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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark  One)**                                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                            |
| **x**                                                                                                                                 | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                            |
| **For the quarterly period ended March 31, 2010**                                                                                |
| ** **                                                                                                                            |
| **OR**                                                                                                                                |
| ** **                                                                                                                            |
| **o**                                                                                                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                            |
| **For the transition period  from        to        ** |

 

**COMMISSIONFILE NUMBER 001-32363**

 

**ADVANCE AMERICA, CASH ADVANCECENTERS, 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 NorthChurch Street**

**Spartanburg,South Carolina 29306**

(Address of principalexecutive offices) (Zip Code)

 

**864-342-5600**

(Registrant’s telephonenumber, including area code)

 

**None**

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

 

Indicate by check 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 past90 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 Exchange Act. (Checkone):

 

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

 

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 May 10, 2010** |
|----------------------------------------|------------|------------------------------------|
| Common Stock, par value $.01 per share |       | 62,193,099 shares             |

 

 

 

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

**Form 10-Q**

**For thethree months ended March 31, 2010**

 
| ** **                             | ** **                                                                                                    | **Page** |
|----------------------------------------|---------------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING  STATEMENTS**        | 3                                                                                                             |
| ** **                             |                                                                                                          |
| **PART I. FINANCIAL INFORMATION** | 4                                                                                                             |
| Item 1.                           | Financial  Statements                                                                                         | 4        |
|                                   | Unaudited Consolidated Balance Sheets December 31,  2009 and March 31, 2010                         | 4        |
|                                   | Interim Unaudited Consolidated Statements of Income  Three Months Ended March 31, 2009 and 2010          | 5        |
|                                   | Interim Unaudited Consolidated Statement of  Stockholders’ Equity Three Months Ended March 31, 2010 | 6        |
|                                   | Interim Unaudited Consolidated Statements of Cash  Flows Three Months Ended March 31, 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                   | 23       |
| Item 3.                           | Quantitative  and Qualitative Disclosures About Market Risk                                                   | 42       |
| Item 4.                           | Controls and  Procedures                                                                                      | 43       |
|                                   |                                                                                                          |     |
| **PART II.  OTHER INFORMATION**   | 44                                                                                                            |
| Item 1.                           | Legal Proceedings                                                                                             | 44       |
| Item 1A.                          | Risk Factors                                                                                                  | 44       |
| Item 2.                           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                  | 44       |
| Item 6.                           | Exhibits                                                                                                      | 44       |
|                                   |                                                                                                          |     |
| **SIGNATURES**                         | 45                                                                                                            |
| ** **                             |                                                                                                          |
| **INDEX  TO EXHIBITS**                 | 46                                                                                                            |

 

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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, 2009,as well as any cautionary language in this Quarterly Report, provide examplesof risks, uncertainties and events that may cause our actual results to differmaterially from the expectations we describe in our forward-looking statements.Although we believe that our expectations are based on reasonable assumptions,actual results may differ materially from those in the forward-lookingstatements as a result of various factors, including, but not limited to, theexamples 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 March 31, 2010**

 

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

 
| ** **                                                                                                                                                                                     | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                                                                                                     |       |                        |       |                     |       |
| Current assets                                                                                                                                                                                 |       |                        |       |                     |       |
| Cash and cash equivalents                                                                                                                                                                      |       | $                           | 38,189     |                     | $          | 11,098 |   |
| Advances and fees receivable, net                                                                                                                                                              |       | 204,234                     |       | 166,764                  |       |
| Deferred income taxes                                                                                                                                                                          |       | 19,145                      |       | 19,145                   |       |
| Other current assets                                                                                                                                                                           |       | 17,383                      |       | 20,532                   |       |
| Total current assets                                                                                                                                                                           |       | 278,951                     |       | 217,539                  |       |
| Restricted cash                                                                                                                                                                                |       | 4,366                       |       | 2,851                    |       |
| Property and equipment, net                                                                                                                                                                    |       | 31,839                      |       | 29,289                   |       |
| Goodwill                                                                                                                                                                                       |       | 127,031                     |       | 126,812                  |       |
| Other assets                                                                                                                                                                                   |       | 3,964                       |       | 3,754                    |       |
| Total assets                                                                                                                                                                                   |       | $                           | 446,151    |                     | $          | 380,245 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                 |       |                        |       |                     |       |
| Current liabilities                                                                                                                                                                            |       |                        |       |                     |       |
| Accounts payable                                                                                                                                                                               |       | $                           | 13,562     |                     | $          | 12,444 |   |
| Accrued liabilities                                                                                                                                                                            |       | 31,432                      |       | 31,426                   |       |
| Income taxes payable                                                                                                                                                                           |       | 11,400                      |       | 5,032                    |       |
| Accrual for third-party lender losses                                                                                                                                                          |       | 4,528                       |       | 3,363                    |       |
| Current portion of long-term debt                                                                                                                                                              |       | 851                         |       | 863                      |       |
| Total current liabilities                                                                                                                                                                      |       | 61,773                      |       | 53,128                   |       |
| Revolving credit facility                                                                                                                                                                      |       | 141,058                     |       | 75,195                   |       |
| Long-term debt                                                                                                                                                                                 |       | 4,367                       |       | 4,116                    |       |
| Deferred income taxes                                                                                                                                                                          |       | 23,349                      |       | 23,349                   |       |
| Deferred revenue                                                                                                                                                                               |       | 2,717                       |       | 2,212                    |       |
| Other liabilities                                                                                                                                                                              |       | 274                         |       | 262                      |       |
| Total liabilities                                                                                                                                                                              |       | 233,538                     |       | 158,262                  |       |
| 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 62,190 outstanding as  of December 31, 2009 and March 31, 2010, respectively |       | 968                         |       | 968                      |       |
| Paid- in capital                                                                                                                                                                               |       | 290,146                     |       | 289,152                  |       |
| Retained earnings                                                                                                                                                                              |       | 182,765                     |       | 192,367                  |       |
| Accumulated other comprehensive loss                                                                                                                                                           |       | (1,934                      | )          | (2,413                   | )          |
| Common stock in treasury (35,207 and 34,631 shares  at cost at December 31, 2009 and March 31, 2010, respectively)                                                                   |       | (259,332                    | )          | (258,091                 | )          |
| Total stockholders’ equity                                                                                                                                                                |       | 212,613                     |       | 221,983                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                |       | $                           | 446,151    |                     | $          | 380,245 |   |

