her loan plus all applicable fees, or 15% of the outstanding balance andrelated interest and fees for our line of credit and installment loan products.Unpaid advances, installment loans, or lines of credit of customers who filefor bankruptcy are charged off upon receipt of the bankruptcy notice.

 

Managementbelieves that the allowance for doubtful accounts and accrual for third-partylender losses are adequate. Management’s ongoing evaluation of the adequacy ofthe allowance for doubtful accounts and accrual for third-party lender lossesis based on its evaluation of the advances and loans outstanding, historicalexperience, and such other factors that, in management’s judgment, deserveconsideration in estimating probable losses.

 

**Goodwill**

 

The Company has approximately $127 million ofgoodwill as of September 30, 2010. Goodwill represents the excess costover the fair value of assets acquired. The Company tests its goodwill forimpairment annually as of September 30 or whenever events or changes incircumstances indicate that the carrying value may not be recoverable.  Estimated cash

 

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flows and related goodwill are grouped at thereporting unit level. A reporting unit is an operating segment, or undercertain circumstances, a component of an operating segment that constitutes abusiness. When estimated future cash flows are less than the carrying value ofthe net assets and related goodwill, an impairment test is performed to measureand recognize the amount of the impairment loss, if any. Impairment losses,related to the carrying value of goodwill, represent the excess of the carryingamount of a reporting unit’s goodwill over the implied fair value of thatgoodwill. In determining the estimated future cash flows, the Company considerscurrent and projected future levels of income, as well as business trends,prospects, and market and economic conditions. Impairment tests involve the useof judgments and estimates related to the fair market value of the businessoperations with which goodwill is associated, taking into consideration bothhistorical operating performances and anticipated future earnings.

 

The Company has approximately $4.4 million of goodwill in itsUnited Kingdom operations. As of September 30, 2010, these operations havecumulatively generated negative cash flow and have not reached break-even atthe center gross profit level for the trailing twelve months. The Company’sexpansion efforts in the United Kingdom began during the third quarter of 2007.The goodwill impairment assessment model projects future positive cash flowssufficient to support the goodwill and long-lived asset base. If the UnitedKingdom operations continue to generate negative cash flow and do notbreak-even, an impairment charge related to its goodwill is possible.

 

**Litigation Accrual**

 

In view of the inherent difficulty of predicting the outcome oflitigation and regulatory matters, particularly where the claimants seek verylarge or indeterminate damages or where the matters present novel legaltheories or involve a large number of parties, the Company cannot state withconfidence what the eventual outcome of pending matters will be, what thetiming of the ultimate resolution of these matters will be, what the eventualloss, fines, or penalties related to each pending matter may be, or the extentto which such amounts may be recoverable under the Company’s insurancepolicies.

 

In accordance with applicable accounting guidance, the Companyestablishes reserves for litigation and regulatory matters when those matterspresent loss contingencies that are both probable and estimable. When losscontingencies are not both probable and estimable, the Company does notestablish reserves. In most of the matters described in Note 6, losscontingencies are not both probable and estimable in the view of managementand, accordingly, reserves have not been established for those matters. Basedon current knowledge, management does not believe that loss contingencies, ifany, arising from pending litigation and regulatory matters, including thelitigation and regulatory matters described in Note 6, will have amaterial adverse effect on the consolidated financial position or liquidity ofthe Company, but may be material to the Company’s results of operations for anyparticular reporting period.

 

**EarningsPer Share**

 

Basic earnings per share is computed by dividing net income by theweighted average number of common shares outstanding for the period excludingunvested restricted stock. Diluted earnings per share is computed by dividingnet income by the weighted average number of common shares outstanding for theperiod, after adjusting for the dilutive effect of unvested restricted stockand outstanding stock options. For the three months ended September 30,2009 and 2010, 209,851 and 727,402, respectively, unvested shares of restrictedstock were not included in the computation of diluted earnings per sharebecause the effect of including them would be anti-dilutive. For the ninemonths ended September 30, 2009 and 2010, 209,851 and 161,402,respectively, unvested shares of restricted stock were not included in thecomputation of diluted earnings per share because the effect of including themwould be anti-dilutive. For the three and nine months ended September 30,2009 and 2010, options to purchase 1,555,000 and 1,537,500 shares of commonstock, respectively, that were outstanding at those dates were not included inthe computation of diluted earnings per share because the effect of includingthem would be anti-dilutive.

 

The following table presents the reconciliation of the denominator usedin the calculation of basic and diluted earnings per share for the three andnine months ended September 30, 2009 and 2010 (in thousands):

 
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Reconciliation of denominator:                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average number of common shares  outstanding—basic   |       | 60,866                                               |       | 61,078                                              |       | 60,863 |   | 61,039 |   |
| Effect of dilutive unvested restricted stock                       |       | 448                                                  |       | 272                                                 |       | 407 |   | 280 |   |
| Effect of dilutive outstanding stock options                       |       | 398                                                  |       | 276                                                 |       | 343 |   | 307 |   |
| Weighted average number of common shares  outstanding—diluted |       | 61,712                                               |       | 61,626                                              |       | 61,613 |   | 61,626 |   |

 

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**Recently Issued Accounting Pronouncements**

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued the Accounting Standards Codification (“ASC”) Standard ASC 810-30, “VariableInterest Entities” (“ASC 810-30”). ASC 810-30 changes how a reporting entitydetermines whether an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated. Thedetermination of whether a reporting entity is required to consolidate anotherentity is based on, among other things, the other entity’s purpose and designand the reporting entity’s ability to direct the activities of the other entitythat most significantly impact the other entity’s performance. ASC 810-30 iseffective for a reporting entity’s first fiscal year beginning afterNovember 15, 2009. The adoption of ASC 810-30 during the quarter ended March 31,2010 did not have a material impact on the Company’s financial position orresults of operations.

 

In July 2010, FASB issued Accounting Standard Update (“ASU”) No. 2010-20,Receivables (Topic 310): Disclosures about the Credit Quality of FinancingReceivables and the Allowance for Credit Losses (“ASU No. 2010-20”). TheASU amends FASB Accounting Standards CodificationTM Topic 310, Receivables, toimprove the disclosures that an entity provides about the credit quality of itsfinancing receivables and the related allowance for credit losses. As a resultof these amendments, an entity is required to disaggregate, by portfoliosegment or class of financing receivable, certain existing disclosures andprovide certain new disclosures about its financing receivables and relatedallowance for credit losses. For public entities, the disclosures as of the endof a reporting period are effective for interim and annual reporting periodsending on or after December 15, 2010. The disclosures about activity thatoccurs during a reporting period are effective for interim and annual reportingperiods beginning on or after December 15, 2010.  As this ASU amends only the disclosurerequirements for loans and the allowance for credit losses, the adoption of ASUNo. 2010-20 is not expected to have a significant impact on the Company’sfinancial statements.

 

**2. Advancesand Fees Receivable, Net**

 

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

 
| ** **                        | ** ** | **December 31,  2009** | ** ** | **September 30,  2010** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Advances receivable               |       | $                           | 200,110    |                         | $          | 192,962 |   |
| Fees and interest receivable      |       | 34,497                      |       | 32,064                       |       |
| Returned items receivable         |       | 36,255                      |       | 35,435                       |       |
| Other                             |       | 6,112                       |       | 3,364                        |       |
| Allowance for doubtful accounts   |       | (53,031                     | )          | (49,433                      | )          |
| Unearned revenues                 |       | (19,709                     | )          | (14,625                      | )          |
| Advances and fees receivable, net |       | $                           | 204,234    |                         | $          | 199,767 |   |

 

Includedin advances, fees and interest receivables are amounts that may be past duethat do not have bank presentment authorizations.

 

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

 

Changes in the allowance for doubtful accounts for the three and ninemonths ended September 30, 2009 and 2010 were as follows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Beginning balance               |       | $                                                    | 56,910     |                                                | $          | 45,636 |   | $ | 59,441 |   | $ | 53,031 |   |
| Provision for doubtful accounts |       | 38,302                                               |       | 32,886                                              |       | 92,519 |   | 71,233 |   |
| Charge-offs                     |       | (40,508                                              | )          | (32,633                                             | )          | (111,913 | ) | (90,392 | ) |
| Recoveries                      |       | 3,586                                                |       | 3,544                                               |       | 18,243 |   | 15,561 |   |
| Ending balance                  |       | $                                                    | 58,290     |                                                | $          | 49,433 |   | $ | 58,290 |   | $ | 49,433 |   |

 

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Changes in the accrual for third-party lender losses for the three andnine months ended September 30, 2009 and 2010 were as follows (inthousands):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Beginning balance               |       | $                                                    | 3,853      |                                                | $          | 3,973 |   | $ | 3,960 |   | $ | 4,528 |   |
| Provision for doubtful accounts |       | 481                                                  |       | 422                                                 |       | 374 |   | (133 | ) |
| Ending balance                  |       | $                                                    | 4,334      |                                                | $          | 4,395 |   | $ | 4,334 |   | $ | 4,395 |   |

 

The total changes in the allowance for doubtful accounts and theaccrual for third-party lender losses for the three and nine months ended September 30,2009 and 2010 were as follows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Beginning balance               |       | $                                                    | 60,763     |                                                | $          | 49,609 |   | $ | 63,401 |   | $ | 57,559 |   |
| Provision for doubtful accounts |       | 38,783                                               |       | 33,308                                              |       | 92,893 |   | 71,100 |   |
| Charge-offs                     |       | (40,508                                              | )          | (32,633                                             | )          | (111,913 | ) | (90,392 | ) |
| Recoveries                      |       | 3,586                                                |       | 3,544                                               |       | 18,243 |   | 15,561 |   |
| Ending balance                  |       | $                                                    | 62,624     |                                                | $          | 53,828 |   | $ | 62,624 |   | $ | 53,828 |   |

 

**4. Other Current Assets**

 

Other current assets consisted of the following (in thousands):

 
| ** **                             | ** ** | **December 31,  2009** | ** ** | **September 30,  2010** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Prepaid income taxes                   |       | $                           | 3,637      |                         | $          | 14,636 |   |
| Prepaid rent                           |       | 6,287                       |       | 5,802                        |       |
| Prepaid insurance                      |       | 2,874                       |       | 2,450                        |       |
| Prepaid taxes and licenses             |       | 1,558                       |       | 1,155                        |       |
| Prepaid workers compensation loss fund |       | 346                         |       | 346                          |       |
| Other                                  |       | 2,681                       |       | 5,570                        |       |
| Total                                  |       | $                           | 17,383     |                         | $          | 29,959 |   |

 

**5. Accrued Liabilities**

 

Accrued liabilities consisted of the following (in thousands):

 
| ** **                          | ** ** | **December 31,  2009** | ** ** | **September 30,  2010** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Legal fines and settlements         |       | $                           | 6,666      |                         | $          | 21,642 |   |
| Employee compensation               |       | 9,191                       |       | 10,205                       |       |
| Workers’ compensation          |       | 4,996                       |       | 4,753                        |       |
| Center closing costs                |       | 817                         |       | 2,184                        |       |
| Leasehold maintenance expenses      |       | 1,130                       |       | 1,681                        |       |
| Deferred revenue                    |       | 1,709                       |       | 1,544                        |       |
| Straight-line rent accrual          |       | 2,142                       |       | 1,486                        |       |
| Accounting and tax fees             |       | 528                         |       | 1,029                        |       |
| Legal fees                          |       | 547                         |       | 848                          |       |
| Property, sales and franchise taxes |       | 519                         |       | 679                          |       |
| Severance                           |       | 41                          |       | 364                          |       |
| Advertising                         |       | 770                         |       | 145                          |       |
| Construction in progress            |       | 72                          |       | 122                          |       |
| Other                               |       | 2,304                       |       | 1,622                        |       |
| Total                               |       | $                           | 31,432     |                         | $          | 48,304 |   |

 

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**6.Commitments and Contingencies**

 

The Company is involved in a number of active lawsuits, includinglawsuits filed by private litigants and matters arising out of actions taken bystate regulatory authorities. The Company is also involved in various otherlegal proceedings with state and federal regulators. In addition, the Companyis obligated to advance expenses, and, in certain circumstances, indemnify fordamages, incurred by certain of its current and former officers and directorsin responding to inquiries, or defending against claims or proceedings thathave arisen by reason of the fact that such person is or was an officer ordirector of the Company. Under certain circumstances, the Company may also beobligated to defend and indemnify other parties against whom claims have been asserted.Unless otherwise stated below, the Company is vigorously defending againstthese actions and will, when management believes appropriate in considerationof ongoing litigation expenses and other factors, evaluate reasonablesettlement opportunities. The amount of losses and/or the probability of anunfavorable outcome, if any, cannot be reasonably estimated for these legalproceedings unless otherwise stated below. Accordingly, except as otherwisespecified below, no accrual has been recorded for any of these matters as of September 30,2010.

 

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

 

On July 16, 2008, Kerri Stone filed a putative class actioncomplaint in the Superior Court of California in San Diego against the Companyand its California subsidiary. Defendants removed the case to the United StatesDistrict Court for the Southern District of California. The amended complaintalleges violations of the California Deferred Deposit Transaction Law and theCalifornia Unfair Competition Law and seeks an order requiring defendants todisgorge and/or make restitution of all revenue and loan principal, pay threetimes the amount of damages the class members actually incurred, reasonableattorneys’ fees and costs of suit, and punitive damages.  The complaint also seeks certain injunctiverelief. The parties are engaged in discovery and the Company anticipates thatthe case will proceed to trial during 2011.

 

*Betts andReuter v. McKenzie Check Advance of Florida, LLC et al.*

 

The Company and the Company’s subsidiary, McKenzie Check Advance ofFlorida, LLC (“McKenzie”), are defendants in a putative class actionlawsuit commenced by former customers, Wendy Betts and Donna Reuter, onJanuary 11, 2001, and a third named class representative, Tiffany Kelly,in the Circuit Court of Palm Beach County, Florida. This putative class actionalleges that McKenzie, by and through the actions of certain officers,directors, and employees, engaged in unfair and deceptive trade practices andviolated Florida’s criminal usury statute, the Florida Consumer Finance Act,and the Florida Racketeer Influenced and Corrupt Organizations Act. The suitseeks unspecified damages, and the named defendants could be required to refundfees and/or interest collected, refund the principal amount of cash advances,pay multiple damages, and pay other monetary penalties. Ms. Reuter’s claimhas been held to be subject to binding arbitration, which the Company expectsto proceed in parallel with this case. However, the trial court has denied thedefendants’ motion to compel arbitration of Ms. Kelly’s claims. TheCompany has appealed this decision.

 

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

 

A second Florida lawsuit was filed on August 24, 2004, in theCircuit Court of Palm Beach County by former customers Gerald Betts andMs. Reuter against the Company, the Company’s Florida subsidiary, AdvanceAmerica, Cash Advance Centers of Florida, Inc., and certain officers anddirectors. The allegations, relief sought, and the Company’s defenses in thislawsuit are nearly identical to those alleged in the first *Betts and Reuter* lawsuit described above.The case is currently stayed, pending a decision from the Florida Supreme Courtin *Pendergast v. Sprint Nextel Corp.*, whichis a separate case, to which the Company is not a party, involving arbitrationissues.

 

*Hooper andVaughn v. Advance America, Cash Advance Centers of Missouri, Inc.*

 

On March 10, 2008, Trishia Hooper and Josephine Vaughn filed aputative class action lawsuit in the United States District Court for theWestern District of Missouri against the Company’s Missouri subsidiary, AdvanceAmerica, Cash Advance Centers of Missouri, Inc. The action alleged thatthe arbitration clause and class action waiver in the Company’s subsidiary’scustomer loan agreements were unconscionable, that the Company’s subsidiary’spractices violated the Missouri statutes governing unfair and deceptive tradepractices, interest rates, loan renewals, debt reduction, and consideration ofborrower’s ability to repay. The lawsuit sought certification as a classaction, unspecified monetary damages, and a declaratory judgment that thearbitration clause and class action waiver was unconscionable and injunctiverelief. On May 27, 2010, the Company and the class representatives enteredinto a settlement agreement. The settlement agreement does not 

 

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involvean admission of wrongdoing or liability. Pursuant to the terms of thesettlement agreement, the case will be dismissed, the Company and all otherdefendants will be released from any and all claims and liability, the Companywill establish a settlement pool of approximately $2 million for paymentsand/or credits to settle the claims of certain customers of the Company’sMissouri subsidiary and payment of all attorney fees, class actionadministration fees, and other fees and expenses related to the litigation, andthe Company’s subsidiary will offer discounts on the repayment of certaindefaulted loans and on fees to certain class members for future loans. TheCompany took a charge against earnings in the second quarter of 2010 of approximately$2 million to cover the estimated costs of settlement. On November 4,2010, the court entered an order granting final approval of the settlement. TheCompany does not expect any additional charges related to this case.

 

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

 

On July 27, 2004, John Kucan, Welsie Torrence, and Terry Coates,each of whom was a customer of Republic Bank & Trust Company (“Republic”),the lending bank for whom the Company previously marketed, processed, andserviced cash advances in North Carolina, filed a putative class action lawsuitin the General Court of Justice for the Superior Court Division for New HanoverCounty, North Carolina against the Company and Mr. William M. Webster IV,Chairman of the Company’s Board of Directors and the Company’s former ChiefExecutive Officer, alleging, among other things, that the relationship betweenthe Company’s North Carolina subsidiary and Republic constituted an alleged “renta charter” relationship and therefore Republic was not the “true lender” of thecash advances it offered. The lawsuit also claimed that the cash advances weremade, administered, and collected in violation of numerous North Carolinaconsumer protection laws. The lawsuit sought an injunction barring thesubsidiary from continuing to do business in North Carolina, the return of theprincipal amount of the cash advances made to the plaintiff class since August 2001,along with three times the interest and/or fees associated with those advances,which could have, under certain circumstances, totaled approximately $220million, plus attorneys’ fees and other unspecified costs.

 

On September 17, 2010, the Company and the class representativesentered into a settlement agreement. The settlement agreement does not involveany admission of wrongdoing or liability and is subject to court approval andcertain other conditions before it becomes final and the lawsuit is concluded.Pursuant to the terms of the settlement agreement, the case will be dismissed,the Company and all other defendants will be released from any and all claimsand liability, the Company will establish a settlement pool of approximately$18.75 million for payments and/or credits to settle the claims of certaincustomers of the Company’s North Carolina subsidiary and payment of allattorney fees, class action administration fees, and any and all other fees andexpenses related to the litigation. The Company has taken a charge againstearnings in the third quarter of 2010 of approximately $16.3 million to coverthe estimated net costs of settlement less insurance proceeds.