 

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 Ended March 31, 2009 and 2010**

 

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

 
| ** **                                     | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| **Total Revenues**                             |       | $        | 156,393    |     | $          | 144,398 |   |
| **Center Expenses:**                           |       |     |       |     |       |
| Salaries and related payroll costs             |       | 47,513   |       | 47,585   |       |
| Provision for doubtful accounts                |       | 21,098   |       | 12,734   |       |
| Occupancy costs                                |       | 24,773   |       | 23,472   |       |
| Center depreciation expense                    |       | 3,723    |       | 2,696    |       |
| Advertising expense                            |       | 2,181    |       | 3,635    |       |
| Other center expenses                          |       | 12,706   |       | 11,511   |       |
| Total center expenses                          |       | 111,994  |       | 101,633  |       |
| Center gross profit                            |       | 44,399   |       | 42,765   |       |
| **Corporate and Other Expenses  (Income):**    |       |     |       |     |       |
| General and administrative expenses            |       | 14,071   |       | 16,641   |       |
| Legal Settlements                              |       | —   |       | 38       |       |
| Corporate depreciation expense                 |       | 688      |       | 690      |       |
| Interest expense                               |       | 1,699    |       | 1,177    |       |
| Interest income                                |       | (17      | )          | (13      | )          |
| Loss on disposal of property and equipment     |       | 33       |       | 168      |       |
| Loss on impairment of assets                   |       | 2,209    |       | —   |       |
| Income before income taxes                     |       | 25,716   |       | 24,064   |       |
| Income tax expense                             |       | 10,573   |       | 10,577   |       |
| Net income                                     |       | $        | 15,143     |     | $          | 13,487 |   |
| Net income per common share:                   |       |     |       |     |       |
| Basic                                          |       | $        | 0.25       |     | $          | 0.22 |   |
| Diluted                                        |       | $        | 0.25       |     | $          | 0.22 |   |
| Dividends declared per common share            |       | $        | 0.0625     |     | $          | 0.0625 |   |
| Weighted average number of shares outstanding: |       |     |       |     |       |
| Basic                                          |       | 60,858   |       | 60,969   |       |
| Diluted                                        |       | 61,234   |       | 61,664   |       |

 

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**

 

**ThreeMonths Ended March 31, 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                                             |       | —            |       | —     |       | —      |       | 13,487       |       | —            |       | —           |       | —     |       | 13,487     |       |
| Foreign  currency translation                           |       | —            |       | —     |       | —      |       | —       |       | (479              | )          | —           |       | —     |       | (479       | )          |
| Total  comprehensive income                             |       |              |       |       |       |        |       |         |       |              |       |             |       |       |       | 13,008     |       |
| Dividends  paid ($0.0625 per share)                     |       | —            |       | —     |       | —      |       | (3,870       | )          | —            |       | —           |       | —     |       | (3,870     | )          |
| Dividends  payable                                      |       | —            |       | —     |       | —      |       | (15          | )          | —            |       | —           |       | —     |       | (15        | )          |
| Purchases  of treasury stock                            |       | —            |       | —     |       | —      |       | —       |       | —            |       | (52              | )          | (383       | )          | (383       | )          |
| Issuance  of restricted stock                           |       | —            |       | —     |       | —      |       | —       |       | —            |       | 592              |       | —     |       | —     |       |
| Vesting  of restricted stock issued from treasury stock |       | —            |       | —     |       | (1,436      | )          | —       |       | —            |       | —           |       | 1,436      |       | —     |       |
| Amortization  of restricted stock                       |       | —            |       | —     |       | 332         |       | —       |       | —            |       | —           |       | —     |       | 332        |       |
| Stock  option expense                                   |       | —            |       | —     |       | 298         |       | —       |       | —            |       | —           |       | —     |       | 298        |       |
| Stock  option exercises                                 |       | —            |       | —     |       | (188        | )          | —       |       | —            |       | 36               |       | 188        |       | —     |       |
| **Balances, March 31, 2010**                       |       | 96,821            |       | $          | 968        |        | $          | 289,152      |       | $                 | 192,367    |             | $          | (2,413     | )          | (34,631    | )          | $ | (258,091 | ) | $ | 221,983 |   |

 

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**

 

**ThreeMonths Ended March 31, 2009 and 2010**

 