 

*NorthCarolina Commissioner of Banks Order*

 

On February 1, 2005, the Commissioner of Banks of North Carolinainitiated a contested case against the Company’s North Carolina subsidiary foralleged violations of the North Carolina Consumer Finance Act. In December 2005,the Commissioner of Banks ordered that the Company’s North Carolina subsidiaryimmediately cease and desist operating. In accordance with the Commissioner ofBanks’ order, the Company’s North Carolina subsidiary ceased all businessoperations on December 22, 2005. The Company appealed the Commissioner’sorder to the Superior Court of North Carolina, which denied the appeal. TheCompany has appealed this decision to the North Carolina Court of Appeals. Thisappeal has been stayed pending final approval of the settlement in *Kucan et al. v. Advance**America, Cash AdvanceCenters of North Carolina, Inc. et al*., at which time theCompany will dismiss its appeal and the litigation will end.

 

*PennsylvaniaDepartment of Banking v. NCAS of Delaware, LLC*

 

On September 27, 2006, the Pennsylvania Department of Bankingfiled a lawsuit in the Commonwealth Court of Pennsylvania alleging that theCompany’s Delaware subsidiary, NCAS of Delaware, LLC, was providing linesof credit to borrowers in Pennsylvania without a license required underPennsylvania’s financial licensing law and charging interest and fees in excessof the amounts permitted by Pennsylvania’s usury law. In July 2007, thecourt determined that certain aspects of the Company’s Choice Line of Creditrequired the Company to be licensed under Pennsylvania’s Consumer DiscountCompany Act (“CDCA”) and enjoined the Company from continuing its lending activitiesin Pennsylvania for so long as the CDCA violations continued and fromcollecting monthly participation fees. The Company appealed to the PennsylvaniaSupreme Court and, in May 2008, the Pennsylvania Supreme Court upheld thelower court’s ruling. The Pennsylvania Department of Banking subsequentlyamended its complaint to add the Pennsylvania Attorney General as a plaintiff,to name the Company as a defendant, and to seek damages, fines, and penaltiesunder Pennsylvania’s CDCA, usury laws, and consumer protection laws. In April 2010,the Pennsylvania Commonwealth Court dismissed the alleged CDCA and usuryallegations and partially dismissed the alleged consumer 

 

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protectionlaw violations. The remaining alleged consumer protection law claims willproceed before the trial court. These remaining claims could, under certaincircumstances, total approximately $45 million in damages, plus civil penaltiesof $1,000 for each violation of the Pennsylvania Consumer Protection Law and anadditional $2,000 for violations against customers over the age of 60, andattorneys’ fees and costs.  The partiesare engaged in discovery and the Company will continue to vigorously defendagainst these claims.

 

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

 

On August 1, 2007, Sharlene Johnson, Helena Love, and BonnyBleacher filed a putative class action lawsuit in the United States DistrictCourt, Eastern District of Pennsylvania against the Company and two of itssubsidiaries alleging that they provided lines of credit to borrowers inPennsylvania without a license required under Pennsylvania law and withinterest and fees in excess of the amounts permitted by Pennsylvania law. Thecomplaint seeks, among other things, a declaratory judgment that the monthlyparticipation fee charged to customers with a line of credit is illegal, aninjunction prohibiting the collection of the monthly participation fee, andpayment of damages equal to three times the monthly participation fees paid bycustomers since June 2006, which could total approximately$135 million in damages, plus attorneys’ fees and costs. In January 2008,the trial court entered an order compelling the purported class representativesto arbitrate their claims on an individual basis, unless determined otherwiseby the arbiter. All parties appealed that order and the parties now await aruling on the appeals.

 

*RaymondKing and Sandra Coates v. Advance America, Cash Advance Centers ofPennsylvania, LLC*

 

On January 18, 2007, Raymond King and Sandra Coates, who werecustomers of BankWest Inc., the lending bank for which the Companypreviously marketed, processed, and serviced cash advances in Pennsylvania,filed a putative class action lawsuit in the United States District Court,Eastern District of Pennsylvania alleging various causes of action, includingthat the Company’s Pennsylvania subsidiary made illegal cash advance loans inPennsylvania in violation of Pennsylvania’s usury law, the PennsylvaniaConsumer Discount Company Act, the Pennsylvania Unfair Trade Practices andConsumer Protection Law, the Pennsylvania Fair Credit Extension Uniformity Act,and the Pennsylvania Credit Services Act. The complaint alleges thatBankWest Inc. was not the “true lender” and that the Company’sPennsylvania subsidiary was the “lender in fact.” The complaint seekscompensatory damages, attorneys’ fees, punitive damages, and the trebling ofany compensatory damages. In January 2008, the trial court entered anorder compelling the purported class representatives to arbitrate their claimson an individual basis, unless determined otherwise by the arbiter. All partiesappealed that order and the appeal was stayed pending a decision from theUnited States Supreme Court in *Stolt-Nielsen S.A.v. AnimalFeeds International Corp*. In April 2010, the United States Supreme Court issued its opinionin*Stolt-Nielsen.*The parties now await a ruling on theappeals.

 

*Clerk  v. NCAS of Delaware, LLC, d/b/a AdvanceAmerica, Cash Advance Centers, Inc., of Pennsylvania, et al.*

 

On April 21, 2009, Yulon Clerk filed a putative class actionlawsuit in the Court of Common Pleas of Philadelphia County, Pennsylvania,against the Company’s subsidiaries, Advance America, Cash Advance Centers ofPennsylvania, Inc., and NCAS of Delaware, LLC, as well asBankWest, Inc., whose defense the Company is handling pursuant to an indemnificationagreement, and other unrelated lenders and banks. The complaint alleges thatthe practices of the Company’s subsidiaries and BankWest, Inc. violatedthe Pennsylvania Consumer Discount Protection Act, the Pennsylvania LoanInterest Protection Law, and Pennsylvania Consumer Protection Laws. Thecomplaint seeks certification of a class of individuals for the allegedviolations, a declaration that all loans made to class members areunenforceable, injunctive relief, and monetary damages. The complaint repeatsallegations asserted in other putative class actions filed in Pennsylvania thathave been stayed in favor of mandatory individual arbitrations. The Companyremoved the case to the United States District Court for the Eastern Districtof Pennsylvania and filed a motion to compel arbitration and stay theunderlying action’s proceedings. In August 2009, the District Court issuedan order severing the claims against the individual defendants. OnSeptember 21, 2009, plaintiffs filed three separate complaints seeking thesame relief as the April 21, 2009 complaint against Advance America, CashAdvance Centers of Pennsylvania, Inc., NCAS of Delaware, LLC, andBankWest, Inc. The case against the Company’s Pennsylvania subsidiarieswas subsequently dismissed by consent of the parties on November 11, 2009.Motions to stay and to compel individual arbitration have been filed in theother cases. Those cases were stayed pending a decision from the United StatesSupreme Court in *Stolt-Nielsen S.A. v. Animal FeedsInternational Corp*.  In April 2010,the United States Supreme Court issued its opinion in *Stolt-Nielsen*.The cases against NCAS of Delaware and Bankwest, Inc. are now proceedingbefore the trial court.

 

*Class ActionsAgainst South Carolina Subsidiary*

 

Eight separate putative class actions were filed in South Carolinaagainst the Company’s subsidiary Advance America, Cash Advance Centers of SouthCarolina, Inc. and several other unaffiliated defendants. John and RebeccaMorgan 

 

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fileda complaint on August 27, 2007 in the Horry County Court of Common Pleas;Margaret Horne filed a complaint on September 6, 2007 in the SpartanburgCounty Court of Common Pleas; Tawan Smalls filed a complaint onSeptember 10, 2007 in the Charleston County Court of Commons Pleas;Chadric and Lisa Wiley filed a complaint on September 27, 2007 in theRichland County Court of Common Pleas; Mildred Weaver filed a complaint onSeptember 27, 2007 in the Darlington County Court of Common Pleas; LisaJohnson and Gilbert Herbert filed a complaint on October 2, 2007 in theGeorgetown County Court of Common Pleas; Kimberly Kinney filed a complaint onOctober 12, 2007 in the Marion County Court of Common Pleas; and Carl G.Ferrell filed a complaint on October 30, 2008 in the Richland County Courtof Common Pleas (collectively the “South Carolina Claimants”). The allegationsand relief sought are similar in each case. Plaintiffs allege that the Company’sSouth Carolina subsidiary violated the South Carolina Deferred PresentmentServices Act and the Consumer Protection Code by failing to perform a creditcheck and evaluate a customer’s ability to repay the advance. Each complaintseeks an injunction to prohibit the Company from continuing its operations, thereturn of fees and interest, unspecified actual damages, punitive damages, andattorneys’ fees and costs. Each of the lawsuits has been joined to ongoinglitigation in the South Carolina state court system pursuant to an order of theSouth Carolina Supreme Court consolidating all cases brought against theindustry. In December 2009, a group of industry defendants, including theCompany, reached an agreement in principle, subject to reaching a definitiveagreement and obtaining court approval, for the settlement and release of allclaims brought by the South Carolina Claimants. On June 2, 2010, theCompany, several other unaffiliated defendants, and the class representativesentered into a settlement agreement. The settlement agreement does not involvean admission of wrongdoing or liability on the part of the Company or its SouthCarolina subsidiary. Pursuant to the terms of the settlement agreement, the Companyand its South Carolina subsidiary were released from any and all claimsassociated with this lawsuit. The Court entered an order granting finalapproval of the settlement on September 20, 2010, and the order becamefinal on October 21, 2010. This litigation has concluded and the Companydoes not expect to incur any charges in connection with the settlement beyondthe charge of $0.9 million the Company recorded for the fourth quarter of 2009.

 

*OtherMatters*

 

The Company is also involved in other litigation, arbitrations andadministrative proceedings that are incidental to its business, including,without limitation, regulatory enforcement matters, individual consumer claims,contractual disputes, employee claims for workers’ compensation, wrongful termination,harassment, discrimination, payment of wages due, and customer claims relatingto collection practices and violations of state and/or federal consumerprotection laws.

 

**SEC Investigation**

 

On July 22, 2009, the Company was informed that Kenneth E.Compton, its President and Chief Executive Officer, received a “Wells Notice”from the SEC. The Company understands that the staff intends to recommend thatthe SEC file a civil injunctive action against Mr. Compton allegingthat he violated Section 17(a) of the Securities Act of 1933 andSection 10(b) of the Securities Exchange Act of 1934 andRule 10b-5 thereunder in connection with alleged insider trading involvingless than a material amount of losses avoided by third parties selling Companystock during 2007. The Company did not receive a Wells Notice and does notbelieve it is a subject of this investigation; however, the Company isobligated to advance expenses incurred by its current and former officers anddirectors in connection with this matter.

 

**Changes in Legislation**

 

*OhioLegislation*

 

In November 2008, the State of Ohio capped interest rates on cashadvance loans and limited the number of cash advances a customer may take inany one year. As a result of this legislation, the Company began offering smallloans pursuant to the Ohio Small Loan Act and check-cashing services. The smallloan product and check cashing services generate less revenue than the Company’sformer cash advance product and, as a result, the Company has closed some ofits centers in Ohio. In the third quarter of 2009, the Company stopped offeringsmall loans and began offering cash advances pursuant to the Ohio SecondMortgage Act as a registered Second Mortgage Lender.

 

In the first quarter of 2010, the Ohio Division of FinancialInstitutions issued a rule restricting certain activities by licensedcheck cashers which would have a negative impact on the Company’s operations inOhio. This rule was scheduled to become effective by May 1, 2010, buthas been temporarily stayed by the Court of Common Pleas of Franklin County,Ohio pending the outcome of certain litigation involving the state andunrelated third parties.

 

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*VirginiaLegislation*

 

A Virginia law that went into effect in January 2009 substantiallychanged the terms for cash advance services in Virginia and severely restrictedviable operations for short-term lenders. The Company continues to offer cashadvances in Virginia in conformance with the new regulations, and betweenNovember 2008 and February 2010 also offered an open-ended line of creditproduct. However, a subsequent Virginia Corporation Commission ruling limitedthe Company’s ability to offer the open-ended lines of credit effectiveMarch 1, 2010.  As a result, theCompany ceased offering new open-ended lines of credit in February 2010 andstopped providing new draws on existing lines of credit on September 30, 2010.

 

During the nine months ended September 30, 2010, the Company closed 55centers in Virginia. For the nine months ended September 30, 2010, closingcosts of approximately $1.3 million are included in the income statement as anincrease in other center expenses of $0.9 million, a loss on disposal ofproperty and equipment of $0.1 million, and center salaries and related payrollcosts of $0.3 million.

 

Althoughthe Company intends to seek new revenue opportunities in Virginia (in additionto cash advances), the elimination of the open-ended line of credit product maycause the Company to close or consolidate some or all of its centers inVirginia. If we close all of our remaining centers in Virginia, the estimatedclosing costs, including severance, center tear-down costs, lease terminationcosts, and the write-down of fixed assets would range from $2.2 million to $6.4million, and the collectability of advances and fees receivable in Virginia maybe impaired.  As of September 30, 2010, advances and fees receivable,net of allowance for doubtful accounts, in Virginia was approximately $11million.  At this time, we are not able to determine the amount ofgoodwill impairment, if any, that could result from the cessation of ouroperations in Virginia.

 

*WashingtonLegislation*

 

 A law became effective onJanuary 1, 2010, in the State of Washington that limits the number of cashadvances a customer may take in any one year, limits the cash advance amountthat can be taken out at any one time, and implements a statewide database tomonitor the number of cash advances. This law has negatively affected theCompany’s revenue and profitability. The Company may close or consolidate someor all of its centers in Washington if management determines that it is nolonger economically viable to operate all of its Washington centers.

 

During the nine months ended September 30, 2010, the Company closed 45centers in Washington. For the three months ended September 30, 2010, closingcosts of approximately $0.8 million are included in the income statement as anincrease in other center expenses of $0.7 million and center salaries andrelated payroll costs of $0.1 million. For the nine months ended September 30,2010, closing costs of approximately $1.1 million are included in the incomestatement as an increase in other center expenses of $1 million and centersalaries and related payroll costs of $0.1 million.

 

 If the Company closes all of itsremaining centers in Washington, the estimated closing costs, includingseverance, center tear-down costs, lease termination costs, and the write-downof fixed assets would range from $1 million to $3.7 million, and thecollectability of advances and fees receivable in Washington may be impaired.As of September 30, 2010, advances and fees receivable, net of allowance fordoubtful accounts, in Washington was approximately $3.9 million. At this timethe Company is not able to determine the amount of goodwill impairment, if any,that could result from the cessation of operations in Washington.

 

*Arizona Legislation*

 

An existing law permitting cash advancesin Arizona expired on June 30, 2010, and the Company ceased operations in itsremaining 47 centers in Arizona during the quarter ended September 30, 2010.For the nine months ended September 30, 2010, closing costs of approximately$1.1 million are included in the income statement as an increase in othercenter expenses of $0.6 million, center salaries and related payroll costs of$0.3 million, and a loss on impairment of assets of approximately $0.2 million.The cessation of the Company’s Arizona operations did not result in anyimpairment of goodwill.

 

*SouthCarolina Legislation*

 

A new law in South Carolina became effective January 1, 2010 that,among other things, implements a statewide database to monitor the number ofcash advances made to customers within that state. Although this law has had anegative effect on revenue and profitability in South Carolina, the Companycurrently believes operations will remain economically viable in this state.

 

*KentuckyLegislation*

 

A new law in Kentucky became effective on April 30, 2010 that, amongother things, implements a statewide database to monitor the number of cashadvances made to customers within that state. Although this law has had anegative effect on revenue and profitability in Kentucky, the Company currentlybelieves operations will remain economically viable in this state.

 

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*Rhode Island**Legislation*

 

A new law became effective in Rhode Island on July 1, 2010, thatreduced the maximum allowable fees to be charged on a cash advance from $15 per$100 to $10 per $100. Although the Company expects this law to have a negativeeffect on its revenue and profitability in Rhode Island, management currentlybelieves operations will remain economically viable in this state.

 

*Colorado**Legislation*

 

Anew law became effective in Colorado on August 11, 2010, that expands theminimum term of cash advances to six months, allows repayment in multipleinstallments, and creates a new regime of permitted finance, interest, andother charges. This law has negatively impacted the Company’s revenue andprofitability in Colorado. If management determines that it is no longereconomically viable to operate these centers, the Company may close orconsolidate some or all of its centers.

 

During the nine months ended September 30, 2010, the Company closed 31centers in Colorado. For the three months ended September 30, 2010, closingcosts of approximately $0.5 million are included in the income statement as anincrease in other center expense of $0.4 million and center salaries andrelated payroll cost of $0.1 million. For the nine months ended September 30,2010, closing costs of approximately $0.9 million are included in the incomestatement as an increase in other center expenses of $0.6 million, centersalaries and related payroll cost of $0.1 million, and a loss on impairment ofassets of $0.2 million.

 

 If the Company closes all of itsremaining centers in Colorado, the estimated closing costs, includingseverance, center tear-down costs, lease termination costs, and the write-downof fixed assets would range from $0.7 million to $2.2 million, and thecollectability of advances and fees receivable in Colorado most likely would beimpaired. As of September 30, 2010, advances and fees receivable, net ofallowance for doubtful accounts, in Colorado was approximately $5 million. Atthis time the Company has not determined the amount of goodwill impairment, ifany, that could result from the cessation of operations in Colorado.

 

*Montana Legislation*

 

Dueto a recent law change in Montana that becomes effective on January 1,2011, the Company may close its two centers in that state. The estimated costof closing the centers is approximately $75,000. For the nine months endedSeptember 30, 2010, the operations in Montana generated approximately$100,000 of center gross profit.

 

*Wisconsin**Legislation*

 

A new law becomes effective in Wisconsin on January 1, 2011 that limitsthe total amount of cash advances a customer may have outstanding, allows anextended payment plan on each cash advance, and implements a statewide databaseto monitor the number of cash advances. Although the Company expects this lawto have a negative effect on its revenue and profitability in Wisconsin,management currently believes operations will remain economically viable inthis state.

 

*Illinois**Legislation*

 

A new law becomes effective in Illinois on March 21, 2011 that willchange the terms of the installment loan product currently offered in Illinoisand negatively affect the profitability of this product. However, the new lawcreates a longer term product with multiple installments and applicable fees.The Company intends to offer products in conformance with the new legislation.Although the Company expects this law to have a negative effect on its revenueand profitability in Illinois, management currently believes operations willremain economically viable in this state.

 

*Federal Financial Reform*

 

On July 21, 2010, the United States Congress passed the Dodd-Frank WallStreet Reform and Consumer Protection Act. This new federal legislation createsthe Bureau of Consumer Financial Protection (the “BCFP”), which will haveauthority to regulate consumer finance companies. It is unknown what effectthis legislation will have on the Company until such time as the BCFPpromulgates regulations.

 

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

 

The Company measures the cost of its stock-based employee compensationat fair value on the grant date and recognizes such cost in the financialstatements on a straight-line basis over the requisite service period of theawards, which is generally the vesting period.

 

The Company’s 2004 Omnibus Stock Plan provides for the granting ofrestricted stock, stock options, and other stock awards to certain directors,officers and other key employees of the Company. Under these plans, 5,200,000shares of authorized common stock have been reserved for issuance pursuant togrants approved by the Compensation Committee of the Board of Directors. As ofSeptember 30, 2010, 1,659,942 shares were available for grant under the plans.Additionally, during 2005, the Company granted stock options and shares ofrestricted stock to its President and Chief Executive Officer under aNonqualified Stock Option Agreement and a Restricted Stock Agreement,respectively. Both of these agreements are separate from the Company’s 2004Omnibus Stock Plan.