**(in thousands)**

 
| ** **                                                                                            | ** ** | **2009** | ** ** | **2010** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating  activities**                                                             |       |     |       |     |       |
| Net income                                                                                            |       | $        | 15,143     |     | $          | 13,487 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities, net of acquisition |       |     |       |     |       |
| Depreciation and amortization                                                                         |       | 4,425    |       | 3,387    |       |
| Non-cash interest expense                                                                             |       | 156      |       | 164      |       |
| Provision for doubtful accounts                                                                       |       | 21,098   |       | 12,734   |       |
| Loss on disposal of property and equipment                                                            |       | 33       |       | 168      |       |
| Loss on impairment of assets                                                                          |       | 2,209    |       | —   |       |
| Amortization of restricted stock                                                                      |       | 197      |       | 332      |       |
| Stock option expense                                                                                  |       | 313      |       | 298      |       |
| Common stock issued to director in lieu of cash                                                       |       | 7        |       | —   |       |
| Changes in operating assets and liabilities                                                           |       |     |       |     |       |
| Fees receivable, net                                                                                  |       | (4,772   | )          | (1,114   | )          |
| Other current assets                                                                                  |       | (2,039   | )          | (3,193   | )          |
| Other assets                                                                                          |       | 17       |       | 40       |       |
| Accounts payable                                                                                      |       | 2,041    |       | (1,525   | )          |
| Accrued liabilities                                                                                   |       | (8,264   | )          | (24      | )          |
| Income taxes payable                                                                                  |       | 687      |       | (6,368   | )          |
| Deferred revenue                                                                                      |       | (520     | )          | (505     | )          |
| Net cash provided by operating activities                                                             |       | 30,731   |       | 17,881   |       |
| **Cash flows from investing  activities**                                                             |       |     |       |     |       |
| Changes in advances receivable                                                                        |       | 30,157   |       | 24,663   |       |
| Changes in restricted cash                                                                            |       | (3,284   | )          | 1,515    |       |
| Proceeds from sale of property and equipment                                                          |       | 40       |       | —   |       |
| Purchases of property and equipment                                                                   |       | (1,053   | )          | (1,054   | )          |
| Net cash provided by investing activities                                                             |       | 25,860   |       | 25,124   |       |
| **Cash flows from financing  activities**                                                             |       |     |       |     |       |
| Payments on revolving credit facility, net                                                            |       | (52,043  | )          | (65,863  | )          |
| Payments on mortgage payable                                                                          |       | (108     | )          | (115     | )          |
| Payments on note payable                                                                              |       | (34      | )          | (124     | )          |
| Purchases of treasury stock                                                                           |       | (5       | )          | (383     | )          |
| Payments of dividends                                                                                 |       | (3,828   | )          | (3,870   | )          |
| Changes in book overdrafts                                                                            |       | (2,775   | )          | 421      |       |
| Net cash used in financing activities                                                                 |       | (58,793  | )          | (69,934  | )          |
| Effect of exchange rate changes on cash and cash  equivalents                                         |       | (52      | )          | (162     | )          |
| Net decrease in cash and cash equivalents                                                             |       | (2,254   | )          | (27,091  | )          |
| Cash and cash equivalents, beginning of period                                                        |       | 16,017   |       | 38,189   |       |
| Cash and cash equivalents, end of period                                                              |       | $        | 13,763     |     | $          | 11,098 |   |
|                                                                                                  |       |     |       |     |       |
| Supplemental disclosures of cash flow information:                                                    |       |     |       |     |       |
| Cash paid during the period for:                                                                      |       |     |       |     |       |
| Interest                                                                                              |       | $        | 1,652      |     | $          | 1,192 |   |
| Income taxes                                                                                          |       | 9,673    |       | 10,577   |       |
| Supplemental schedule of non-cash investing and  financing activity:                                  |       |     |       |     |       |
| Property and equipment purchases included in  accounts payable and accrued expenses                   |       | 60       |       | —   |       |
| Restricted stock dividends payable                                                                    |       | 21       |       | 15       |       |

 

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 three months ended March 31, 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 organizations 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 offeredin Virginia a line of credit product with a 25-day billing cycle. 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 March 31, 2009 and 2010, total revenueswithin the Company’s five largest states (measured by total revenues) accountedfor approximately 51% and 49%, respectively, of the Company’s totalrevenues.  The states that represent theCompany’s five largest states (measured by total revenues) change from time totime.

 

**Financial Instrument Assets and Liabilities for Which Carrying ValuesEqual or Approximate Fair Value**

 

Financial assets and liabilities for which carryingvalues equal or approximate fair value include cash and cash equivalents,advances, fees, interest, installment loans, lines of credit receivable,certain other assets, accounts payable, accrued liabilities, and certain otherliabilities.  For these assets andliabilities, the carrying values approximate fair value due to their short-termnature.

 

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**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. A liability for severance payments is recognized when management: (i) decidesto close a center and this plan is unlikely to change; (ii) determinesthat an employee cannot be relocated to another center; and (iii) informsthe employee of the termination and the benefits that will be paid. Costs toterminate the lease are recorded at the earlier of the date the lease isterminated or the date the leased property is no longer used. All other expensesare recorded when 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.

 

**Goodwill**

 

The Company has approximately $126.8 millionof goodwill as of March 31, 2010. Goodwill represents the excess cost over thefair value of assets acquired. The Company tests its goodwill for impairmentannually as of September 30 or whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Estimated cash flowsand related goodwill are grouped at the reporting unit level. A reporting unitis an operating segment, or under certain circumstances, a component of anoperating segment that constitutes a business. When estimated future cash flowsare less 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’sgoodwill over the implied fair value of that goodwill. In determining theestimated future cash flows, the Company considers current and projected futurelevels of income, as well as business trends, prospects, and market andeconomic conditions. Impairment tests involve the use of judgments andestimates related to the fair market value of the business operations withwhich goodwill is associated, taking into consideration both historicaloperating performances and anticipated future earnings.

 

The Company has approximately $4.2 million of goodwill in itsUnited Kingdom operations. As of March 31, 2010, these operations havecumulatively generated negative cash flow and have not reached break-even atthe center gross profit level. The Company’s expansion efforts in the UnitedKingdom began during the third quarter of 2007. The goodwill impairmentassessment model projects future positive cash flows sufficient to support thegoodwill and long-lived asset base. If the United Kingdom operations continueto generate negative cash flow and do not break-even, an impairment chargerelated 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 management and,accordingly, reserves have not been established for those matters. Based oncurrent knowledge, management does not believe that loss contingencies, if any,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.

 

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**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. At March 31, 2009 and 2010, 219,851 and171,068, respectively, unvested shares of restricted stock were not included inthe computation of diluted earnings per share because the effect of includingthem would be anti-dilutive. At March 31, 2009 and 2010, options topurchase 1,567,500 and 1,555,000 shares of common stock, respectively, thatwere outstanding at those dates were not included in the computation of dilutedearnings per share because the effect of including them 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 monthsended March 31, 2009 and 2010 (in thousands):

 
| ** **                                                         | ** ** | **2009** | ** ** | **2010** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Reconciliation of denominator:                                     |       |     |       |     |       |
| Weighted average number of common shares  outstanding—basic   |       | 60,858   |       | 60,969   |       |
| Effect of dilutive unvested restricted stock                       |       | 287      |       | 342      |       |
| Effect of dilutive outstanding stock options                       |       | 89       |       | 353      |       |
| Weighted average number of common shares  outstanding—diluted |       | 61,234   |       | 61,664   |       |

 

**Recently Issued Accounting Pronouncements**

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued ASC 105-10-05, “Generally Accepted Accounting Principles” (“ASC105-10-05”), which establishes the Accounting Standards Codification (“Codification”or “ASC”) as the single source of authoritative U.S. generally acceptedaccounting principles (“GAAP”) recognized by the FASB to be applied bynongovernmental entities. Rules and interpretive releases of the SEC underauthority of federal securities laws are also sources of GAAP for SECregistrants. The Codification supersedes all existing non-SEC accounting andreporting standards.

 

The FASB will no longer issue new standards in the form of Statements,FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it willissue Accounting Standards Updates which will serve to update the Codification,provide background information about the guidance, and provide the basis forconclusions on changes to the Codification.

 

The ASC is not intended to change GAAP but does change the way theguidance is organized and presented. The adoption of ASC 105-10-05 had noimpact on the Company’s financial position or results of operations.

 

In December 2007, the FASB issued ASC 805-10-65, “BusinessCombinations” (“ASC 805-10-65”). ASC 805-10-65 modifies the accounting forbusiness combinations and requires, with limited exceptions, the acquirer in abusiness combination to recognize 100 percent of the assets acquired,liabilities assumed, and any non-controlling interest in the acquiree at theacquisition-date fair value. In addition, ASC 805-10-65 requires the expensingof acquisition-related transaction and restructuring costs and requires thatcertain contingent assets and liabilities acquired, as well as contingentconsideration, be recognized at fair value. ASC 805-10-65 also modifies theaccounting for certain acquired income tax assets and liabilities. ASC805-10-65 is effective for acquisitions consummated on or after January 1,2009. The adoption of ASC 805-10-65 did not have a material impact on theCompany’s financial position or results of operations.

 

In December 2007, the FASB issued ASC 810-10-65 (“ASC 810-10-65”),“Noncontrolling Interests in Consolidated Financial Statements—an amendment toARB No. 51”, which establishes accounting and reporting standards for anoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. ASC 810-10-65 clarifies that a noncontrolling interest in asubsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as acomponent of equity in the consolidated financial statements. Among otherrequirements, ASC 810-10-65 requires consolidated net income to be reported atamounts that include the amounts attributable to both the parent and thenoncontrolling interest. It also requires disclosure, on the face of theconsolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest. ASC 810-10-65 iseffective for fiscal years beginning after December 15, 2008. The adoptionof ASC 810-10-65 did not have a material impact on the Company’s financialposition or results of operations.

 

In April 2009, the FASB issued ASC 825-10-65, “Interim Disclosuresabout Fair Value of Financial Instruments” (“ASC 825-10-65”). ASC 825-10-65amends the disclosure requirements in SFAS No. 107, “Disclosures aboutFair Value of Financial Instruments”, and APB Opinion No. 28, “InterimFinancial Reporting”, to require disclosures about the fair value of financialinstruments, including disclosure of the method and significant assumptionsused to estimate the fair value of 

 

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financialinstruments, in interim financial statements as well as in annual financialstatements. The Company has adopted the disclosure requirements of ASC825-10-65, with no material impact on the Company’s financial position orresults of operations.

 

In May 2009, the FASB issued ASC 855-10-05 through ASC 855-10-55, “SubsequentEvents” (collectively, ASC “855-10”), which establishes general standards ofaccounting for disclosure of events that occur after the balance sheet date butbefore the financial statements are issued or are available to be issued. ASC855-10-25, “Recognition,” requires an entity to recognize, in the financialstatements, subsequent events that provide additional information regardingconditions that existed at the balance sheet date. Subsequent events thatprovide information about conditions that did not exist at the balance sheetdate shall not be recognized in the financial statements under ASC 855-10. ASC855-10 was effective for interim and annual reporting periods on or after June 15,2009. The Company adopted ASC 855-10 during the second quarter of 2009, and itsapplication had no material impact on the Company’s financial position orresults of operations. 