 

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

 

 All stock options were grantedwith an exercise price equal to the fair market value of the Company’s common stockon the dates of grant as determined pursuant to the Company’s 2004 OmnibusStock Plan. The Company estimated the fair value of stock options on the dateof grant using the Black-Scholes option pricing model using the followingassumptions:

 

·                  *Expectedterm*—The expected term represents the period during which the Company’sstock options are expected to be outstanding. The Company based itsdetermination of the expected term by giving consideration to the contractualterms of the stock option awards, vesting schedules, expectations of futureemployee behavior and published academic research regarding exercisebehavior.  For the options granted in thefirst nine months of 2009, the Company assumed that the options would beexercised on their exercise date because the high dividend rate on the grantdate relative to the strike price would make immediate exercise the likelybehavior.

 

·                  *Expectedvolatility*—The expected volatility represents the amount bywhich the price of the underlying shares has fluctuated or is expected tofluctuate during the expected term. The Company based its estimated volatilityon its historical stock price volatility and the stock price volatility ofother public companies in its industry, which the Company believes isrepresentative of its expected future volatility over the expected term of itsoptions.

 

·                  *Expecteddividends*—The Company assumes its dividend yield iscontinuous over the life of the option in its Black-Scholes option pricingmodel.  For the 2009 stock option grants,the Company used its current dividend rate of $0.0625 per share per quarter andassumed discreet quarterly dividend dates consistent with past practices overthe life of the options.

 

·                  *Risk-freerate*—The Company used risk-free interest rates for periods within theexpected terms of the options based on the U.S. Treasury yield curve in effectat each option grant date.

 

To estimate each stock option’s weighted average fair value on thegrant dates, the following weighted average assumptions were used in theBlack-Scholes option pricing model for all stock options granted during thenine months ended September 30, 2009: an expected term of two years; anexpected volatility of 66%; an expected dividend yield of 21.9%; and arisk-free rate of 1.03%. There were no stock options granted during the ninemonths ended September 30, 2010.

 

The weighted average grant date fair value of options granted duringthe nine months ended September 30, 2009 is $0.12 per option, which is beingexpensed ratably over each award’s respective vesting period.

 

The following table provides certain information with respect to stockoptions outstanding and exercisable at September 30, 2010 under the Company’sstock-based compensation plans:

 
| ** **                                           | ** ** | **Outstanding** | ** **        | **Exercisable** | ** ** |
|------------------------------------------------------|------------|-----------------|-------------------|-----------------|------------|
| Number of stock options                              |       | 1,948,836       |              | 1,082,000       |       |
| Range of exercise prices                             |       | $               |  1.14-$14.70 |            | $          |  1.14-$14.70 |   |
| Weighted average exercise price                      |       | $               |  9.63        |            | $          |  11.58 |   |
| Aggregate intrinsic value (in thousands)             |       | $               | —            |            | $          |  — |   |
| Weighted average remaining contractual term  (years) |       | 5.7             |              | 5.8             |       |

 

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A summary of the Company’s restricted stock activity for the ninemonths ended September 30, 2010 and the weighted average grant date fair valuesfollows:

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value   Per Share** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|
| Nonvested at December 31, 2009 |       | 722,743    |       | $                                                            | 3.10       |   |
| Granted                             |       | 594,202    |       | $                                                            | 5.29       |   |
| Vested                              |       | (142,210   | )          | $                                                            | 1.76       |   |
| Forfeited                           |       | (95,024    | )          | $                                                            | 2.67       |   |
| Nonvested at September 30, 2010     |       | 1,079,711  |       | $                                                            | 4.85       |   |

 

The total grant date fair value of restricted shares vested during thenine months ended September 30, 2009 and 2010 was approximately$0.3 million and $0.2 million, respectively. The total fair market valueof these shares on the dates vested was approximately $0.1 million and$0.7 million, for the nine months ended September 30, 2009 and 2010,respectively.

 

A summary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three and nine months ended September 30, 2009 and 2010 follows (inthousands):

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Restricted stock                       |       | $                                                    |       | 154                                                 |       | $ |   | 414 |   | $ |   | 558 |   | $ |   | 1,204 |   |
| Stock options                          |       | 294                                                  |       | 229                                                 |       | 909 |   | 823 |   |
| Total stock-based compensation expense |       | $                                                    |       | 448                                                 |       | $ |   | 643 |   | $ |   | 1,467 |   | $ |   | 2,027 |   |

 

As of September 30, 2010, the total compensation cost not yetrecognized related to nonvested stock awards under the Company’s plans isapproximately $5.7 million. The weighted average period over which this expenseis expected to be recognized is approximately 2.6 years.

 

**8.Transactions with Variable Interest Entities**

 

The Company conducts business in Texas through a wholly ownedsubsidiary registered as a Credit Services Organization (“CSO”) under Texaslaw. In connection with operating as a CSO, the Company entered into a creditservices organization agreement (“CSO Agreement”) with an unaffiliatedthird-party lender in 2007. The agreement governs the terms by which theCompany refers customers in Texas to that lender, on a non-exclusive basis, fora possible extension of credit. The Company processes loan applications andcommits to reimburse the lender for any loans or related fees that are notcollected from those customers.

 

The Company has determined that the lender is a variable interestentity (“VIE”) but that the Company is not the primary beneficiary of this VIE.Therefore, the Company has not consolidated the lender as of and for the threeand nine months ended September 30, 2009 and 2010.

 

Under the terms of the Company’s agreement with its third-party lender,the Company is contractually obligated to reimburse the lender for the fullamount of the cash advances and certain related fees that are not collectedfrom the customers. As of September 30, 2009 and 2010, the third-party lender’soutstanding cash advances and interest receivable, which were not recorded onthe Company’s balance sheet, totaled approximately $19.1 million and $19million, respectively, which is the amount the Company would be obligated topay the third-party lender if these amounts were to become uncollectible.Additionally, if these cash advances were to become uncollectible, the Companywould also be required to pay the third-party lender all related non-sufficientfunds (“NSF”) fees and late fees on these advances.

 

Because of the Company’s economic exposure for losses related to thethird-party lender’s advances and interest receivable, the Company hasestablished an accrual for third-party lender losses to reflect the Company’sestimated probable 

 

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lossesrelated to uncollectible third-party lender cash advances. The accrual forthird-party lender losses that was reported in the Company’s balance sheet atSeptember 30, 2009 and 2010 was approximately $4.3 million and $4.4million, respectively, and was established on a basis similar to the allowancefor doubtful accounts.

 

**9. Related Party Transactions**

 

In January 2009, the Company entered into a one-year consultingarrangement with Mr. Tony S. Colletti, a member of its Board of Directors,for his support of government relations initiatives on the Company’s behalf inIllinois and Washington, D.C. The consulting arrangement ended on December 31,2009.  Included in general andadministrative expenses, for the three and nine months ended September 30,2009, are expenses of approximately $58,000 and $179,000, respectively, relatedto this consulting arrangement.

 

Effective July 31, 2010, Mr. Colletti entered into an agreement withthe Community Financial Services Association of America (“CFSA”), an industrytrade group composed of the Company and more than 100 other companies engagedin the cash advance services industry, to provide consulting and advisoryservices on regulatory initiatives. Under the consulting agreement, the CFSAwill pay Mr. Colletti approximately $525,000 between July 31, 2010 and December31, 2011. As of September 30, 2010, the Company has paid approximately $0.8million of membership dues and other funds to the CFSA, all of which areincluded in general and administrative expenses. In addition, Kenneth E.Compton, the Company’s President and Chief Executive Officer, serves as amember of the CFSA’s Board of Directors.

 

Included in general and administrative expenses are expenses withrelated parties, relating primarily to aircraft operating expenses, legalexpenses, and operating leases for office space, of approximately $69,000 and$51,000 for the three months ended September 30, 2009 and 2010, respectively,and approximately $193,000 and $179,000 for the nine months ended September 30,2009 and 2010, respectively.

 

Under a time-share arrangement, the Company’s former Chairman has usedthe Company’s aircraft for private purposes in exchange for the Company’s useof an identical aircraft owned by the Company’s former Chairman. Included inaccounts receivable at September 30, 2010 is a $4,000 net receivable related tothis arrangement. Pursuant to this time-share arrangement, the Company enteredinto a Time Sharing Agreement on August 5, 2010, with Johnson Management, LLC,a limited liability company that is owned by the Company’s former Chairman, whois also the beneficial owner of more than five percent of the Company’s commonstock. This agreement provides the Company with the right to lease an aircraftfrom Johnson Management, LLC for a period of one year, subject to automaticrenewal on a month-to month basis, at a lease rate equal to the cost ofoperating the aircraft, plus an additional charge equal to 100% of the cost offuel, oil and lubricants used on the flight. The Company intends to use theaircraft for business purposes when the Company-owned aircraft is unavailable.

 

The Company pays rent of $350 per month for office space used by theCompany’s current Chairman at an office building owned by the Company’s formerChairman.

 

The Company’s former Chairman’s brother is a partner of a law firm thatprovides the Company with certain routine legal services. During the three andnine months ended September 30, 2010, the Company incurred costs and expensesof approximately $8,000 and $35,000, respectively, for those services.

 

The Company incurred costs and expenses of approximately $641,000 and $342,000for the nine months ended September 30, 2009 and 2010, respectively, for theadvancement of expenses incurred by certain of the Company’s current and formerofficers and directors in connection with their responses to requests forinformation and subpoenas as part of an investigation by the U.S. Securitiesand Exchange Commission (“SEC”) into alleged insider trading by third partiesin the Company’s securities. These costs were incurred by the Company pursuantto indemnification agreements that require the Company to advance expenses to,and may require the Company to indemnify its current and former officers anddirectors for, damages incurred by them in responding to the pending SECinvestigation or defending against any related enforcement proceedings,including the “Wells Notice” issued by the SEC to the Company’s Chief ExecutiveOfficer on July 22, 2009.

 

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

 

In March 2008, the Company amended and restated its prior revolvingcredit facility with a syndicate of banks. This credit facility now providesthe Company with a $270 million revolving line of credit, which includesthe ability to issue up to $25 million in letters of credit. Thisrevolving credit facility matures on March 24, 2013. The Company has theoption to increase the revolving credit facility by an additional$95 million, subject to compliance with the credit agreement’s covenantsand conditions and upon receipt of sufficient commitments from lenders in thelending syndicate.

 

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The credit facility is collateralized by substantially all of theCompany’s assets and contains various financial covenants that require, amongother things, the maintenance of a minimum net worth and certain leverage andfixed charge coverage ratios and also restricts the encumbrance of assets andthe creation of indebtedness. A breach of a covenant or an event of defaultcould prohibit the Company from accessing otherwise available borrowings, orcould cause all amounts outstanding under the revolving credit facility tobecome due and payable. The Company was in compliance with all financialcovenants at September 30, 2010.

 

In general, the Company’s borrowings under the revolving creditfacility bear interest, at the Company’s option, at a base rate plus anapplicable margin or a LIBOR-based rate plus an applicable margin. The baserate equals the greater of: (i) the prime rate set by Bank of America; and(ii) the sum of the federal funds rate plus 0.50%. The applicable marginis determined each quarter by a pricing grid based on the Company’s totalleverage ratio of consolidated debt to consolidated EBITDA. The base rateapplicable margin ranges from 1.50% to 2.25% based upon the Company’s totalleverage ratio. The LIBOR-based applicable margin ranges from 2.50% to 3.25%based upon the Company’s total leverage ratio. As of September 30, 2010,the applicable margin for the prime-based rate was 1.75% and the applicablemargin for the LIBOR-based rate was 2.75%.

 

Asof September 30, 2010, the Company had $111 million outstanding on therevolving portion of the credit facility and $6.2 million of standbyletters of credit outstanding. Borrowings under the revolving credit facilityare subject to compliance with certain covenants and conditions.

 

The carrying value of the credit facility approximated its fair valueat December 31, 2009 and September 30, 2010.

 

The Company owns its headquarters building and related land subject toa mortgage loan, the principal amount of which was approximately$4.6 million and $4.2 million at December 31, 2009 and September 30,2010, respectively. The mortgage loan is payable to an insurance company and iscollateralized by our corporate headquarters building and related land. Themortgage loan is payable in 180 monthly installments of approximately$66,400, including principal and interest, and bears interest at a fixed rateof 7.30% over its term. The mortgage loan matures on June 10, 2017. Thecarrying amount of the Company’s corporate headquarters (land, landimprovements and building) was approximately $4.6 million and $4.4 millionat December 31, 2009 and September 30, 2010, respectively.

 

The fair market value of the Company’s long-term debt is estimatedusing a discounted cash flow analysis and was approximately $5.9 million atDecember 31, 2009 and $5.2 million at September 30, 2010.

 

**11.  Income Taxes**

 

The effective income tax rate as a percentage of income before incometaxes was 39.3% and 64.3% for the three months ended September 30, 2009and 2010, respectively. The effective income tax rate as a percentage of incomebefore income taxes was 37.7% and 46.7% for the nine months ended September 30,2009 and 2010, respectively.

 

The Company adopted FASB ASC 740-10 on January 1, 2007. As aresult of the implementation of FASB ASC 740-10, the Company recognized noadjustments to the January 1, 2007 balance of retained earnings. At theadoption date, the Company did not have any unrecognized tax benefits and didnot have any interest or penalties accrued. As of December 31, 2009 and September 30,2010, the Company had $0.7 million and $0.9 million of total gross unrecognizedtax benefits including interest, respectively. Of this total approximately $0.7million and $0.9 million, respectively, represents the amount of unrecognizedtax benefits that are permanent in nature and, if recognized, would affect theannual effective tax rate. The increase in the total gross unrecognized taxbenefit including interest during the three months ended September 30,2010, is primarily attributable to the accrual of another three months ofinterest.

 

The Company’s continuing practice is to recognize interest andpenalties related to income tax matters in income tax expense. As of September 30,2010, the Company had approximately $0.1 million accrued for gross interest, ofwhich approximately $13,000 was a current period expense. The Company hasdetermined that it is possible that the total amount of unrecognized taxbenefits that relate to various state examinations may increase or decreasewithin twelve months of the reporting date. However, at this time, a reasonableestimate of the range of possible change cannot be made until furthercorrespondence has been conducted with the state taxing authorities.

 

The Company is subject to U.S. income taxes, as well as various otherforeign, state and local jurisdictions. With few exceptions, the Company is nolonger subject to U.S. federal, state and local, or non-U.S. income taxexaminations by tax authorities for years before the tax year ended September 30,2005, although carry forward attributes that were generated prior to 2005 maystill be adjusted upon examination by the taxing authorities if they eitherhave been used or will be used in a future period. The income tax returns forthe years 2005 through 2008 are under examination by a state taxing authoritythat 

 

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hascompleted its examinations and issued a proposed assessment for tax years 2005through 2008. In consideration of the proposed assessment, the total grossunrecognized tax benefit was increased by $0.9 million through September 30,2010. At this time, it is too early to predict the final outcome of thismatter.

 

**12. Subsequent Events**

 

On October 27, 2010, the Company’s Board of Directors declared acash dividend of $0.0625 per share of common stock, payable on December 3,2010 to shareholders of record on November 23, 2010.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF 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 “Part I. Item 1. FinancialStatements.” This discussion contains forward-looking statements that involverisks and uncertainties such as our plans, objectives, expectations andintentions. Our actual results could differ materially from those anticipatedby these forward-looking statements. Please see “Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2009and “Part II. Item 1.A “Risk Factors” of this Quarterly Report and “Forward-LookingStatements” at the end of this section for further discussion of theuncertainties, risks and assumptions associated with these statements.*

 

**Overview**

 

Headquartered in Spartanburg, South Carolina, we are the largestnon-bank provider of cash advance services in the United States as measured bythe number of centers operated. Our centers typically provide short-term,unsecured cash advances that are due on the customers’ next payday. As of September 30,2010, we operated 2,322 centers in 31 states in the United States, 21 centersin the United Kingdom and 17 centers in Canada, and had 64 limited licensees inthe United Kingdom.

 

Our industry has been significantly affected by increasing regulatorychallenges. Legislation that negatively impacts cash advance services, whetherthrough preclusions, interest rate ceilings, fee reductions, mandatoryextensions of term length, limits on the amount or term of our products andservices, or limits on consumers’ use of our products and services couldmaterially and adversely affect our business. We are very active in monitoringand evaluating regulatory initiatives in all of the states and are closelyinvolved with the efforts of the Community Financial Services Association ofAmerica (“CFSA”), which is an industry trade group composed of our Company andmore than 100 other companies engaged in the cash advance services industry.

 

***Cash Advance Services***

 

Our primary business is offering cash advance services, which consistprimarily of cash advances but also include installment loans and lines ofcredit. However, we offer additional complimentary products and services.

 

In most states where we operate, we originate cash advance servicesunder the authority of state-specific enabling statutes that allow for cashadvances ranging from single and installment closed-end terms to revolvinglines of credit with open-ended terms. The particular cash advance servicesoffered in any given location may change from time to time depending uponchanges in state law and federal law. Additionally, where permitted byapplicable law, we may service customers for a third-party lender. In Texas,where we operate as a Credit Services Organization (“CSO”), we offer afee-based credit services package to assist customers in trying to improvetheir credit and in obtaining an extension of consumer credit through athird-party lender. Under the terms of our agreement with this lender, weprocess customer applications and are contractually obligated for all losses.The permitted size of a cash advance varies by jurisdiction and ranges from $50to $5,000. However, our typical cash advance ranges from $50 to $1,000. Thefinance charges on cash advance services currently offered also vary byjurisdiction and range up to 22% of the amount of the cash advance.

 

A customer may obtain a cash advance in one of three ways: (1) byvisiting one of our centers in person and completing an application;(2) by visiting our website, beginning the application process online,then visiting one of our centers in person to complete the application andreceive a cash advance; or (3) by visiting our website, completing anapplication online and receiving a cash advance from a third-party lender thatis directly deposited in the customer’s bank account.

 

Our customers also may obtain online cash advances made by third-partylenders that are governed by the laws of the state where the customer resides.We receive revenue from online cash advances made by third-party lenders basedon a percentage of the net fees, defined as advance fees less a provision fordoubtful accounts and a cost of capital charge, but otherwise are notcontractually obligated for losses.

 

Additional fees that we may charge and collect include annualparticipation fees, fees for returned checks, late fees, and other fees aspermitted by applicable law. Currently, none of the cash advance services weoffer include annual participation fees. Fees for returned checks or 

 

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electronicdebits that are declined for non-sufficient funds (“NSF”) vary by state andrange up to $30, and late fees vary by state and range up to $50. In Texas andonline, the third-party lenders charge NSF fees and late fees in accordancewith applicable law.