 

In June 2009, the FASB issued ASC 810-30, “Variable InterestEntities.” ASC 810-30 changes how a reporting entity determines whether anentity that is insufficiently capitalized or is not controlled through voting(or similar rights) should be consolidated. The determination of whether areporting entity is required to consolidate another entity is based on, amongother things, the other entity’s purpose and design and the reporting entity’sability to direct the activities of the other entity that most significantlyimpact the other entity’s performance. ASC 810-30 is effective for a reportingentity’s first fiscal year beginning after November 15, 2009. The adoptionof ASC 810-30 during the quarter ended March 31, 2010 did not have amaterial impact on the Company’s financial position or results of operations.

 

**2. Advancesand Fees Receivable, Net**

 

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

 
| ** **                        | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Advances receivable               |       | $                           | 200,110    |                     | $          | 161,935 |   |
| Fees and interest receivable      |       | 34,497                      |       | 27,591                   |       |
| Returned items receivable         |       | 36,255                      |       | 25,671                   |       |
| Other                             |       | 6,112                       |       | 3,843                    |       |
| Allowance for doubtful accounts   |       | (53,031                     | )          | (40,538                  | )          |
| Unearned revenues                 |       | (19,709                     | )          | (11,738                  | )          |
| Advances and fees receivable, net |       | $                           | 204,234    |                     | $          | 166,764 |   |

 

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 monthsended March 31, 2009 and 2010 were as follows (in thousands):

 
| ** **                      | ** ** | **2009** | ** ** | **2010** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Beginning balance               |       | $        | 59,441     |     | $          | 53,031 |   |
| Provision for doubtful accounts |       | 21,898   |       | 13,899   |       |
| Charge-offs                     |       | (36,544  | )          | (34,602  | )          |
| Recoveries                      |       | 8,459    |       | 8,210    |       |
| Ending balance                  |       | $        | 53,254     |     | $          | 40,538 |   |

 

Changes in the accrual for third-party lender losses for the threemonths ended March 31, 2009 and 2010 were as follows (in thousands):

 
| ** **                      | ** ** | **2009** | ** ** | **2010** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Beginning balance               |       | $        | 3,960      |     | $          | 4,528 |   |
| Provision for doubtful accounts |       | (800     | )          | (1,165   | )          |
| Ending balance                  |       | $        | 3,160      |     | $          | 3,363 |   |

 

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The total changes in the allowance for doubtful accounts and theaccrual for third-party lender losses for the three months ended March 31,2009 and 2010 were as follows (in thousands):

 
| ** **                      | ** ** | **2009** | ** ** | **2010** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Beginning balance               |       | $        | 63,401     |     | $          | 57,559 |   |
| Provision for doubtful accounts |       | 21,098   |       | 12,734   |       |
| Charge-offs                     |       | (36,544  | )          | (34,602  | )          |
| Recoveries                      |       | 8,459    |       | 8,210    |       |
| Ending balance                  |       | $        | 56,414     |     | $          | 43,901 |   |

 

**4. Other Current Assets**

 

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

 
| ** **                             | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Prepaid rent                           |       | $                           | 6,287      |                     | $          | 6,202 |   |
| Prepaid income taxes                   |       | 3,637                       |       | 5,265                    |       |
| Prepaid insurance                      |       | 2,874                       |       | 2,941                    |       |
| Prepaid taxes and licenses             |       | 1,558                       |       | 1,430                    |       |
| Prepaid workers compensation loss fund |       | 346                         |       | 346                      |       |
| Other                                  |       | 2,681                       |       | 4,348                    |       |
| Total                                  |       | $                           | 17,383     |                     | $          | 20,532 |   |

 

**5. Accrued Liabilities**

 

Accrued liabilities consisted of the following (in thousands):

 
| ** **                          | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Employee compensation               |       | $                           | 9,191      |                     | $          | 8,808 |   |
| Legal fines and settlements         |       | 6,666                       |       | 6,680                    |       |
| Workers’ compensation          |       | 4,996                       |       | 4,924                    |       |
| Straight-line rent accrual          |       | 2,142                       |       | 1,870                    |       |
| Deferred revenue                    |       | 1,709                       |       | 1,645                    |       |
| Center closing costs                |       | 817                         |       | 1,221                    |       |
| Legal fees                          |       | 547                         |       | 1,207                    |       |
| Accounting and tax                  |       | 528                         |       | 755                      |       |
| Property, sales and franchise taxes |       | 519                         |       | 668                      |       |
| Severance                           |       | 41                          |       | 370                      |       |
| Advertising                         |       | 770                         |       | 224                      |       |
| Construction in progress            |       | 72                          |       | —                   |       |
| Other                               |       | 3,434                       |       | 3,054                    |       |
| Total                               |       | $                           | 31,432     |                     | $          | 31,426 |   |

 

**6.Commitments and Contingencies**

 

The Company is involved in a number of active lawsuits, includinglawsuits filed by private litigants and those matters arising out of actions takenby state 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 

 

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officeror director of the Company. Under certain circumstances, the Company may alsobe obligated to defend and indemnify other parties against whom claims have beenasserted. Unless otherwise stated below, the Company is vigorously defendingagainst these actions and will, when management believes appropriate inconsideration of ongoing litigation expenses and other factors, evaluatereasonable settlement opportunities. The amount of losses and/or theprobability of an unfavorable outcome, if any, cannot be reasonably estimatedfor these legal proceedings unless otherwise stated below. Accordingly, exceptas otherwise specified below, no accrual has been recorded for any of thesematters as of March 31, 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 the first half of 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, on January 11,2001, and a third named class representative, Tiffany Kelly, in the CircuitCourt of Palm Beach County, Florida. This putative class action alleges thatMcKenzie, by and through the actions of certain officers, directors, andemployees, engaged in unfair and deceptive trade practices and violated Florida’scriminal usury statute, the Florida Consumer Finance Act, and the FloridaRacketeer Influenced and Corrupt Organizations Act. The suit seeks unspecifieddamages, and the named defendants could be required to refund fees and/orinterest collected, refund the principal amount of cash advances, pay multipledamages, and pay other monetary penalties. Ms. Reuter’s claim has beenheld to be subject to binding arbitration, which the Company expects to proceedin parallel with this case. However, the trial court has denied the defendants’motion to compel arbitration of Ms. Kelly’s claims and the Company hasappealed 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 and Ms. Reuteragainst the Company, the Company’s Florida subsidiary, Advance America, CashAdvance Centers of Florida, Inc., and certain officers and directors. Theallegations, relief sought, and the Company’s defenses in this lawsuit arenearly identical to those alleged in the first *Bettsand Reuter* lawsuit described above. The case is currently stayed,pending a decision from the Florida Supreme Court in *Pendergastv. Sprint Nextel Corp.*, which is a separate case, to which theCompany is not a party, involving arbitration issues.

 

*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 alleges thatthe arbitration clause and class action waiver in the Company’s subsidiary’scustomer loan agreements are unconscionable, that the Company’s subsidiary’spractices violate the Missouri statutes governing unfair and deceptive tradepractices, interest rates, loan renewals, debt reduction, and consideration ofborrower’s ability to repay. The lawsuit seeks certification as a class action,unspecified monetary damages, and a declaratory judgment that the arbitrationclause and class action waiver is unconscionable and injunctive relief. Thematter has been stayed until May 21, 2010 to allow the parties to continuesettlement negotiations.

 

*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 was a “rent a charter”relationship and therefore 

 

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Republicwas not the “true lender” of the cash advances it offered. The lawsuit alsoclaims that the cash advances were made, administered, and collected inviolation of numerous North Carolina consumer protection laws. The lawsuitseeks an injunction barring the subsidiary from continuing to do business inNorth Carolina, the return of the principal amount of the cash advances made tothe plaintiff class since August 2001, along with three times the interestand/or fees associated with those advances plus attorneys’ fees and otherunspecified costs. The Company sought to enforce the arbitration provisions inthe customer agreements. The trial court granted class certification and ruledthat the arbitration clause is unenforceable. The Company has appealed thisruling.

 

*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.

 

*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 lendingactivities in Pennsylvania for so long as the CDCA violations continued andfrom collecting monthly participation fees. The Company appealed to thePennsylvania Supreme Court and, in May 2008, the Pennsylvania SupremeCourt upheld the lower court’s ruling. The Pennsylvania Department of Banking subsequentlyamended its complaint to add the Pennsylvania Attorney General as a plaintiffand the Company as a defendant. The amended complaint also seeks to perfect aclaim for alleged violations of the state’s usury law by seeking unspecifieddamages, including disgorgement of profits earned in Pennsylvania, trebleactual damages, and restitution, which, under certain circumstances, couldtotal approximately $135 million, plus civil penalties of $1,000 for eachviolation of the Pennsylvania Consumer Protection Law and an additional $2,000for violations against customers over the age of 60, and attorneys’ fees andcosts.  In April 2010, thePennsylvania Commonwealth Court dismissed the Pennsylvania Department ofBanking’s alleged CDCA and usury allegations and, in part, the alleged consumerprotection law violations.  This order,if it stands, would have the effect of eliminating the potential for trebledamages and reducing the damages estimation to approximately $45 million, plusapplicable penalties and attorneys’ fees. The remaining claims will proceedbefore the trial court.

 

*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 appeal was stayed,pending a decision from the United States Supreme Court in *Stolt-Nielsen S.A. v. AnimalFeeds InternationalCorp*. In April 2010, the United States Supreme Court issued itsopinion in *Stolt-Nielsen*.  Accordingly, the Company anticipates the staywill be lifted and the Third Circuit Court will schedule proceedings for theappeal of the trial court’s order.

 

*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,

 

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includingthat the Company’s Pennsylvania subsidiary made illegal cash advance loans inPennsylvania in violation of Pennsylvania’s usury law, the Pennsylvania ConsumerDiscount Company Act, the Pennsylvania Unfair Trade Practices and ConsumerProtection Law, the Pennsylvania Fair Credit Extension Uniformity Act, and thePennsylvania Credit Services Act. The complaint alleges that BankWest Inc.was not the “true lender” and that the Company’s Pennsylvania subsidiary wasthe “lender in fact.” The complaint seeks compensatory damages, attorneys’fees, punitive damages, and the trebling of any compensatory damages. 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 appeal was stayedpending a decision from the United States Supreme Court in *Stolt-Nielsen S.A. v. AnimalFeeds InternationalCorp*.  The Company anticipatesthe Third Circuit Court will now schedule proceedings for the appeal.