 

Each new customer must provide us with certain personal informationsuch as his or her name, address, phone number, proof of identification,employment information or source of income, bank account, and references. Thisinformation is entered into our information system and, where applicable, thatof the third-party lender. The customer’s identification, proof of incomeand/or employment and proof of bank account are verified. In jurisdictionswhere we provide the cash advance, we determine whether to approve a cashadvance and the size of a cash advance based primarily on a customer’s income.We do not perform credit checks through consumer reporting agencies. In thefuture, we may consider other criteria in evaluating cash advances. When athird-party lender provides the cash advance, such as in Texas and online, theapplicable third-party lender decides whether to approve a cash advance andestablishes all of the underwriting criteria and terms, conditions, andfeatures of the customer agreements.

 

After the documents presented by the customer have been reviewed forcompleteness and accuracy, copied for record-keeping purposes and the cashadvance has been approved, the customer enters into an agreement governing theterms of the cash advance. The customer then provides a personal check or anAutomated Clearing House (“ACH”) authorization, which enables electronicpayment from the customer’s account, to cover the amount of the cash advanceplus charges for applicable fees and/or interest and/or the balance due underthe agreement, and makes an appointment to return on a specified due date,typically his or her next payday, to repay the cash advance plus the applicablecharges. However, in some states, customers are not required to provide us witha personal check or ACH authorization, and payment cycles may vary dependingupon state law and type of service. At the specified due date, the customer isrequired to make the applicable payment, usually payment in full of the cashadvance plus fees and interest if applicable. Payment is usually made inperson, in cash at the center where the cash advance was initiated or issuedunless the cash advance was completed on the internet, in which case thecustomer makes payment by ACH authorization.

 

Upon payment in full, the customer’s check is returned and/or his orher ACH authorization is deemed to be revoked. If the customer does not repaythe outstanding cash advance in full on or before the due date, we will seek tocollect from the customer the amount of the cash advance and any applicable fees,including late and NSF fees due, and may deposit the customer’s personal checkor initiate the electronic payment from the customer’s bank account.

 

***Other Products***

 

We may offer alternative products and services to our customers wherepermissible under applicable law. For instance, in Ohio, we currently offercheck cashing services at state authorized rates. We may also offer theproducts or services of a third party that we market, process, and/or serviceat our centers pursuant to an agreement with the third party. For instance, wecurrently offer pre-paid debit cards and money orders, money transmission, andbill payment services. Our Advance America branded pre-paid Visa debit card isissued by a federally chartered bank and regulated by the Office of ThriftSupervision. The card allows a cardholder to load cash onto the card and usethe card wherever VISA debit cards are accepted. We are compensated under anagreement with the bank based on a number of factors related to the bank’srevenue from purchases and subsequent cardholder activity, such as charges forloads, ATM withdrawals, account maintenance/plan charges, and purchases. Wealso sell money orders, and provide money transfer services and bill paymentservices as an agent of a licensed third-party money transmitter. We arecompensated by the money transmitter based upon the number and value of moneytransfers, money orders, and bill payments made at our centers.

 

***Approval Process***

 

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

 

In order for a new customer to be approved for a cash advance, he orshe is required to have a bank account and a regular source of income, such asa job. To obtain a cash advance, a customer typically:

 

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

 

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·                  enters into an agreementgoverning the terms of the cash advance, including the customer’s agreement torepay the amount advanced in full on or before a specified due date (usuallythe customer’s next payday), and our agreement to defer the presentment ordeposit of the customer’s check or ACH authorization until the due date;

 

·                  writes a personal check orprovides an ACH authorization to cover the amount advanced plus charges forapplicable fees and/or interest; and

 

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

 

In jurisdictions where we provide cash advances, we determine whetherto approve the cash advance to our customers. We require proof ofidentification, bank account, and income source, as described above, and weprimarily consider the customer’s income in determining the amount of the cashadvance. In the future we may consider other criteria in evaluating cash advances.When a third-party lender provides the cash advance, such as in Texas andonline, the applicable third-party lender decides whether to approve a cashadvance and establishes all of the underwriting criteria and terms, conditions,and features of the customer agreements.

 

***Payment Plans***

 

In most states, a customer may qualify for an extended payment plan (“PaymentPlan”). Generally, the terms of our Payment Plans conform to the CFSA BestPractices for extended payment plans. Certain states have specified their ownterms and eligibility requirements for Payment Plans. Typically, a customer mayenter into a Payment Plan for no additional fee once every twelve months andthe Payment Plan will call for scheduled payments that coincide with thecustomer’s next four paydays. In some states, a customer may enter into aPayment Plan more frequently. We do not engage in collection efforts while acustomer is enrolled in a Payment Plan. If a customer misses a scheduledpayment under a Payment Plan, we may resume our normal collection procedures.We do not offer a Payment Plan for installment loans or lines of credit. Thethird-party lender in Texas does not offer a Payment Plan for advances to itscustomers. The third-party internet lenders offer Payment Plans as required bystate law.

 

Certain states also provide for credit counseling plans. If a customerinforms us that he or she has entered into a credit counseling plan, we workwith the credit counselor and the customer to create a modified payment plan.

 

***Collection Process***

 

Repayment terms vary depending upon state law, the type of cash advanceservice offered, and whether the cash advance was completed online or in one ofour centers. Generally, as part of the closing process, we explain the customer’srepayment obligations and establish the expectation that the customer will payus in cash on or before the due date in accordance with their agreement withus. The day before the due date, we generally call the customer to confirmtheir payment.

 

If a customer does not pay the amount due, our center management hasthe discretion to either commence past-due collection efforts, which mayproceed for up to 14 days in most states, or deposit the customer’spersonal check or debit their bank account in accordance with their ACHauthorization. If center management decides to commence past-due collectionefforts, employees typically contact the customer by telephone or in person toobtain a payment or a promise to pay and, in cases where we hold a check,attempt to exchange the customer’s check for a cashier’s check, if funds areavailable.

 

If, at the end of this past-due collection period or Payment Plan, thecenter has been unable to collect the amount due, the customer’s check isdeposited or their ACH authorization is processed. Additional collectionefforts are not required if the customer’s deposited check or ACH debit clears.For the year ended December 31, 2009, and the nine months ended September 30,2010, we deposited customer checks or presented an ACH authorization forapproximately 5.9% and 6.4%, respectively, of all customer checks we receivedand approximately 30% and 35.4%, respectively, of these deposited customerchecks or presented ACH’s cleared.  Ifthe customer’s check or ACH debit does not clear and is returned because ofnon-sufficient funds in the customer’s account or because of a closed accountor a stop-payment order, we begin additional collection efforts. Theseadditional collection efforts are carried out by center employees and typicallyinclude contacting the customer by telephone or in person to obtain payment ora promise to pay and attempting to exchange the customer’s check for a cashier’scheck, if funds become available. We also send out a series of collectionletters, which are automatically distributed from a central location based on aset of pre-determined criteria.

 

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In the case of cash advances in the form of lines of credit, if acustomer fails to make a payment when due in accordance with the terms of theiragreement with us, center management may close the line of credit, acceleratethe maturity date, and take the steps outlined above or work with the customerto bring his or her payments current. If we close the line of credit andaccelerate the maturity date, we stop charging interest on the outstandingamount and begin collection efforts as described above.

 

***Selected Operating Data***

 

The following table presents key operating data for our business:

 
| ** **                                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Number of centers open at end of period                                                                      |       | 2,614                                                |       | 2,360                                               |       | 2,614 |   | 2,360 |   |
| Number of customers served—all credit products  (thousands)                                             |       | 816                                                  |       | 785                                                 |       | 1,147 |   | 1,117 |   |
| Number of cash advances originated (thousands) (1)                                                           |       | 2,862                                                |       | 2,591                                               |       | 7,836 |   | 7,290 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                      |       | $                                                    | 1,034,647  |                                                | $          | 961,208 |   | $ | 2,824,109 |   | $ | 2,688,468 |   |
| Average amount of each cash advance originated (1)                                                           |       | $                                                    | 362        |                                                | $          | 371 |   | $ | 360 |   | $ | 369 |   |
| Average charge to customers for providing and processing  a cash advance (1)                                 |       | $                                                    | 53         |                                                | $          | 55 |   | $ | 53 |   | $ | 55 |   |
| Average duration of a cash advance (days) (1)(2)                                                             |       | 17.6                                                 |       | 18.1                                                |       | 17.5 |   | 18.1 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 20                                                   |       | 10                                                  |       | 27 |   | 10 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                                    | 7,410      |                                                | $          | 3,800 |   | $ | 12,625 |   | $ | 4,300 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                                    | 354        |                                                | $          | 333 |   | $ | 446 |   | $ | 277 |   |
| Number of installment loans originated (thousands)  (4)                                                      |       | 10                                                   |       | 23                                                  |       | 25 |   | 40 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                                  |       | $                                                    | 4,479      |                                                | $          | 10,003 |   | $ | 11,202 |   | $ | 17,882 |   |
| Average principal amount of each installment loan  originated (4)                                            |       | $                                                    | 461        |                                                | $          | 436 |   | $ | 443 |   | $ | 452 |   |

 

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(1)           Excludes lines of credit and installmentloans.

(2)           Excludes the impact of extended paymentplans.

(3)           In Virginia, we began offering lines ofcredit in November 2008, ceased offering new lines of credit to customers inFebruary 2010, and stopped providing advances on existing lines of crediton September 30, 2010.

(4)           The installment loan activity reflectsloans we originated as the lender in Illinois.

 

***Revenues and Expenses***

 

Our revenues consist primarily of fees and/or interest paid to usdirectly by our customers. Our expenses relate primarily to the operation ofour centers. These expenses include salaries and related payroll costs,occupancy expense related to our leased centers, center depreciation expense,advertising expense, and other center expenses that consist principally ofcosts related to center closings, communications, delivery, supplies, travel,bank charges, various compliance and collection costs, and costs associatedwith theft.

 

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

 

Our provision for doubtful accounts and accrual for third-party lenderlosses are primarily based upon models that analyze specific portfoliostatistics and also reflect, to a lesser extent, management’s judgmentregarding overall accuracy. The analytical models take into account severalfactors including the number of transactions customers complete, and charge-offand recovery rates. Additional factors, such as changes in state laws, centerclosings, length of time centers have been open in a state, and relative mix ofnew centers within a state are also evaluated to determine whether the resultsfrom the analytical models should be revised.

 

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The provision for doubtful accounts decreased from 23.1% of revenues,or $38.8 million, and 19.6% of revenues, or $92.9 million, for the three monthsand nine months ended September 30, 2009, respectively, to 21.6% ofrevenues, or $33.3 million, and 16.2% of revenues, or $71.1 million, forthe same periods in 2010.

 

During the nine months ended September 30, 2009, we also receivedproceeds from the sale of receivables in the amount of $2.2 million compared to$0.7 million for the nine months ended September 30, 2010.

 

***Income Taxes***

 

The effective income tax rate as a percentage of income before incometaxes was 39.3% and 64.3% for the three months ended September 30, 2009 and2010, respectively. The effective income tax rate as a percentage of incomebefore income taxes was 37.7% and 46.7% for the nine months ended September 30,2009 and 2010, respectively.

 

***Changes in Legislation***

 

During the last few years, legislation that prohibits or severelyrestricts our products and services has been introduced or adopted in a numberof states and at the federal level, and we expect that trend to continue forthe foreseeable future. For example, in July 2010, the Dodd-Frank WallStreet Reform and Consumer Protection Act was signed into law. Among otheritems, this act created the Bureau of Consumer Financial Protection, which willhave authority to regulate companies that provide consumer financial services.At the state level, a 2009 law in Virginia prompted us to change our cashadvance product and to offer an open-ended line of credit product. However, asubsequent Virginia Corporation Commission ruling and additional legislationlimited our ability to offer and service the open-ended line of credit productin Virginia. As a result, we have consolidated a number of our centers inVirginia, and we may determine that further consolidation of centers inVirginia is appropriate if the cash advance product we now offer in Virginia isnot sufficiently profitable to maintain. In the State of Washington a January 1,2010 law places a number of restrictions on our cash advance product includinglimiting the number of cash advances a customer may take to eight advances inany one year. As a result, we expect our revenues and profits in Washingtonwill be significantly reduced. If we are unable to operate profitably inWashington, we may cease operating in that state. New laws in each of SouthCarolina and Kentucky implement a statewide database to monitor the number ofloans made to customers. New Colorado legislation permits a multipleinstallment loan that we expect will significantly lower our revenues andprofits in Colorado. Further, legislation permitting cash advances in Arizonaexpired on July 1, 2010, and as a result, we have ceased operations inArizona. Legislation in Mississippi that is scheduled to expire in 2012 may notbe renewed or could be modified in a manner that affects our operationsnegatively. We are regularly refining our cash advance services and developingnew products and services or operations to address recent or anticipatedlegislative and regulatory changes. Some of these legislative and regulatorychanges may result in our discontinuing operations, while other changes mayresult in less significant short-term or long-term changes, interruptions inrevenues, and lower operating margins. We generally cannot estimate whateffect, if any, operational changes we make in response to legislative andregulatory changes may have on our financial results until we are able todevelop legal and financially viable alternative products and services.

 

***Operations in Ohio***

 

In November 2008, the State of Ohio capped interest rates on cashadvance loans and limited the number of cash advances a customer may take inany one year. As a result of this legislation, we began offering small loanspursuant to the Ohio Small Loan Act and check-cashing services. The small loanproduct and check cashing services generate less revenue than our former cashadvance product and, as a result, we have consolidated some of our centers inOhio. In the third quarter of 2009, we stopped offering small loans and beganto offer cash advances pursuant to the Ohio Second Mortgage Act as a registeredsecond mortgage lender. A rule issued by the Ohio Division of FinancialInstitutions in the first quarter of 2010, and temporarily stayed by the Ohiocourts pending the outcome of certain litigation between that state andunrelated third parties, would, if enforced, restrict certain activities bylicensed check cashers and could have a further negative impact on ouroperations in Ohio.

 

For the three months ended September 30, 2009 and 2010, 5.9% and7.4%, respectively, of our total revenues were generated from our operations inOhio. For the nine months ended September 30, 2009 and 2010, 5.5% and7.2%, respectively, of our total revenues were generated from our operations inOhio. The following is a summary of financial information for our operations inOhio for those periods (in thousands):

 

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| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 9,869      |                                                | $          | 11,359 |   | $ | 26,164 |   | $ | 31,561 |   |
| Total center expenses      |       | 8,709                                                |       | 9,184                                               |       | 27,274 |   | 24,368 |   |
| Center gross profit (loss) |       | $                                                    | 1,160      |                                                | $          | 2,175 |   | $ | (1,110 | ) | $ | 7,193 |   |

 

***Operations in Virginia***

 

A Virginia law that went into effect in January 2009 substantiallychanged the terms for cash advance services in Virginia and severely restrictedviable operations for short-term lenders. We continue to offer cash advances in Virginia in conformity with thenew regulations, and between November 2008 and February 2010 alsooffered an open-ended line of credit product. However, a subsequent VirginiaCorporation Commission ruling limited our ability to offer the open-ended linesof credit effective March 1, 2010. As a result, we ceased offering new open-endedlines of credit in February 2010 and continued to service existing linesof credit. Because of additional legislation that was passed in 2010, westopped providing new draws on existing lines of credit on September 30,2010.

 

During the nine months ended September 30, 2010, we closed 55centers in Virginia. For the nine months ended September 30, 2010, closingcosts of approximately $1.3 million are included in the income statement as anincrease in other center expenses of $0.9 million, a loss on disposal ofproperty and equipment of $0.1 million, and center salaries and related payrollcosts of $0.3 million.

 

Althoughthe Company intends to seek new revenue opportunities in Virginia (in additionto cash advances), the elimination of the open-ended line of credit product maycause the Company to close or consolidate some or all of its centers inVirginia. If we close all of our remaining centers in Virginia, the estimatedclosing costs, including severance, center tear-down costs, lease termination costs,and the write-down of fixed assets would range from $2.2 million to $6.4million, and the collectability of advances and fees receivable in Virginia maybe impaired.  As of September 30, 2010, advances and fees receivable,net of allowance for doubtful accounts, in Virginia was approximately $11million.  At this time, we are not able to determine the amount ofgoodwill impairment, if any, that could result from the cessation of ouroperations in Virginia.

 

For the three months ended September 30, 2009 and 2010, 5.8% and4.5%, respectively, of our total revenues were generated from our operations inVirginia. For the nine months ended September 30, 2009 and 2010, 8.9% and4.6%, respectively, of our total revenues were generated from our operations inVirginia. The following is a summary of financial information for ouroperations in Virginia for the three and nine months ended September 30,2009 and 2010 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 9,720      |                                                | $          | 6,940 |   | $ | 42,311 |   | $ | 20,399 |   |
| Total center expenses      |       | 8,648                                                |       | 5,065                                               |       | 38,564 |   | 15,823 |   |
| Center gross profit (loss) |       | $                                                    | 1,072      |                                                | $          | 1,875 |   | $ | 3,747 |   | $ | 4,576 |   |

 

***Operations in Washington***

 

A law became effective in the State of Washington on January 1,2010 that limits the number of cash advances a customer may take in any oneyear, limits the cash advance amount that can be taken out at any one time, andimplements a statewide database to monitor the number of cash advances. This lawhas negatively affected our revenue and profitability in Washington.

 

As a result, during the nine months ended September 30, 2010, weclosed 45 centers in Washington. For the three months ended September 30,2010, closing costs of approximately $0.8 million are included in the incomestatement as an increase in other center expenses of $0.7 million and centersalaries and related payroll costs of $0.1 million. For the nine months ended September 30,2010, closing costs of approximately $1.1 million are included in the incomestatement as an increase in other center expenses of $1 million and centersalaries and related payroll costs of $0.1 million.

 

If we close all of our remaining centers in Washington, the estimatedclosing costs, including severance, center tear-down costs, lease terminationcosts, and the write-down of fixed assets would range from $1 million to$3.7 million, and the collectability of advances and fees receivable inWashington may be impaired. As of September 30, 2010, advances and feesreceivable, net of allowance for doubtful accounts, in Washington wasapproximately $3.9 million. At this time, we are not able to determine theamount of goodwill impairment, if any, that could result from the cessation ofour operations in Washington.

 

For the three months ended September 30, 2009 and 2010, 4.2% and0.8%, respectively, of our total revenues were generated from our operations inWashington. For the nine months ended September 30, 2009 and 2010, 4.2%and 1.2%, respectively, of our total revenues were generated from ouroperations in Washington. The following is a summary of financial informationfor our operations in Washington for the three and nine months ended September 30,2009 and 2010 (in thousands):

 

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| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 6,998      |                                                | $          | 1,289 |   | $ | 19,805 |   | $ | 5,081 |   |
| Total center expenses      |       | 5,178                                                |       | 3,476                                               |       | 14,848 |   | 10,480 |   |
| Center gross profit (loss) |       | $                                                    | 1,820      |                                                | $          | (2,187 | ) | $ | 4,957 |   | $ | (5,399 | ) |

 

***Operations in South Carolina***

 

A new law in South Carolina became effective January 1, 2010 that,among other things, prohibits any consumer from having more than one cashadvance outstanding at any time and implements a statewide database to monitorthe number of cash advances made to customers within that state. Although thislaw has negatively affected our revenue and profitability in South Carolina, wecurrently believe operations will remain economically viable in this state.