 

*Clerk v.NCAS of Delaware, LLC, d/b/a Advance America, 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 as BankWest, Inc.,whose defense the Company is handling pursuant to an indemnification agreement,and other unrelated lenders and banks. The complaint alleges that the practicesof the Company’s subsidiaries and BankWest, Inc. violated the PennsylvaniaConsumer Discount Protection Act, the Pennsylvania Loan Interest ProtectionLaw, and Pennsylvania Consumer Protection Laws. The complaint seekscertification of a class of individuals for the alleged violations, adeclaration that all loans made to class members are unenforceable, injunctiverelief, and monetary damages. The complaint repeats allegations asserted inother putative class actions filed in Pennsylvania that have been stayed infavor of mandatory individual arbitrations. The Company removed the case to theUnited States District Court for the Eastern District of Pennsylvania and fileda motion to compel arbitration and stay the underlying action’s proceedings. InAugust 2009, the District Court issued an order severing the claims againstthe individual defendants. On September 21, 2009, plaintiffs filed threeseparate complaints seeking the same relief as the April 21, 2009complaint against Advance America, Cash Advance Centers of Pennsylvania, Inc.,NCAS of Delaware, LLC, and BankWest, Inc. The case against theCompany’s Pennsylvania subsidiaries was subsequently dismissed by consent ofthe parties on November 11, 2009. Motions to stay and to compel individualarbitration have been filed in the other cases. The matter was stayed pending adecision from the United States Supreme Court in *Stolt-NielsenS.A. v. Animal Feeds International Corp*.  The Company anticipates this matter will nowproceed against the remaining defendants.

 

*Class ActionsAgainst South Carolina Subsidiary*

 

Eight separate putative class actions have been filed in South Carolinaagainst the Company’s subsidiary Advance America, Cash Advance Centers of SouthCarolina, Inc. and several other unaffiliated defendants. John and RebeccaMorgan filed a complaint on August 27, 2007 in the Horry County Court ofCommon Pleas; Margaret Horne filed a complaint on September 6, 2007 in theSpartanburg County Court of Common Pleas; Tawan Smalls filed a complaint on September 10,2007 in the Charleston County Court of Commons Pleas; Chadric and Lisa Wileyfiled a complaint on September 27, 2007 in the Richland County Court ofCommon Pleas; Mildred Weaver filed a complaint on September 27, 2007 inthe Darlington County Court of Common Pleas; Lisa Johnson and Gilbert Herbertfiled a complaint on October 2, 2007 in the Georgetown County Court ofCommon Pleas; Kimberly Kinney filed a complaint on October 12, 2007 in theMarion County Court of Common Pleas; and Carl G. Ferrell filed a complaint on October 30,2008 (collectively the “South Carolina Claimants”). The allegations and reliefsought are similar in each case. Plaintiffs allege that the Company’s SouthCarolina subsidiary violated the South Carolina Deferred Presentment ServicesAct and the Consumer Protection Code by failing to perform a credit check andevaluate a customer’s ability to repay the advance. Each complaint seeks aninjunction to prohibit the Company from continuing its operations, the returnof 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. The Company recorded a chargefor the fourth quarter of 2009 of approximately $0.9 million to cover theestimated costs of that settlement.

 

*OtherMatters*

 

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

 

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**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 and Section 10(b) ofthe Securities Exchange Act of 1934 and Rule 10b-5 thereunder inconnection with alleged insider trading involving less than a material amountof losses avoided by third parties selling Company stock during 2007. TheCompany did not receive a Wells Notice and does not believe it is a subject ofthis investigation; however, the Company is obligated to advance expensesincurred by its current and former officers and directors in connection withthis 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 through 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 becomeeffective by May 1, 2010, but has been temporarily stayed by the Court ofCommon Pleas of Franklin County, Ohio.

 

During the three months ended March 31, 2010, the Company closedfour centers in Ohio.  For the threemonths ended March 31, 2010, $0.1 million are included in the incomestatement as an increase in other center expenses, and other related payrollcosts.

 

*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 cash advances in Virginia in conformancewith the new regulations, and between November 2008 and February 2010also offered an open-ended line of credit product.  However, a subsequent Virginia CorporationCommission ruling limited the Company’s ability to offer the open-ended linesof credit effective March 1, 2010. As a result, the Company ceased offering new open-ended lines of creditin February 2010 and has continued to service existing lines of creditsince that time.  Because of additionallegislation that was passed in 2010, the Company also will stop providing newdraws on existing lines of credit on or before October 1, 2010.

 

During the three months ended March 31, 2010, the Company closed53 centers in Virginia. For the three months ended March 31, 2010, closurecosts of $1.3 million are included in the income statement as an increase inother center expenses of $0.9 million, a loss on disposal of property andequipment of $0.1 million, and other related payroll costs of $0.3 million. Ifthe Company closes all of its remaining centers in Virginia, the estimatedclosing costs, including severance, center tear-down costs, lease terminationcosts, and the write-down of fixed assets, will range from $2.8 million to$7.4 million, and the collectability of advances and fees receivable inVirginia most likely would be impaired. As of March 31, 2010, the netadvances and fees receivable balance in Virginia was approximately$13.1 million. At this time, the Company is unable to determine the amountof goodwill impairment, if any, that would result from the cessation ofoperations in Virginia.