 

For the three months ended September 30, 2009 and 2010, 5.4% and3.5%, respectively, of our total revenues were generated from our operations inSouth Carolina. For the nine months ended September 30, 2009 and 2010,5.2% and 3.7%, respectively, of our total revenues were generated from ouroperations in South Carolina. The following is a summary of financialinformation for our operations in South Carolina for the three and nine monthsended September 30, 2009 and 2010 (in thousands):

 

| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 9,013      |                                                | $          | 5,451 |   | $ | 24,896 |   | $ | 16,234 |   |
| Total center expenses      |       | 6,400                                                |       | 5,491                                               |       | 17,176 |   | 15,264 |   |
| Center gross profit (loss) |       | $                                                    | 2,613      |                                                | $          | (40 | ) | $ | 7,720 |   | $ | 970 |   |

 

***Operations in Kentucky***

 

A new law in Kentucky became effective on April 30, 2010 that,among other things, prohibits any consumer from having more than two cashadvances outstanding at any time, establishes a maximum aggregate advanceamount of $500, and implements a statewide database to monitor the number anddollar amount of advances made to customers within that state. Although thislaw has negatively affected our revenue and profitability in Kentucky, wecurrently believe operations will remain economically viable in this state.

 

For the three months ended September 30, 2009 and 2010, 1.3% and0.9%, respectively, of our total revenues were generated from our operations inKentucky. For the nine months ended September 30, 2009 and 2010, 1.2% and1.1%, respectively, of our total revenues were generated from our operations inKentucky. The following is a summary of financial information for ouroperations in Kentucky for the three and nine months ended September 30,2009 and 2010 (in thousands):

 

| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 2,114      |                                                | $          | 1,446 |   | $ | 5,861 |   | $ | 4,770 |   |
| Total center expenses      |       | 1,604                                                |       | 1,435                                               |       | 4,535 |   | 4,475 |   |
| Center gross profit (loss) |       | $                                                    | 510        |                                                | $          | 11 |   | $ | 1,326 |   | $ | 295 |   |

 

***Operations in Colorado***

 

A new law in Colorado became effective on August 11, 2010, thatexpands the minimum term of cash advances to six months, allows repayment inmultiple installments, and creates a new regime of permitted finance, interest,and other charges. This law has negatively affected our revenue andprofitability in Colorado.

 

During the nine months ended September 30, 2010, we closed 31 centersin Colorado and we may close additional centers if we determine that they areno longer economically viable to operate. For the three months ended September 30,2010, closing costs of approximately $0.5 million are included in the incomestatement as an increase in other center expenses of $0.4 million and centersalaries and related payroll costs of $0.1 million. For the nine months ended September 30,2010, closing costs of approximately $0.9 million are included in the incomestatement as an increase in other center 

 

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expensesof $0.6 million, center salaries and related payroll costs of $0.1 million, anda loss on impairment of assets of $0.2 million.

 

If we close all of our remaining centers in Colorado, the estimatedclosing costs, including severance, center tear-down costs, lease terminationcosts, and the write-down of fixed assets would range from $0.7 million to $2.2million, and the collectability of advances and fees receivable in Colorado maybe impaired. As of September 30, 2010, advances and fees receivable, netof allowance for doubtful accounts, in Colorado was approximately $5 million.At this time we are not able to determine the amount of goodwill impairment, ifany, that could result from closing our remaining centers in Colorado.

 

For the three months ended September 30, 2009 and 2010, 2% and1.4%, respectively, of our total revenues were generated from our operations inColorado. For the nine months ended September 30, 2009 and 2010, 1.9% ofour total revenues were generated from our operations in Colorado. Thefollowing is a summary of financial information for our operations in Coloradofor the three and nine months ended September 30, 2009 and 2010 (inthousands):

 

| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 3,351      |                                                | $          | 2,083 |   | $ | 9,122 |   | $ | 8,203 |   |
| Total center expenses      |       | 2,982                                                |       | 3,354                                               |       | 8,559 |   | 8,816 |   |
| Center gross profit (loss) |       | $                                                    | 369        |                                                | $          | (1,271 | ) | $ | 563 |   | $ | (613 | ) |

* *

***Operations in Montana***

 

Dueto a recent law change in Montana that becomes effective on January 1,2011, the Company may close its two centers in that state. The estimated costof closing the centers is approximately $75,000. For the nine months endedSeptember 30, 2010, the operations in Montana generated approximately$100,000 of center gross profit.

 

***Closings***

 

*Closing of Operations in Arizona.*An existing law permittingcash advances in Arizona expired June 30, 2010. We ceased operations inour remaining 47 centers in Arizona during the third quarter ended September 30,2010.  For the nine months ended September 30,2010, closing costs of approximately $1.1 million are included in the incomestatement as an increase in other center expenses of $0.6 million, centersalaries and related payroll costs of $0.3 million and a loss on the impairmentof assets of approximately $0.2 million. The cessation of our Arizona operationsdid not result in any impairment of goodwill.

 

For the three months ended September 30, 2009 and 2010, 2.5% and0.3%, respectively, of our total revenues were generated from our operations inArizona. For the nine months ended September 30, 2009 and 2010, 2.4% and1.7%, respectively, of our total revenues were generated from our operations inArizona. The following is a summary of financial information for our operationsin Arizona for the three and nine months ended September 30, 2009 and 2010(in thousands):

 

| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 4,153      |                                                | $          | 424 |   | $ | 11,393 |   | $ | 7,357 |   |
| Total center expenses      |       | 2,888                                                |       | 2,374                                               |       | 7,790 |   | 6,822 |   |
| Center gross profit (loss) |       | $                                                    | 1,265      |                                                | $          | (1,950 | ) | $ | 3,603 |   | $ | 535 |   |

 

*Closing of Operations in New Hampshire.*  Legislation in New Hampshire became effectivein 2009 that effectively prohibits the offering of cash advances in NewHampshire. As a result of this legislation, we determined that it was no longereconomically viable to continue operating in New Hampshire. As a result, weclosed 22 centers in New Hampshire in the first quarter of 2009, one in thesecond quarter of 2009, and one in the fourth quarter of 2009.  Approximately $0.7 million of costsassociated with closing our New Hampshire operations were recognized during2008, and the remaining $0.6 million was recognized during the first quarter of2009.

 

The following is a summary of financial information for our operationsin New Hampshire for the three and nine months ended September 30, 2009and 2010 (in thousands):

 

| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2010**                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
| Total revenues             |       | $                                                    | 11         |                                                | $          | — |   | $ | 145 |   | $ | — |   |
| Total center expenses      |       | —                                               |       | (1                                                  | )          | 1,190 |   | 48 |   |
| Center gross profit (loss) |       | $                                                    | 11         |                                                | $          | 1 |   | $ | (1,045 | ) | $ | (48 | ) |

 

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***Centers***

 

The following table illustrates the composition of our center networkat December 31, 2009 and September 30, 2010:

 
| **State**           | ** ** | **December 31,  2009** | ** ** | **September 30,  2010** | ** ** |
|---------------------|------------|-----------------------------|------------|------------------------------|------------|
| Alabama             |       | 142                         |       | 140                          |       |
| Arizona (1)         |       | 48                          |       | —                       |       |
| California          |       | 282                         |       | 280                          |       |
| Colorado            |       | 62                          |       | 31                           |       |
| Delaware            |       | 16                          |       | 14                           |       |
| Florida             |       | 241                         |       | 242                          |       |
| Idaho               |       | 7                           |       | 6                            |       |
| Illinois            |       | 65                          |       | 62                           |       |
| Indiana             |       | 100                         |       | 95                           |       |
| Iowa                |       | 34                          |       | 34                           |       |
| Kansas              |       | 53                          |       | 54                           |       |
| Kentucky            |       | 44                          |       | 44                           |       |
| Louisiana           |       | 84                          |       | 81                           |       |
| Michigan            |       | 151                         |       | 152                          |       |
| Mississippi         |       | 61                          |       | 61                           |       |
| Missouri            |       | 86                          |       | 83                           |       |
| Montana             |       | 2                           |       | 2                            |       |
| Nebraska            |       | 22                          |       | 20                           |       |
| Nevada              |       | 13                          |       | 11                           |       |
| North Dakota        |       | 6                           |       | 2                            |       |
| Ohio                |       | 181                         |       | 175                          |       |
| Oklahoma            |       | 67                          |       | 66                           |       |
| Rhode Island        |       | 21                          |       | 20                           |       |
| South Carolina      |       | 140                         |       | 131                          |       |
| South Dakota        |       | 11                          |       | 11                           |       |
| Tennessee           |       | 62                          |       | 61                           |       |
| Texas               |       | 244                         |       | 243                          |       |
| Utah                |       | 6                           |       | 3                            |       |
| Virginia            |       | 139                         |       | 84                           |       |
| Washington          |       | 91                          |       | 46                           |       |
| Wisconsin           |       | 62                          |       | 58                           |       |
| Wyoming             |       | 10                          |       | 10                           |       |
| Total United States |       | 2,553                       |       | 2,322                        |       |
| Canada              |       | 13                          |       | 17                           |       |
| United Kingdom      |       | 21                          |       | 21                           |       |
| Total               |       | 2,587                       |       | 2,360                        |       |

 

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(1)          As previously announced, we closed all of ourcenters in Arizona during 2010.

 

***New centers***

 

We opened three and six new centers during the three months endedSeptember 30, 2009 and 2010, respectively. We opened seven and thirteen newcenters during the nine months ended September 30, 2009 and 2010, respectively.

 

***Closed centers***

 

We closed 24 and 122 centers during the three months ended September30, 2009 and 2010, respectively. We closed 190 and 240 centers during the ninemonths ended September 30, 2009 and 2010, respectively. We recorded expensesrelated 

 

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tocenter closures and scheduled center closings of approximately$0.2 million and $2.4 million for the three months ended September 30,2009 and 2010, respectively. We recorded expenses related to center closuresand scheduled center closings of approximately $5.3 million and $5.6 million inthe nine months ended September 30, 2009 and 2010, respectively. The costs areincluded in the income statements for the three and nine months ended September30, 2009 and 2010, as shown below (in thousands).

 
| ** **                                 | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                                   | ** ** | **2010**                                                  | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                 | ** ** | ** **                                                 | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Center salaries and related payroll costs  |       | $                                                          | —     |                                                      | $          | 605 |   | $ | 408 |   | $ | 816 |   |
| Occupancy and other center expenses        |       | 200                                                        |       | 1,805                                                     |       | 2,658 |   | 3,811 |   |
| Loss on disposal of property and equipment |       | —                                                     |       | 21                                                        |       | 44 |   | 300 |   |
| Loss on impairment of assets               |       | —                                                     |       | —                                                    |       | 2,209 |   | 654 |   |
|                                       |       | $                                                          | 200        |                                                      | $          | 2,431 |   | $ | 5,319 |   | $ | 5,581 |   |

 

***Seasonality***

 

Our business is seasonal due to the impact offluctuating demand for cash advances and fluctuating collection ratesthroughout the year. Demand has historically been highest in the third andfourth quarters of each year, corresponding to the back-to-school and holidayseasons and lowest in the first quarter of each year, corresponding to ourcustomers’ receipt of income tax refunds. Our provision for doubtful accountsand allowance for doubtful accounts are historically lowest as a percentage ofrevenues in the first quarter of each year, corresponding to customers’ receiptof income tax refunds, and increase as a percentage of revenues for theremainder of each year.

 

**Critical Accounting Policies and Use of Estimates**

 

The preparation of our financial statements, in conformity withgenerally accepted accounting principles (“GAAP”) in the United States,requires us to make estimates and assumptions that affect the reported amountsof assets, liabilities, and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. In applying the accounting principles, wemust often make estimates and assumptions regarding expected outcomes oruncertainties. As might be expected, the actual results or outcomes aregenerally different than the estimated or assumed amounts. These differencesare usually minor and are included in our consolidated financial statements assoon as they are known. Estimates, judgments, and assumptions are continuallyevaluated based on available information and experience. Because of the use ofestimates inherent in the financial reporting process, actual results coulddiffer from those estimates.

 

Actual results related to the estimates and assumptions made inpreparing our consolidated financial statements will emerge over periods oftime, such as estimates and assumptions underlying the determination of theallowance for doubtful accounts, accrual for third-party lender losses, legalsettlements, and regulatory loss contingencies. These estimates and assumptionsare monitored and periodically adjusted as circumstances warrant. These amountsmay be adjusted based on higher or lower actual loss experience. Although thereis greater risk with respect to the accuracy of these estimates and assumptionsbecause of the period over which actual results may emerge, such risk ismitigated by the ability to make changes to these estimates and assumptionsover the same period.

 

We believe that the following critical accounting policies affect themore significant estimates and assumptions used in the preparation of ourfinancial statements.

 

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

 

We believe the most significant estimates made in the preparation ofour accompanying consolidated financial statements relate to the determinationof an allowance for doubtful accounts for estimated probable losses on cashadvances we make directly to customers and an accrual for third-party lenderlosses for estimated probable losses on cash advances and certain related feesfor loans that we process for the third-party lender in Texas. See “Off-BalanceSheet Arrangement with Third-Party Lender” in this section. Our advances andfees receivable, net, on our balance sheet, do not include the advances andinterest receivable for loans processed by us for the third-party lender inTexas because these loans are owned by the third-party lender.

 

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The provision for doubtful accounts decreased from 23.1% of revenues,or $38.8 million, and 19.6% of revenues, or $92.9 million, for the threeand nine months ending September 30, 2009, respectively, to 21.6% of revenues,or $33.3 million, and 16.2% of revenues, or $71.1 million, for the same periodsin 2010.

 

During the nine months ended September 30, 2009, we also receivedproceeds from the sale of receivables in the amount of $2.2 million compared to$0.7 million for the nine months ended September 30, 2010, respectively.

 

The allowance for doubtful accounts and accrual for third-party lenderlosses are primarily based upon financial models that analyze specificportfolio statistics and also reflect, to a lesser extent, management’sjudgment regarding overall accuracy. The analytical models take into accountseveral factors including the number of transactions customers complete andcharge-off and recovery rates. Additional factors such as new products, changesin state laws, center closings, length of time centers have been open in astate, and relative mix of new centers within a state are also evaluated todetermine whether the results from the analytical models should be revised.

 

We record the allowance for doubtful accounts as a reduction ofadvances and fees receivable, net, on our balance sheet. We record the accrualfor third-party lender losses as a current liability on our balance sheet. Wecharge the portion of advances and fees deemed to be uncollectible against theallowance for doubtful accounts and credit any subsequent recoveries (includingsales of debt without recourse) to the allowance for doubtful accounts.

 

Unpaid advances and the related fees and/or interest are generallycharged off 60 days after the date a customer’s check was returned, theACH authorization was rejected by the customer’s bank, or the default date,unless the customer has paid at least 15% of the total of his or her cashadvance plus all applicable fees, or 15% of the outstanding balance and relatedinterest and fees for our line of credit and installment loan products. Unpaidcash advances or cash advances of customers who file for bankruptcy are chargedoff upon receipt of the bankruptcy notice. Although management uses the bestinformation available to make evaluations, future adjustments to the allowancefor doubtful accounts and accrual for third-party lender losses may benecessary if conditions differ substantially from our assumptions used inassessing their adequacy.

 

Our business experiences cyclicality in receivable balances from boththe time of year and the day of the week. Fluctuations in receivable balancesresult in a corresponding impact on the allowance for doubtful accounts,accrual for third-party lender losses, and provision for doubtful accounts.

 

Our receivables are traditionally lower at the end of the firstquarter, corresponding to tax refund season, and reach their highest levelduring the last week of December.

 

In addition to the seasonal fluctuations, the receivable balances canfluctuate throughout a week, generally being at their highest levels on aWednesday or Thursday and at their lowest levels on a Friday. In general,receivable balances decrease approximately 2% to 5% from a typical Thursday toa typical Friday. The third quarter of 2009 began and ended on a Wednesday. Thethird quarter of 2010 began and ended on a Thursday.

 

To the extent historical credit experience is not indicative of futureperformance or other assumptions used by management do not prevail, our lossexperience could differ significantly, resulting in either higher or lowerfuture provisions for doubtful accounts. As of September 30, 2010, if theestimated rates used in calculating our allowance for doubtful accounts andthird-party lender losses were 5% higher or lower, it would have increased ordecreased our provision for doubtful accounts by approximately$2.7 million.

 

***Intangible Assets***

 

As a result of our acquisition of the National Cash Advance group ofaffiliated companies in October 1999, we recorded approximately$143 million of goodwill. During 2007 and 2008, we completed nine acquisitionsin the United Kingdom, resulting in additional goodwill of approximately$5.4 million. As of September 30, 2010, the carrying value of goodwill was$127 million due to the amortization of goodwill prior to the adoption of ASC350-20-35, “Goodwill—Subsequent Measurement”, and the change in the exchangerate for our United Kingdom assets. Due to the significance of goodwill and thereduction of net income that would occur if goodwill were impaired, we assessthe impairment of our long-lived and intangible assets annually, during thefourth quarter of each year, or whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors that couldtrigger an impairment review include significant underperformance relative tohistorical or projected future cash flows, significant changes in the manner ofuse of the acquired assets or the strategy of the overall business, andsignificant negative industry trends. A reporting unit is an operating segment,or under certain circumstances, a component of an operating segment thatconstitutes a business. Our 

 

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reportingunits consist of multiple state-based operations and therefore the cessation ofoperations in any particular state does not imply that goodwill for therelevant reporting unit will be impaired. When estimated future cash flows areless than the carrying value of the net assets and related goodwill, animpairment test is performed to measure and recognize the amount of theimpairment loss, if any. Impairment losses, related to the carrying value ofgoodwill, represent the excess of the carrying amount of a reporting unit’s goodwillover the implied fair value of that goodwill. In determining the estimatedfuture discounted cash flows, we consider current and projected future levelsof income, as well as business trends, prospects, and market and economicconditions. Impairment tests involve the use of judgments and estimates relatedto the fair market value of the business operations with which goodwill isassociated, taking into consideration both historical operating performance andanticipated future earnings. We believe that the estimates of future cash flowsand fair value are reasonable. Changes in estimates of those cash flows andfair value, however, could affect the evaluation, and any impairment wouldlower our net income.

 

We have approximately $4.4 million of goodwill in our United Kingdomoperations. As of September 30, 2010, these operations have cumulativelygenerated negative cash flow and have not reached break-even at the centergross profit level for the trailing twelve months. Our expansion efforts in theUnited Kingdom began in the third quarter of 2007. Our goodwill impairmentassessment model projects future positive cash flows sufficient to support thegoodwill and long-lived asset base in our United Kingdom operations. If theUnited Kingdom operations continue to generate negative cash flow and do notbreak-even, an impairment charge related to its goodwill is possible.

 

We cannot predict the occurrence of certain events that might adverselyaffect the carrying value of our goodwill. Should the operations of thebusinesses with which goodwill is associated incur significant adverse changesin business, clients, adverse actions by regulators, unanticipated competition,loss of our revolving line of credit, and/or changes in technology or markets,some or all of our recorded goodwill could be impaired.

 

***Litigation Accrual***

 

In view of the inherent difficulty of predicting the outcome oflitigation and regulatory matters, particularly where the claimants seek verylarge or indeterminate damages or where the matters present novel legaltheories or involve a large number of parties, we cannot state with confidencewhat the eventual outcome of pending matters will be, what the timing of theultimate resolution of these matters will be, or what the eventual loss, fines,or penalties related to each pending matter may be or the extent to which suchamounts may be recoverable under our insurance policies.

 

In accordance with applicable accounting guidance, we establishreserves for litigation and regulatory matters when those matters present losscontingencies that are both probable and estimable. When loss contingencies arenot both probable and estimable, we do not establish reserves. In some of thematters described in “Part II. Other Information - Item 1. Legal Proceedings”loss contingencies are not both probable and estimable in the view ofmanagement, and accordingly, reserves have not been established for thosematters. Based on current knowledge, management does not believe that losscontingencies, if any, arising from pending litigation and regulatory matters,including the litigation and regulatory matters described in this QuarterlyReport on Form 10-Q, will have a material adverse effect on ourconsolidated financial position or liquidity, but may be material to ourresults of operations for any particular reporting period.

 

***Accrued Workers’ CompensationExpenses***

 

Accrued liabilities in our December 31, 2009 and September 30,2010, financial statements include an accrual of approximately $5 million and$4.8 million, respectively, for workers’ compensation. The costs of bothreported claims and claims incurred but not reported, up to specifieddeductible limits, are estimated based on historical data, projected payrollnumbers and other information. We review estimates and periodically update ourestimates and the resulting reserves and any necessary adjustments arereflected in earnings currently. To the extent historical claims are notindicative of future claims, there are changes in payroll numbers, workers’ compensationloss development factors change, or other assumptions used by management do notprevail, our expense and related accrued liabilities could increase ordecrease.

 

***Income Taxes***

 

We use certain assumptions and estimates in determining income taxes payableor refundable for the current year, deferred income tax liabilities and assetsfor events recognized differently in our financial statements and income taxreturns, and income tax expense. Determining these amounts requires analysis ofcertain transactions and interpretation of tax laws and regulations. Weexercise considerable judgment in evaluating the amount and timing ofrecognition of the resulting income tax liabilities and assets. These judgmentsand estimates are re-evaluated on a continual basis as regulatory and businessfactors change.

 

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No assurance can be given that neither our tax returns nor the incometax reported on our Consolidated Financial Statements will be adjusted as aresult of adverse rulings by the U.S. Tax Court, changes in the tax code, orassessments made by the Internal Revenue Service (“IRS”). We are subject topotential adverse adjustments, including but not limited to, an increase in thestatutory federal or state income tax rates, the permanent non-deductibility ofamounts currently considered deductible either now or in future periods, andthe dependence on the generation of future taxable income, including capitalgains, in order to ultimately realize deferred income tax assets.

 

***Accounting for Stock-Based EmployeeCompensation***

 

In 2004, we adopted ASC 718, “Stock Compensation”. Accordingly, wemeasure the cost of our stock-based employee compensation at the grant datebased on fair value and recognize such cost in the financial statements overeach award’s requisite service period. As of September 30, 2010, the totalcompensation expense not yet recognized related to nonvested stock awards underour stock-based employee compensation plans is approximately $5.7 million.The weighted average period over which this expense is expected to berecognized is approximately 2.6 years. See “Item 1. FinancialStatements — Notes to Interim Unaudited Consolidated FinancialStatements—Note 7. Capital Stock and Stock-Based Compensation Plans” for adescription of our restricted stock and stock option awards and the assumptionsused to calculate the fair value of such awards, including the expectedvolatility assumed in valuing our stock option grants.

 

***Recently Issued Accounting Pronouncements***

 

See “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 1. Summary of SignificantAccounting Policies” for a description of the most recent pronouncements.

 

**Results of Operations**

 

***Three Months Ended September 30, 2009 Compared to Three Months EndedSeptember 30, 2010***

 

The following tables set forth our results of operations for the threemonths ended September 30, 2009 compared to the three months ended September30, 2010:

 
| ** **                                        | ** ** | **Three Months Ended September 30,**                       | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                                                       | ** ** | **2010** | ** ** | **Variance  Favorable/(Unfavorable)** | ** ** |
| ** **                                        | ** ** | **Dollars**                                                                    | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Total Revenues**                                |       | $                                                                              | 167,920    |   | 100.0 | % | $ | 154,228 |   | 100.0 | % | $ | (13,692 | ) | (8.2 | )% |
| **Center Expenses:**                              |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                |       | 44,508                                                                         |       | 26.5 | % | 43,451 |   | 28.2 | % | 1,057 |   | 2.4 | % |
| Provision for doubtful accounts                   |       | 38,783                                                                         |       | 23.1 | % | 33,308 |   | 21.6 | % | 5,475 |   | 14.1 | % |
| Occupancy costs                                   |       | 23,399                                                                         |       | 13.9 | % | 21,740 |   | 14.1 | % | 1,659 |   | 7.1 | % |
| Center depreciation expense                       |       | 3,159                                                                          |       | 1.9 | % | 2,340 |   | 1.5 | % | 819 |   | 25.9 | % |
| Advertising expense                               |       | 4,235                                                                          |       | 2.5 | % | 5,530 |   | 3.6 | % | (1,295 | ) | (30.6 | )% |
| Other center expenses                             |       | 10,558                                                                         |       | 6.3 | % | 11,654 |   | 7.6 | % | (1,096 | ) | (10.4 | )% |
| Total center expenses                             |       | 124,642                                                                        |       | 74.2 | % | 118,023 |   | 76.6 | % | 6,619 |   | 5.3 | % |
| Center gross profit                               |       | 43,278                                                                         |       | 25.8 | % | 36,205 |   | 23.4 | % | (7,073 | ) | (16.3 | )% |
| **Corporate and Other Expenses  (Income):**       |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses               |       | 14,259                                                                         |       | 8.5 | % | 14,358 |   | 9.3 | % | (99 | ) | (0.7 | )% |
| Legal settlements                                 |       | 6,399                                                                          |       | 3.8 | % | 16,196 |   | 10.5 | % | (9,797 | ) | (153.1 | )% |
| Corporate depreciation expense                    |       | 671                                                                            |       | 0.4 | % | 447 |   | 0.3 | % | 224 |   | 33.4 | % |
| Interest expense                                  |       | 1,556                                                                          |       | 0.9 | % | 1,291 |   | 0.8 | % | 265 |   | 17.0 | % |
| Interest income                                   |       | (126                                                                           | )          | — | % | (49 | ) | — | % | (77 | ) | (61.1 | )% |
| (Gain)/loss on disposal of property and equipment |       | (197                                                                           | )          | (0.1 | )% | 30 |   | — | % | (227 | ) | (115.2 | )% |
| Loss on impairment of assets                      |       | —                                                                         |       | — | % | — |   | — | % | — |   | — | % |
| Total corporate and other expenses                |       | 22,562                                                                         |       | 13.5 | % | 32,273 |   | 20.9 | % | (9,711 | ) | (43.0 | )% |
| Income before income taxes                        |       | 20,716                                                                         |       | 12.3 | % | 3,932 |   | 2.5 | % | (16,784 | ) | (81.0 | )% |
| Income tax expense                                |       | 8,135                                                                          |       | 4.8 | % | 2,528 |   | 1.6 | % | 5,607 |   | 68.9 | % |
| Net income                                        |       | $                                                                              | 12,581     |   | 7.5 | % | $ | 1,404 |   | 0.9 | % | $ | (11,177 | ) | (88.8 | )% |

 

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| ** **                                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                                             | ** ** | **2010** | ** ** |
| **Center Information:**                                                                                 |       |                                                 |       |   |   |
| Number of centers open at beginning of period                                                           |       | 2,635                                                |       | 2,476 |   |
| Opened                                                                                                  |       | 3                                                    |       | 6 |   |
| Acquired                                                                                                |       | —                                               |       | — |   |
| Closed                                                                                                  |       | (24                                                  | )          | (122 | ) |
| Number of centers open at end of period                                                                 |       | 2,614                                                |       | 2,360 |   |
| Weighted average number of centers open during the  period                                              |       | 2,624                                                |       | 2,415 |   |
| Number of customers served—all credit products  (thousands)                                        |       | 816                                                  |       | 785 |   |
| Number of cash advances originated (thousands) (1)                                                      |       | 2,862                                                |       | 2,591 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                 |       | $                                                    | 1,034,647  |   | $ | 961,208 |   |
| Average amount of each cash advance originated (1)                                                      |       | $                                                    | 362        |   | $ | 371 |   |
| Average charge to customers for providing and processing  a cash advance (1)                            |       | $                                                    | 53         |   | $ | 55 |   |
| Average duration of a cash advance (days) (1)(2)                                                        |       | 17.6                                                 |       | 18.1 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 20                                                   |       | 10 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                                    | 7,410      |   | $ | 3,800 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                                    | 354        |   | $ | 333 |   |
| Number of installment loans originated (thousands)  (4)                                                 |       | 10                                                   |       | 23 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                             |       | $                                                    | 4,479      |   | $ | 10,003 |   |
| Average principal amount of each installment loan  originated (4)                                       |       | $                                                    | 461        |   | $ | 436 |   |

 

----

(1)           Excludes lines of credit and installment loans.

(2)           Excludes the impact of extended payment plans.

(3)           In Virginia, we beganoffering lines of credit in November 2008, ceased offering new lines of creditto customers in February 2010, and stopped providing advances on existing linesof credit on September 30, 2010.

(4)           The installment loan activity reflects loans weoriginated as the lender in Illinois.

 
| ** **                                                                            | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                                                 | ** ** | **2010** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                                              | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                     | ** ** |
| **Per Center (based on weighted  average number of centers open during the period):** |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Center revenues                                                                       |       | $                                                        | 64.0       |   | 100.0 | % | $ | 63.9 |   | 100.0 | % | $ | (0.1 | ) | (0.2 | )% |
| Center expenses:                                                                      |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 17.0                                                     |       | 26.5 | % | 18.0 |   | 28.2 | % | (1.0 | ) | (5.9 | )% |
| Provision for doubtful accounts                                                       |       | 14.8                                                     |       | 23.1 | % | 13.8 |   | 21.6 | % | 1.0 |   | 6.8 | % |
| Occupancy costs                                                                       |       | 8.9                                                      |       | 13.9 | % | 9.0 |   | 14.1 | % | (0.1 | ) | (1.1 | )% |
| Center depreciation expense                                                           |       | 1.2                                                      |       | 1.9 | % | 1.0 |   | 1.5 | % | 0.2 |   | 16.7 | % |
| Advertising expense                                                                   |       | 1.6                                                      |       | 2.5 | % | 2.3 |   | 3.6 | % | (0.7 | ) | (43.8 | )% |
| Other center expenses                                                                 |       | 4.0                                                      |       | 6.3 | % | 4.8 |   | 7.6 | % | (0.8 | ) | (20.0 | )% |
| Total center expenses                                                                 |       | 47.5                                                     |       | 74.2 | % | 48.9 |   | 76.6 | % | (1.4 | ) | (2.9 | )% |
| Center gross profit                                                                   |       | $                                                        | 16.5       |   | 25.8 | % | $ | 15.0 |   | 23.4 | % | $ | (1.5 | ) | (9.1 | )% |

 

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***Revenue Analysis***

 

Total revenues decreased approximately $13.7 million during the threemonths ended September 30, 2010 compared to the same period in 2009. Totalrevenues for the 2,341 centers opened prior to July 1, 2009 and still open asof September 30, 2010 decreased $2.1 million, from $154.4 million forthe three months ended September 30, 2009 to $152.3 million for the sameperiod in 2010. Excluding revenues from Virginia, Washington, Kentucky, SouthCarolina, Arizona, and Colorado for the three months ended September 30, 2010,total revenues for the Company’s centers opened prior to July 1, 2009 and stillopen as of September 30, 2010 increased 2.8% compared to the same period in2009. Centers opened prior to July 1, 2009 were at least three months andfifteen months old as of September 30, 2009 and 2010, respectively. Totalrevenues for the 19 centers opened after July 1, 2009 and still open as ofSeptember 30, 2010 increased $0.4 million, from $9,000 for the three monthsended September 30, 2009 to $0.4 million for the same period in 2010. Theremainder of total revenues, or the centers that were closed, represented adecrease of approximately $12 million for the three months ended September 30,2010 compared to the same period in 2009.

 

***Center Expense Analysis***

 

*Salaries and related payroll costs.* The net decrease of $1.1 million, or 2.4%, in salaries and relatedpayroll costs for the three months ended September 30, 2010 compared to thesame period in 2009 was primarily due to a reduction in the number of centersopen during the three months ended September 30, 2010 compared to the sameperiod in 2009.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts decreased from 23.1% of revenues, or$38.8 million, for the three months ended September 30, 2009 to 21.6% ofrevenues, or $33.3 million, for the same period in 2010. This decrease isdue primarily to an improvement in the loss rates and a reduction in totalreceivables at September 30, 2010 compared to September 30, 2009.

 

*Occupancy costs.*  The net decrease of $1.7 million, or 7.1%, inoccupancy costs for the three months ended September 30, 2010 compared to thesame period in 2009 was due primarily to a reduction in the number of centers openduring the three months ended September 30, 2010 as compared to the same periodin 2009.

 

*Advertising expense.*  The increase in advertising expense of $1.3million for the three months ended September 30, 2010 was due primarily to adirect mail initiative of approximately $0.6 million, additional broadcastadvertising of approximately $0.5 million and an increase in online advertisingof approximately $0.2 million during the three months ended September 30, 2010,compared to the same period in 2009.

 

*Other center expenses.*  The net increase of $1.1 million, or 10.4%,in other center expenses for the three months ended September 30, 2010 was dueprimarily to an increase in center relocation and closing costs ofapproximately $1.8 million for the three months ended September 30, 2010compared to the same period in 2009, This increase was partially offset by adecrease in telephone expenses, office supplies, travel expenses, and bank feesof approximately $0.7 million for the three months ended September 30, 2010compared to the same period in 2009.

 

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

 

*General and administrative expenses.*  The net increase in general andadministrative expenses of approximately $0.1 million for the three monthsended September 30, 2010 compared to the same period in 2009 was due primarilyto:

 

·      higher salaries and expensesrelated to personnel of approximately $0.4 million, and

 

·      an increase in professionalfees of approximately $0.1 million.

 

This increase was partiallyoffset by:

 

·      a decrease in consultingfees associated with the point of sale system of approximately $0.3 million,and

 

·      a decrease in legal fees,net of insurance reimbursements, of approximately $0.8 million.

 

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*Legal Settlements.*Theamounts reflected as legal settlements are primarily a result of chargesaccrued during the three months ended September 30, 2009 and 2010 ofapproximately $6 million and $16.3 million for the settlement of the Arkansasand North Carolina class-action lawsuits, respectively, net of any insurancereimbursements.

 

*Interest expense.*  The decrease in interest expense of $0.3 millionfor the three months ended September 30, 2010, as compared to the same periodin 2009 was due primarily to a decrease in the average outstanding balance ofvariable interest debt during the quarter.

 

*Income Tax Expense.*  The effective income tax rate was 39.3% and64.3% for the three months ended September 30, 2009 and 2010, respectively. Theincrease in income tax expense for the three months ended September 30, 2010 ascompared to the same period in 2009 was primarily due to lower pre-tax profits,primarily as a result of legal settlements, along with other discrete itemsrecognized at September 30, 2010. Additionally, permanent non-deductible itemsremained stable for the year, but when applied to lower pre-tax income,resulted in an increase to the effective income tax rate.

 

**Results of Operations**

 

***Nine Months Ended September 30, 2009 Compared to Nine Months EndedSeptember 30, 2010***

 

The following tables set forth our results of operations for the ninemonths ended September 30, 2009 compared to the nine months ended September 30,2010:

 
| ** **                                        | ** ** | **Nine Months Ended September 30,**                        | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                                                       | ** ** | **2010** | ** ** | **Variance  Favorable/(Unfavorable)** | ** ** |
| ** **                                        | ** ** | **Dollars**                                                                    | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Total Revenues**                                |       | $                                                                              | 474,437    |   | 100.0 | % | $ | 439,983 |   | 100.0 | % | $ | (34,454 | ) | (7.3 | )% |
| **Center Expenses:**                              |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                |       | 137,425                                                                        |       | 29.0 | % | 135,155 |   | 30.7 | % | 2,270 |   | 1.7 | % |
| Provision for doubtful accounts                   |       | 92,893                                                                         |       | 19.6 | % | 71,100 |   | 16.2 | % | 21,793 |   | 23.5 | % |
| Occupancy costs                                   |       | 71,419                                                                         |       | 15.1 | % | 67,204 |   | 15.3 | % | 4,215 |   | 5.9 | % |
| Center depreciation expense                       |       | 10,142                                                                         |       | 2.1 | % | 7,596 |   | 1.7 | % | 2,546 |   | 25.1 | % |
| Advertising expense                               |       | 15,351                                                                         |       | 3.2 | % | 15,732 |   | 3.6 | % | (381 | ) | (2.5 | )% |
| Other center expenses                             |       | 34,870                                                                         |       | 7.3 | % | 33,102 |   | 7.5 | % | 1,768 |   | 5.1 | % |
| Total center expenses                             |       | 362,100                                                                        |       | 76.3 | % | 329,889 |   | 75.0 | % | 32,211 |   | 8.9 | % |
| Center gross profit                               |       | 112,337                                                                        |       | 23.7 | % | 110,094 |   | 25.0 | % | (2,243 | ) | (2.0 | )% |
| **Corporate and Other Expenses  (Income):**       |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses               |       | 42,128                                                                         |       | 8.9 | % | 47,622 |   | 10.8 | % | (5,494 | ) | (13.0 | )% |
| Legal settlements                                 |       | 6,399                                                                          |       | 1.3 | % | 18,584 |   | 4.2 | % | (12,185 | ) | (190.4 | )% |
| Corporate depreciation expense                    |       | 2,038                                                                          |       | 0.4 | % | 1,838 |   | 0.4 | % | 200 |   | 9.8 | % |
| Interest expense                                  |       | 4,850                                                                          |       | 1.0 | % | 3,565 |   | 0.8 | % | 1,285 |   | 26.5 | % |
| Interest income                                   |       | (160                                                                           | )          | — | % | (67 | ) | — | % | (93 | ) | (58.1 | )% |
| (Gain)/loss on disposal of property and equipment |       | (244                                                                           | )          | — | % | 350 |   | 0.1 | % | (594 | ) | (243.4 | )% |
| Loss on impairment of assets                      |       | 2,209                                                                          |       | 0.5 | % | 654 |   | 0.1 | % | 1,555 |   | 70.4 | % |
| Total corporate and other expenses                |       | 57,220                                                                         |       | 12.1 | % | 72,546 |   | 16.4 | % | (15,326 | ) | (26.8 | )% |
| Income before income taxes                        |       | 55,117                                                                         |       | 11.6 | % | 37,548 |   | 8.6 | % | (17,569 | ) | (31.9 | )% |
| Income tax expense                                |       | 20,751                                                                         |       | 4.4 | % | 17,535 |   | 4.0 | % | 3,216 |   | 15.5 | % |
| Net income                                        |       | $                                                                              | 34,366     |   | 7.2 | % | $ | 20,013 |   | 4.6 | % | $ | (14,353 | ) | (41.8 | )% |

 

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| ** **                                                                                              | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** |
| **Center Information:**                                                                                 |       |                                                |       |   |   |
| Number of centers open at beginning of period                                                           |       | 2,797                                               |       | 2,587 |   |
| Opened                                                                                                  |       | 7                                                   |       | 13 |   |
| Acquired                                                                                                |       | —                                              |       | — |   |
| Closed                                                                                                  |       | (190                                                | )          | (240 | ) |
| Number of centers open at end of period                                                                 |       | 2,614                                               |       | 2,360 |   |
| Weighted average number of centers open during the  period                                              |       | 2,717                                               |       | 2,495 |   |
| Number of customers served—all credit products  (thousands)                                        |       | 1,147                                               |       | 1,117 |   |
| Number of cash advances originated (thousands) (1)                                                      |       | 7,836                                               |       | 7,290 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                 |       | $                                                   | 2,824,109  |   | $ | 2,688,468 |   |
| Average amount of each cash advance originated (1)                                                      |       | $                                                   | 360        |   | $ | 369 |   |
| Average charge to customers for providing and  processing a cash advance (1)                            |       | $                                                   | 53         |   | $ | 55 |   |
| Average duration of a cash advance (days) (1)(2)                                                        |       | 17.5                                                |       | 18.1 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 27                                                  |       | 10 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                                   | 12,625     |   | $ | 4,300 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                                   | 446        |   | $ | 277 |   |
| Number of installment loans originated (thousands)  (4)                                                 |       | 25                                                  |       | 40 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                             |       | $                                                   | 11,202     |   | $ | 17,882 |   |
| Average principal amount of each installment loan  originated (4)                                       |       | $                                                   | 443        |   | $ | 452 |   |

 

----

(1)           Excludes lines of credit and installment loans.

(2)           Excludes the impact of extended payment plans.

(3)           In Virginia, we beganoffering lines of credit in November 2008, ceased offering new lines of creditto customers in February 2010, and stopped providing advances on existing linesof credit on September 30, 2010.

(4)           The installment loan activity reflects loans weoriginated as the lender in Illinois and Colorado.

 
| ** **                                                                            |   | **Nine Months Ended September 30,** |       |
|---------------------------------------------------------------------------------------|--------|---------------------------------------------------------|------------|
| ** **                                                                            |   | **2009**                                                |       | **2010** |   | **Variance  Favorable/  (Unfavorable)** |   |
| ** **                                                                            |   | **Dollars**                                             | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** |   |
| ** **                                                                            |   | **(Dollars in thousands)**                    |       |
| **Per Center (based on weighted  average number of centers open during the period):** |   |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Center revenues                                                                       |   | $                                                       | 174.6      |   | 100.0 | % | $ | 176.3 |   | 100.0 | % | $ | 1.7 |   | 1.0 | % |
| Center expenses:                                                                      |   |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |   | 50.6                                                    |       | 29.0 | % | 54.2 |   | 30.7 | % | (3.6 | ) | (7.1 | )% |
| Provision for doubtful accounts                                                       |   | 34.2                                                    |       | 19.6 | % | 28.5 |   | 16.2 | % | 5.7 |   | 16.7 | % |
| Occupancy costs                                                                       |   | 26.3                                                    |       | 15.1 | % | 26.9 |   | 15.3 | % | (0.6 | ) | (2.3 | )% |
| Center depreciation expense                                                           |   | 3.7                                                     |       | 2.1 | % | 3.0 |   | 1.7 | % | 0.7 |   | 18.9 | % |
| Advertising expense                                                                   |   | 5.7                                                     |       | 3.2 | % | 6.3 |   | 3.6 | % | (0.6 | ) | (10.5 | )% |
| Other center expenses                                                                 |   | 12.8                                                    |       | 7.3 | % | 13.3 |   | 7.5 | % | (0.5 | ) | (3.9 | )% |
| Total center expenses                                                                 |   | 133.3                                                   |       | 76.3 | % | 132.2 |   | 75.0 | % | 1.1 |   | 0.8 | % |
| Center gross profit                                                                   |   | $                                                       | 41.3       |   | 23.7 | % | $ | 44.1 |   | 25.0 | % | $ | 2.8 |   | 6.8 | % |

 

***Revenue Analysis***

 

Total revenues decreased approximately $34.5 million during the ninemonths ended September 30, 2010 compared to the same period in 2009. Totalrevenues for the 2,337 centers opened prior to January 1, 2009 and stillopen as of September 30, 2010 decreased $3.7 million, from $427 million for thenine months ended September 30, 2009 to $423.3 million for the same periodin 2010. Excluding revenues from Virginia, Washington, Kentucky, SouthCarolina, Arizona, and Colorado for the nine months ended September 30, 2010,total revenues for the Company’s centers opened prior to January 1, 2009 andstill open as of September 30, 2010 increased 7.3% compared to the same periodin 2009. Centers opened prior to January 1, 2009 were at least nine monthsand eighteen months old as of September 30, 2009 and 2010, respectively. Totalrevenues for the 23 centers opened after January 1, 2009 and still open asof September 30, 2010 increased $1 million, from $0.2 million for the ninemonths ended September 30, 2009 to $1.2 million for the same period in2010. 

 

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Theremainder of total revenues, or the centers that were closed, represented adecrease of approximately $31.8 million for the nine months ended September 30,2010 compared to the same period in 2009.

 

***Center Expense Analysis***

 

*Salaries and related payroll costs.*  The net decrease of $2.3 million, or 1.7%, insalaries and related payroll costs for the nine months ended September 30, 2010was primarily due to a reduction in the number of centers open during the ninemonths ended September 30, 2010 compared to the same period in 2009. A portionof the per center increase in salaries and related payroll costs was due to anincrease in the average number of full-time equivalent field employees duringthe nine months ended September 30, 2010 as compared to the same period in2009.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts decreased from 19.6% of revenues, or$92.9 million, for the nine months ended September 30, 2009 to 16.2% ofrevenues, or $71.1 million, for the same period in 2010. This decrease isdue primarily to an improvement in the loss rates and a reduction in totalreceivables at September 30, 2010 compared to September 30, 2009. During thenine months ended September 30, 2009 and 2010, we received proceeds from thesale of receivables in the amounts of $2.2 and $0.7 million, respectively.

 

*Occupancy costs.*  The net decrease of $4.2 million, or 5.9%, inoccupancy costs for the nine months ended September 30, 2010 compared to thesame period in 2009 was due primarily to a reduction in the number of centersopen during the nine months ended September 30, 2010 as compared to September30, 2009.

 

* Advertisingexpense.*The increase inadvertising expense of $0.4 million for the nine months ended September 30,2010 was due primarily to additional broadcast advertising of approximately$0.5 million and an increase in online advertising of approximately $0.2 million,compared to the same period in 2009. This increase was partially offset by adecrease in direct mail of approximately $0.4 million for the nine months endedSeptember 30, 2010, compared to the same period in 2009.

 

*Other center expenses.*  The net decrease of $1.8 million, or 5.1%, inother center expenses for the nine months ended September 30, 2010 compared tothe same period in 2009 was due primarily to a reduction in the number ofcenters open during the nine months ended September 30, 2010 as compared toSeptember 30, 2009.

 

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

 

*General and administrative expenses.*  The net increase in general andadministrative expenses of approximately $5.5 million for the nine months endedSeptember 30, 2010 compared to the same period in 2009 was due primarily to:

 

·      higher legal fees, net ofinsurance reimbursements, of approximately $1.1 million;

 

·      an increase in salaries andexpenses related to personnel of approximately $1.5 million; and

 

·      an increase in consultingfees of approximately $0.7 million.

 

*Legal Settlements.*Theamounts reflected as legal settlements are primarily a result of chargesaccrued during the nine months ended September 30, 2009 and 2010 ofapproximately $6 million and $16.3 million for the settlement of the Arkansasand North Carolina class-action lawsuits, respectively, net of any insurancereimbursements.

 

*Gain/loss on disposal of property and equipment.*The decrease ofapproximately $0.6 million for the nine months ended September 30, 2010,relates primarily to $0.4 million of expenses incurred in connection with theclosing and consolidation of centers for the nine months ended September 30,2010, compared to a $0.2 million gain for the nine months ended September 30, 2009.

 

*Loss on impairment of assets.* The decrease ofapproximately $1.5 million for the nine months ended September 30, 2010,relates primarily to $0.7 million of expenses incurred in connection with theimpairment of assets for the nine months ended September 30, 2010, compared to$2.2 million for the nine months ended September 30, 2009.

 

*Interest expense.*  The decrease in interest expense ofapproximately $1.3 million for the nine months ended September 30, 2010, ascompared to the same period in 2009 was due primarily to a decrease in theaverage outstanding balance of variable interest debt year to date.

 

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*Income Tax Expense.*  The effective income tax rate was 37.7% and46.7% for the nine months ended September 30, 2009 and 2010, respectively.The increase in income tax expense for the nine months ended September 30,2010 as compared to the same period in 2009 was primarily due to a reduction instate income taxes recognized at September 30, 2009 and lower pre-taxprofits, primarily as a result of legal settlements, along with other discreteitems recognized at September 30, 2010. Additionally, permanentnon-deductible items remained stable for the year, but when applied to lowerpre-tax income, resulted in an increase to the effective income tax rate.

 

**Liquidity and Capital Resources**

 

The following table presents a summary of cash flows for the ninemonths ended September 30, 2009 and 2010 (dollars in thousands):

 
|                                                          |   |     |       |     |       | **Variance  Favorable/(Unfavorable)** |       |
|---------------------------------------------------------------|--------|----------|------------|----------|------------|---------------------------------------|------------|
|                                                          |   | **2009** | ** ** | **2010** | ** ** | **Dollars**                           | ** ** | **%** |   |
| Cash flows provided by (used in):                             |   |     |       |     |       |                                  |       |   |   |
| Operating activities                                          |   | $121,006 |       | $81,953  |       | $(39,053                              | )          | (32.3 | )% |
| Investing activities                                          |   | (69,011  | )          | (58,494  | )          | 10,517                                |       | 15.2 | % |
| Financing activities                                          |   | (55,108  | )          | (42,834  | )          | 12,274                                |       | 22.3 | % |
| Effect of exchange rate changes on cash and cash  equivalents |   | 6        |       | (57      | )          | (63                                   | )          | (1050.0 | )% |
| Net decrease in cash and cash equivalents                     |   | (3,107   | )          | (19,432  | )          | (16,325                               | )          | (525.4 | )% |
| Cash and cash equivalents, beginning of period                |   | 16,017   |       | 38,189   |       | 22,172                                |       | 138.4 | % |
| Cash and cash equivalents, end of period                      |   | $12,910  |       | $18,757  |       | $5,847                                |       | 45.3 | % |

 

Our principal sources of cash are from operations and from borrowingsunder our revolving credit facility. See “Certain Contractual CashCommitments—Long-Term Debt Obligations” in this section for a detaileddescription of our revolving credit facility. We anticipate that our primaryuses of cash will be to provide working capital, finance capital expenditures,meet debt service requirements, fund advances, finance center growth, fundacquisitions, and pay dividends on our common stock.

 

We borrow under our revolving credit facility to fund our advances andto meet our other liquidity needs. Our day-to-day balances under our revolvingcredit facility, as well as our cash balances, vary because of seasonal andday-to-day requirements resulting from making and collecting advances. Forexample, if a month ends on a Friday (a typical payday), our borrowings and ourcash balances will be high compared to a month that does not end on a Friday.This is because a substantial portion of the advances will be repaid in cash onthat day but sufficient time will not yet have passed for the cash to reducethe outstanding borrowings under our revolving credit facility. Our borrowingsunder our revolving credit facility will also increase as the demand foradvances increases during our peak periods such as the back-to-school andholiday seasons. Conversely, our borrowings typically decrease during the taxrefund season when cash receipts from customers’ peak or the customer demandfor new advances decreases. Advances and fees receivable, net, decreasedapproximately $12.4 million, or 5.9%, to $199.8 million at September 30,2010 compared to $212.2 million at September 30, 2009. Advances and feesreceivable, net, decreased approximately $4.5 million, or 2.2%, to$199.8 million at September 30, 2010 compared to $204.2 million atDecember 31, 2009 due primarily to tax refund season.

 

During the nine months ended September 30, 2009 and 2010, werepurchased 4,387 and 53,024 shares of our common stock, respectively, at acost of approximately $11,500 and $276,686, respectively. All of these shareswere surrendered by employees to satisfy their tax obligations with respect tothe vesting of shares of restricted stock awarded pursuant to our 2004 OmnibusStock Plan.

 

During the nine months ended September 30, 2009 and 2010, zero and42,793 stock options, respectively, were surrendered at a cost of zero andapproximately $231,819, respectively, in a net settlement in order to satisfythe exercise price and withholding obligations associated with stock optionexercises.

 

Although our revolving credit facility places restrictions on ourcapital expenditures and acquisitions, we believe that these restrictions donot prohibit us from pursuing our strategy or limit our current level of operations.Cash that is restricted due to certain states’ regulatory liquidityrequirements is not included in cash and cash equivalents. Instead, therestricted cash is shown on our consolidated balance sheet as a non-currentasset under the line item “Restricted cash.” Historically, these restrictions have not had, nor do we expect them tohave, an impact on our ability to meet our liquidity

 

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needsfor operations. However, our ability to make dividends to our stockholders andrepurchases of our common stock has been, and in the future may be, restrictedunder our revolving credit facility.

 

***Cash Flows from Operating Activities***

 

Net cash provided by operating activities decreased approximately 32.3%to $82 million for the nine months ended September 30, 2010 comparedto $121 million for the same period in 2009. The decrease in operating cashflows was primarily attributable to a decrease in net income of approximately$14.4 million, and a decrease in the provision for doubtful accounts ofapproximately $21.8 million.

 

***Cash Flows from Investing Activities***

 

Net cash used in investing activities decreased approximately 15.2% to$58.5 million for the nine months ended September 30, 2010 compared to $69million for the same period in 2009. The change in investing cash flow wasprimarily due to a decrease in advances receivable of approximately $11.1million, partially offset by an increase of approximately $0.6 million inremodeling and new center imaging costs.

 

***Cash Flows from Financing Activities***

 

Net cash used in financing activities decreased 22.3% to$42.8 million for the nine months ended September 30, 2010 comparedto $55.1 million for the same period in 2009. The change in financing cashflows was primarily the result of a decrease in net repayments of the revolvingcredit facility of approximately $10.7 million and a decrease in payments ofbook overdrafts of approximately $2.2 million. These decreases were partiallyoffset by $0.4 million and $0.2 million increases in repurchases of restrictedstock and payments of long-term debt, respectively.

 

**Capital Expenditures**

 

For the nine months ended September 30, 2009 and 2010, we incurredcosts related to capital expenditures of approximately $3 million and $3.6million, respectively. Capital expenditures included expenditures for newcenters opened, center remodels, and computer equipment replacements in ourcenters and at our corporate headquarters.

 

**Off-Balance Sheet Arrangement with Third-Party Lender**

 

In Texas, where we operate as a CSO, we offer a fee-based creditservices package to assist customers in trying to improve their credit and inobtaining an extension of consumer credit through a third-party lender. Underthe terms of our agreement with this lender, we process customer applicationsand are contractually obligated to reimburse the lender for the full amount ofthe cash advances and certain related fees that are not collected from thecustomers. As of September 30, 2009 and 2010, the third-party lender’soutstanding advances and interest receivable (which were not recorded on ourbalance sheet) totaled approximately $19.1 million and $19 million, respectively.We are obligated to pay the third-party lender to the extent these amountsbecome uncollectible. Additionally, if these advances become uncollectible, weare also required to pay the third-party lender all related NSF fees and latefees on these advances.

 

Because of our economic exposure for losses related to the third-partylender’s advances and interest receivable, we have established an accrual forthird-party lender losses to reflect our estimated probable losses related touncollectible third-party lender advances. The accrual for third-party lenderlosses that was reported in our balance sheet at September 30, 2009 and2010 was approximately $4.3 million and $4.4 million, respectively, and wasestablished on a basis similar to the allowance for doubtful accounts. Ifactual losses on the third-party lender’s advances are materially greater thanour accrual for third-party lender losses, our business, results of operationsand financial condition could be adversely affected. See “Item 1. FinancialStatements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 8. Transactions with Variable Interest Entities.”

 

**Certain Contractual Cash Commitments**

 

Our principal future contractual obligations and commitments as of September 30,2010, including periodic interest payments, included the following (inthousands):

 

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| ** **                                     | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| **Contractual Cash Obligations**     | ** ** | **Total**  | ** ** | **2010**                                            | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **2015 and  thereafter** | ** ** |
| Long-term debt obligations:                    |       |       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Revolving credit facility                      |       | $          | 110,968    |                                                | $          | — |   | $ | — |   | $ | — |   | $ | 110,968 |   | $ | — |   | $ | — |   |
| Mortgage payable                               |       | 4,236      |       | 123                                                 |       | 513 |   | 552 |   | 594 |   | 639 |   | 1,815 |   |
| Note payable                                   |       | 379        |       | 125                                                 |       | 254 |   | — |   | — |   | — |   | — |   |
| Interest payable on long-term debt obligations |       | 1,147      |       | 79                                                  |       | 286 |   | 245 |   | 203 |   | 158 |   | 176 |   |
| Operating lease obligations (1)           |       | 117,607    |       | 15,772                                              |       | 49,871 |   | 33,179 |   | 15,096 |   | 2,484 |   | 1,205 |   |
| Purchase obligations                           |       | 8,897      |       | 4,960                                               |       | 3,101 |   | 827 |   | 9 |   | — |   | — |   |
| Total                                          |       | $          | 243,234    |                                                | $          | 21,059 |   | $ | 54,025 |   | $ | 34,803 |   | $ | 126,870 |   | $ | 3,281 |   | $ | 3,196 |   |

 

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

 

***Long-Term Debt Obligations***

 

In March 2008, we entered into an amendment and restatement of ourprior credit facility with a syndicate of banks. As amended and restated ourrevolving credit facility provides us with a $270 million revolving lineof credit, including the ability to issue up to $25 million in letters ofcredit. Our revolving credit facility matures on March 24, 2013. We havethe option to increase the revolving credit facility by an additional$95 million upon receipt of sufficient commitments from lenders in thelending syndicate and other eligible lenders as defined in the creditagreement. Any portion of our revolving credit facility that is repaid may beborrowed again subject to any limitations based on financial covenants. In July 2008,we amended our credit facility to modify the consolidated net worth test toreduce the requirement by the cost of repurchases of common stock made afterJanuary 1, 2008.

 

As of September 30, 2010, we had approximately $111 millionoutstanding on the revolving portion of our credit facility and approximately$6.2 million of commitments under outstanding letters of credit, leavingapproximately $152.9 million available for future borrowings under this creditfacility, subject to additional limitations based on certain financial covenants.As of September 30, 2010, the senior leverage covenant restricted thatadditional availability to approximately $59.5 million.

 

In general, our borrowings under our revolving credit facility bearinterest, at our option, at a base rate plus an applicable margin or aLIBOR-based rate plus an applicable margin. The base rate equals the greaterof: (i) the prime rate set by Bank of America, the administrative agentunder the revolving credit facility; and (ii) the sum of the federal fundsrate plus 0.50%. The applicable margin is determined each quarter by a pricinggrid based on our total leverage ratio of consolidated debt to consolidatedearnings before interest, taxes, depreciation, and amortization (“EBITDA”) asdefined in the credit agreement. The base rate applicable margin ranges from1.50% to 2.25% based upon our total leverage ratio. The LIBOR-based applicablemargin ranges from 2.50% to 3.25% based upon our total leverage ratio. As of September 30,2010, the applicable margin for the prime-based rate was 1.75% and theapplicable margin for the LIBOR-based rate was 2.75%.

 

The applicable rate is chosen when we request a draw down under therevolving credit facility and is based on the forecasted working capitalrequirements and the required notice period for each type of borrowing.LIBOR-based rates can be selected for one-, two-, three-, or six-month terms.In the case of a base rate loan, we must notify the bank on the requested dateof any required borrowing and in the case of a LIBOR-based loan, we must notifythe bank three business days prior to the date of the requested borrowing. Baserate loans are variable, and the rates on those loans are changed whenever theunderlying rate changes. LIBOR-based loans bear interest for the term of theloan at the rate set at the time of borrowing for that loan.

 

Our obligations under the revolving credit facility are guaranteed byeach of our domestic subsidiaries. Our borrowings under the revolving creditfacility are collateralized by substantially all of our assets and the assetsof our subsidiaries. In addition, our borrowings under the revolving creditfacility are secured by a pledge of all of the capital stock, or similar equityinterests, of our domestic subsidiaries and 65% of the voting capital stock, orsimilar equity interests, of our foreign subsidiaries. Our revolving creditfacility contains various financial covenants that require, among other things,the maintenance of minimum net worth, maximum leverage and senior leverage,minimum fixed charge coverage and maximum charge-off ratios. The maximumleverage allowed under the revolving credit facility is three and one half(3.5) times trailing 12-month EBITDA, as defined in the credit agreement. Themaximum senior leverage allowed under the revolving credit facility is twotimes trailing 12-month EBITDA as defined in the credit agreement. Our trailing12-month EBITDA, as defined in the credit agreement, as of September 30,2010 was approximately $90.4 million. The charge-off ratio, as defined

 

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inthe revolving credit facility, limits the average of actual charge-offsincurred during each fiscal month to a maximum of 4.50% of the average amountof adjusted transaction receivables outstanding at the end of each fiscal monthduring the prior 12 consecutive months. At September 30, 2010, our chargeoff ratio was 3.5% and was calculated based on average monthly charge-offs of$9.3 million and average transaction receivables of $269.2 million.We had charge-offs of $29.1 million during the three months ended September 30,2010 and could have charged off an additional $36.4 million within thelimits of this covenant for the three months ended September 30, 2010. Therevolving credit facility contains customary covenants, including covenantsthat restrict our ability to, among other things (i) incur liens,(ii) incur certain indebtedness (including guarantees or other contingentobligations), (iii) engage in mergers and consolidations, (iv) engagein sales, transfers, and other dispositions of property and assets (includingsale-leaseback transactions), (v) make loans, acquisitions, jointventures, and other investments, (vi) make dividends and otherdistributions to, and redemptions and repurchases from, equity holders,(vii) prepay, redeem, or repurchase certain debt, (viii) make changesin the nature of our business, (ix) amend our organizational documents, oramend or otherwise modify certain of our debt documents, (x) change ourfiscal quarter and fiscal year ends, (xi) enter into transactions with ouraffiliates, and (xii) issue certain equity interests. The revolving creditfacility contains customary events of default, including events of defaultresulting from (i) our failure to pay principal when due or interest,fees, or other amounts after three or more business days, (ii) covenantdefaults, (iii) our material breach of any representation or warranty,(iv) cross defaults to any other indebtedness in excess of $1 millionin the aggregate, (v) bankruptcy, insolvency, or other similarproceedings, (vi) our inability to pay debts, (vii) the failure topay monetary judgment’s within 30 days of the due date in excess of $1 millionin the aggregate (viii) customary ERISA defaults, (ix) actual orasserted invalidity of any material provision of the loan documentation orimpairment of a material portion of the collateral, and (x) a change ofcontrol. A breach of a covenant or an event of default could cause all amountsoutstanding under the revolving credit facility to become immediately due andpayable. We were in compliance with all financial covenants at September 30,2010. See “Liquidity and Capital Resources” in this section for a descriptionof how we utilize the revolving credit facility to meet our liquidity needs.

 

We borrow under our revolving credit facility to fund our advances andour other liquidity needs. Our day-to-day balances under our revolving creditfacility, as well as our cash balances, vary because of seasonal and day-to-dayrequirements resulting from making and collecting advances. For example, if amonth ends on a Friday (a typical payday), our borrowings and our cash balanceswill be high compared to a month that does not end on a Friday. This is becausea substantial portion of the advances will be repaid in cash on that day butsufficient time will not yet have passed for the cash to reduce the outstandingborrowings under our revolving credit facility. Our borrowings under ourrevolving credit facility will also increase as the demand for advancesincreases during our peak periods such as the back-to-school and holidayseasons. Conversely, our borrowings typically decrease during the tax refund seasonwhen cash receipts from customers peak or the customer demand for new advancesdecreases.

 

*United  Kingdom  Overdraft Facility.*  In October 2008, our United Kingdomoperations entered into an overdraft facility. The maximum available borrowingsunder the facility were GBP 400,000, which is equivalent to approximately$637,000 at December 31, 2009. The interest rate on any borrowings underthis facility was the Bank of England base rate plus 1.75%. This facilityexpired and was not renewed during the fourth quarter of 2009.

 

*Mortgage Payable.*  Our corporate headquarters building andrelated land are subject to a mortgage loan, the principal amount of which wasapproximately $4.6 million and $4.2 million at December 31, 2009 and September 30,2010, respectively. The mortgage loan is payable to an insurance company and iscollateralized by our corporate headquarters building and related land. Themortgage loan is payable in 180 monthly installments of approximately$66,400, including principal and interest, and bears interest at a fixed rateof 7.30% over its term. The mortgage loan matures on June 10, 2017. Thecarrying amount of our corporate headquarters (land, land improvements andbuilding) was approximately $4.6 million and $4.4 million atDecember 31, 2009 and September 30, 2010, respectively.

 

***Operating Lease Obligations***

 

We lease all of our centers from third-party lessors under operatingleases. These leases typically have initial terms of three to five years andmay contain provisions for renewal options, additional rental charges based onrevenue, and payment of real estate taxes and common area charges. In addition,we lease aircraft hangar space, warehouse space, and certain security andoffice equipment. The lessor under the aircraft hangar space lease is a companycontrolled by or affiliated with Mr. George D. Johnson, Jr., ourformer Chairman and a significant stockholder. In addition, on July 13,2009, the Company entered into a one-year Aircraft Dry Lease Agreement withCarabo Capital, LLC, an entity of which the Company’s current Chairman isa member. Under the Aircraft Dry Lease, the Company may use Carabo’s aircraftfrom time to time in exchange for one dollar, standard usage expenses, and theCompany’s fulfillment of its obligations under the Aircraft Dry Lease. See “Item 1.Financial Statements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 9. Related Party Transactions.”

 

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***Purchase Obligations***

 

We enter into agreements with vendors to purchase furniture, fixtures,and other items used to open new centers and for marketing agreements. Thesepurchase commitments typically extend for a period of two to three months afterthe opening of a new center, up to one year for marketing agreements, and threeto four years for telephone and internet service agreements. As of September 30,2010, our purchase obligations totaled approximately $8.9 million.

 

**Impact of Inflation**

 

We believe our results of operations are not dependent upon the levelsof inflation.

 

**Forward-Looking Statements**

 

This Quarterly Report on Form 10-Q includes forward-lookingstatements.  All statements other thanhistorical information or statements of current condition contained in thisQuarterly Report, including statements regarding our future financialperformance, our business strategy, and expected developments in our industry,are forward-looking statements. The words “expect,” “intend,” “plan,” “believe,”“project,” “anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,”“continue,” and similar expressions are intended to identify forward-lookingstatements.

 

We have based these forward-looking statements on management’s currentviews and expectations. Although we believe that the current views andexpectations reflected in these forward-looking statements are reasonable,those views and expectations, and the related statements, are inherentlysubject to risks, uncertainties, and other factors, many of which are not underour control and may not even be predictable. These risks, uncertainties, andother factors could cause the actual results, performance or achievements todiffer materially from any future results, performance or achievementsexpressed or implied by the forward-looking statements. These risks,uncertainties, and factors include, but are not limited to:

 

·                  the extent to whichregulations written and implemented by the newly created federal Bureau ofConsumer Financial Protection, and other federal, state, local, and foreigngovernmental regulation of cash advance services, consumer lending, and relatedfinancial products and services limit or prohibit the operation of ourbusiness;

 

·                  the extent to which afederal law that imposes a national cap on our fees and interest or prohibitsor severely restricts cash advance services would likely eliminate our abilityto continue our current operations;

 

·                  our ability to continue togenerate sufficient cash flow to satisfy our liquidity needs and future cashdividends;

 

·                  current and futurelitigation and regulatory proceedings against us and our officers anddirectors;

 

·                  our ability to find growthopportunities and to identify and successfully implement new product andservice offerings;

 

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

 

·                  our ability to preventunauthorized disclosures of sensitive or confidential customer data;

 

·                  the possible impairment ofgoodwill;

 

·                  the fragmentation of ourindustry and competition from various other sources providing similar financialproducts, or other alternative sources of credit, to consumers;

 

·                  the adequacy of ourallowance for doubtful accounts, accrual for third- party lender losses andestimates of losses;

 

·                  the availability of adequatefinancing;

 

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·                  the effect of extendedrepayment plans on our revenues, loss experience, provision for doubtfulaccounts, and results of operations;

 

·                  our ability to operate on aprofitable basis in Canada and the United Kingdom;

 

·                  our relationship with thebanks that are party to our revolving credit facility and that provide certainservices that are needed to operate our business;

 

·                  theft and employee errors;and

 

·                  the factors set forth in “Item 1A.Risk Factors” of our Annual Report on Form 10-K for the year ended December 31,2009, under “Part II. Item 1A. Risk Factors” of our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2010, and under “Part II. Item 1A.Risk Factors” in this Quarterly Report.

 

All forward-looking statements in this Quarterly Report are based oninformation available to us as of the date of this Quarterly Report. Except asrequired under federal securities laws and the rules and regulations ofthe U.S. Securities and Exchange Commission, we do not have any intention, anddo not undertake, to update any forward-looking statements to reflect events orcircumstances arising after the date of this Quarterly Report, whether as aresult of new information, future events or otherwise. As a result of theserisks and uncertainties, readers are cautioned not to place undue reliance onthe forward-looking statements included in this Quarterly Report or that may bemade elsewhere from time to time by, or on behalf of, us. All forward-lookingstatements attributable to us are expressly qualified by these cautionarystatements.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

We have no market-risk-sensitive instruments entered into for tradingpurposes, as defined by GAAP.

 

***Interest Rate Risk***

 

We are exposed to interest rate risk on our revolving credit facility.Our variable interest expense is sensitive to changes in the general level ofinterest rates. We may from time to time enter into interest rate swaps,collars or similar instruments with the objective of reducing our volatility inborrowing costs. We do not use derivative financial instruments for speculativeor trading purposes. We had no derivative financial instruments outstanding asof December 31, 2009 or September 30, 2010. The weighted averageinterest rate on our $141.1 million of variable interest debt as ofDecember 31, 2009 was approximately 3.13%. The weighted average interestrate on our $111 million of variable interest debt as of September 30,2010 was approximately 3.28%.

 

We had total interest expense of $1.6 million and$1.3 million for the three months ended September 30, 2009 and 2010,respectively. We had total interest expense of $4.9 million and $3.6 millionfor the nine months ended September 30, 2009 and 2010, respectively. Theestimated change in interest expense from a hypothetical 200 basis-point changein applicable variable interest rates would have been approximately$0.8 million and $0.5 million for the three months ended September 30,2009 and 2010, respectively. The estimated change in interest expense from ahypothetical 200 basis-point change in applicable variable interest rates wouldhave been approximately $2.3 million and $1.5 million for the nine months endedSeptember 30, 2009 and 2010, respectively.

 

***Foreign Currency Exchange Rate Risk***

 

The expansion of our operations to the United Kingdom and Canada in2007 has exposed us to shifts in currency valuations. We may from time to timeelect to purchase financial instruments as hedges against foreign exchange raterisks with the objective of protecting our results of operations in the UnitedKingdom and Canada against foreign currency fluctuations. We had no suchfinancial instruments outstanding as of December 31, 2009 or September 30,2010.

 

As currency exchange rates change, translation of the financial resultsof our United Kingdom and Canadian operations into United States dollars willbe impacted. Changes in exchange rates have resulted in cumulative translationadjustments which decreased our net assets by approximately $1.9 million ineach of December 31, 2009 and September 30, 2010. These cumulativetranslation adjustments are included in accumulated other comprehensive loss asa separate component of stockholders’ equity. Due to the immateriality of ourcurrent operations in the United Kingdom and Canada, a change in foreigncurrency exchange rates is not expected to have a significant impact on ourconsolidated financial position, results of operations or cash flows.

 

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**ITEM 4.  CONTROLS AND PROCEDURES.**

 

Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we haveevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, as of the end of the periodcovered by this Report. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that those disclosure controls andprocedures are effective. There were no changes in our internal control overfinancial reporting during the quarter ended September 30, 2010, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

See “Part I. Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 6. Commitments andContingencies,” which is incorporated herein by reference.

 

**ITEM1A.  RISK FACTORS.**

 

Our operations and financial results are subject to various risks anduncertainties that could adversely affect our business, results of operations,financial condition, future results, and the trading price of our common stock.In addition to the other information set forth in this Quarterly Report, youshould carefully consider the factors described in “Part I. Item 1A. RiskFactors” of our Annual Report on Form 10-K for the year endedDecember 31, 2009, and in “Part II. Item 1A Risk Factors” of ourQuarterly Report on Form 10-Q for the quarter ended June 30, 2010,which could materially affect our business, results of operations, financialcondition, future results, and the trading price of our common stock.

 

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

 

The following table sets forth information about our stock repurchasesfor the three months ended September 30, 2010:

 
| **Period (1)**                   | ** ** | **Total Number of  Shares Purchased  (2)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Approximate Dollar Value  of  Shares that May Yet Be  Purchased Under the Plans  or Programs (3)** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1 to July 31           |       | —                                                    |       | $                                            | —     |                                                                                                                             | —     |                                                                                                                                                        | $          | — |   |
| August 1 to August 31       |       | —                                                    |       | —                                       |       | —                                                                                                                           |       | —                                                                                                                                                      |       |
| September 1 to September 30 |       | 1,116                                                     |       | 3.60                                         |       | —                                                                                                                           |       | —                                                                                                                                                      |       |
| Total                                 |       | 1,116                                                     |       | $                                            | 3.60       |                                                                                                                             | —     |                                                                                                                                                        | $          | — |   |

 

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(1)                                  Based on tradedate.

 

(2)                                  This columnreflects 1,116 shares 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.

 

(3)                                  InJuly 2008, we completed our stock repurchase program, which was initiallyadopted on May 4, 2005 and subsequently extended on August 16, 2006and on February 13, 2008. We did not repurchase any stock during the threemonths ended September 30, 2010.

 

**ITEM 5. OTHER INFORMATION.**

 

OnOctober 27, 2010, our Board of Directors adopted new compensationarrangements for non-employee directors that will become effective on January 1,2011. The new arrangements: (i) eliminate meeting fees (with the exceptionof special committee meetings); (ii) provide for annual retainers (to bepaid quarterly) based on the independent director’s Board and Committeeservice; and (iii) provide for an annual grant of restricted stock, alongwith minimum stock ownership guidelines. A detailed description of the newcompensation arrangements for a non-employee director is provided in Exhibit 10.1to this Form 10-Q and is incorporated herein by reference.

 

Alsoon October 27, 2010, our Board of Directors formed a new Board committee,called the Industry Relations Committee, for the purpose of monitoring andoverseeing: (i) federal and state regulatory developments and the Company’sresponses to those developments; and (ii) the Company’s relationships withcommunity and consumer organizations. Messrs. Anthony T. Grant and Tony S.Colletti will serve as members of the Committee, with Mr. Grant serving asChairman.

 

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**ITEM6.  EXHIBITS.**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                   |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Non-Employee  Director Compensation Arrangements                                                                                                                                                                  |
| 31(i)(A)    |       | Certification  of Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 31(i)(B)    |       | Certification  of Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 32.1        |       | Certification  of Chief Executive Officer of Advance America, Cash Advance  Centers, Inc. pursuant to 18 U.S.C. Section 1350 (adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002). |
| 32.2        |       | Certification  of Chief Financial Officer of Advance America, Cash Advance Centers, Inc.  pursuant to 18 U.S.C. Section 1350 (adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002). |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                   | ADVANCE  AMERICA, CASH ADVANCE |
|------------------------|--------------------------------|
|                   | CENTERS, INC.             |
|                   |                           |
| November 8,  2010 | By:                            | /s/  J. PATRICK O’SHAUGHNESSY |
|                   |                           |   |
|                   |                           | J.  Patrick O’Shaughnessy |
| * *               | * *                       | *Executive Vice President and* |
| * *               | * *                       | *Chief Financial Officer* |
| * *               | * *                       | *(Duly authorized officer and* |
| * *               | * *                       | *principal financial officer)* |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                   |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                    |       | Non-Employee  Director Compensation Arrangements                                                                                                                                                                  |
| 31(i)(A)                |       | Certification  of Principal Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 31(i)(B)                |       | Certification  of Principal Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) under the Securities Exchange Act of 1934, as amended.                                                    |
| 32.1                    |       | Certification  of Chief Executive Officer of Advance America, Cash Advance  Centers, Inc. pursuant to 18 U.S.C. Section 1350 (adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002). |
| 32.2                    |       | Certification  of Chief Financial Officer of Advance America, Cash Advance  Centers, Inc. pursuant to 18 U.S.C. Section 1350 (adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002). |

 

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