 

*ArizonaLegislation*

 

An existing law permitting cash advances in Arizona is scheduled toexpire on June 30, 2010. In light of this pending expiration, the Companyis reviewing alternatives to continue serving customers in Arizona. However, if the law is not renewed or extended or we are not able to offer aneconomically viable alternative product or service, we may be forced to closeour centers in Arizona.  If we decide to close our remaining Arizonacenters, we estimate the closing costs, including severance, center tear-downcosts, lease termination costs, and the write-down of fixed assets would rangefrom $1.2 million to $3.7 million, and the collectability of advancesand fees receivable in Arizona most likely would be impaired. As of March 31,2010, the net advances and fees receivable balance in Arizona was approximately$4.6 million. At this time we are not able to determine the amount ofgoodwill impairment, if any, that would result from the cessation of operationsin Arizona.

 

*WashingtonLegislation*

 

A law became effective on January 1, 2010, in the State ofWashington that limits the number of cash advances a customer may take in anyone year, limits the cash advance amount that can be taken out at any one time,and implements a statewide database to monitor the number of cash advances. TheCompany believes this law will negatively impact its

 

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revenueand profitability. The Company may close or consolidate some or all of itscenters in Washington if management determines that it is no longereconomically viable to operate all of its Washington centers.

 

During the three months ended March 31, 2010, the Company closedeight centers in Washington. For the three months ended March 31, 2010,closing costs of $0.2 million for the eight centers are included in the incomestatements as other center expense and other related payroll expense.

 

If the Company closes all of its remaining centers in Washington, theestimated closing costs, including severance, center tear-down costs, leasetermination costs, and the write-down of fixed assets would range from$2.1 million to $7.5 million, and the collectability of advances andfees receivable in Washington most likely would be impaired. As of March 31,2010, the net advances and fees receivable balance in Washington wasapproximately $7.1 million. At this time the Company is not able todetermine the amount of goodwill impairment, if any, that would result from thecessation of operations in Washington.

 

*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. The Company believes thislaw will negatively impact its revenue and profitability in South Carolina.Although the Company expects this law to have a negative impact on itsoperations in South Carolina, management currently believes operations willremain economically viable in that state.

 

*KentuckyLegislation*

 

A new law in Kentucky became effective in the first half of 2010 that,among other things, implements a statewide database to monitor the number ofcash advances made to customers within that state. The Company believes thislaw will negatively impact its revenue and profitability in Kentucky. Althoughthe Company expects this law to have a negative impact on our operations inKentucky, management currently believes operations will remain economically viablein that state.

 

**OtherCommitments and Contingencies**

 

At March 31, 2010, the Company had approximately $2.9 million inunfunded commitments to lend to customers in Virginia under the line of creditproduct.

 

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

 

Thefollowing table provides certain information with respect to the stocksurrendered by employees to satisfy their tax obligations with respect to thevesting of shares of restricted stock awarded pursuant to the Company’s 2004Omnibus Stock Plan.

 
| ** **                                   | ** ** | **Three months ended  March 31, 2009** | ** ** | **Three months ended  March 31, 2010** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **Shares**                                  | ** ** | **Dollars**                                 | ** ** | **Shares** | ** ** | **Dollars** | ** ** |
| Omnibus Stock Plan – Shares Surrendered |       | 3,272                                       |       | $                                           | 5,200      |   | 51,908 |   | $ | 272,669 |   |
| Total                                        |       | 3,272                                       |       | $                                           | 5,200      |   | 51,908 |   | $ | 272,669 |   |

 

TheCompany measures the cost of its stock-based employee compensation at fairvalue on the grant date and recognizes such cost in the financial statements ona straight-line basis over the requisite service period of the awards, which isgenerally the vesting period.

 

TheCompany’s 2004 Omnibus Stock Plan provides for the granting of restrictedstock, stock options, and other stock awards to certain directors, officers andother key employees of the Company. Under these plans, 5,200,000 shares of authorizedcommon stock have been reserved for issuance pursuant to grants approved by thecompensation committee of the Board of Directors. Asof March 31, 2010, 1,571,548 shares were available for grant under the plans. Additionally,during 2005, the Company granted stock options and shares of restricted stockto its President and Chief Executive Officer under a Nonqualified Stock OptionAgreement and a Restricted Stock Agreement, respectively. Both of theseagreements are separate from the Company’s 2004 Omnibus Stock Plan.

 

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

 

The grant date fair value of all shares of restricted stock was basedon the fair market value of the Company’s common stock on the dates of grant asdetermined pursuant to the Company’s 2004 Omnibus Stock Plan. These amounts arebeing expensed ratably over each award’s respective vesting period.

 

All stock options were granted with an exercise price equal to the fairmarket value of the Company’s common stock on the dates of grant as determinedpursuant to the Company’s 2004 Omnibus Stock Plan. The Company estimated thefair value of stock options on the date of grant using the Black-Scholes optionpricing model using the following assumptions:

 

·                  *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 quarter of 2009, the Company assumed that the options would be exercisedon their exercise date because the high dividend rate on the grant daterelative to the strike price would make immediate exercise the likely behavior.

 

·                  *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 the grantdates, the following weighted average assumptions were used in theBlack-Scholes option pricing model for all stock options granted during thethree months ended March 31, 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 for the threemonths ended March 31, 2010.

 

The weighted average grant date fair value of options granted duringthe three months ended March 31, 2009 is $0.12 per option, which is expensedratably over each award’s respective vesting period.

 

The following table provides certain information with respect to stockoptions outstanding and exercisable at March 31, 2010 under the Company’sstock-based compensation plans:

 
| ** **                                           | ** ** | **Outstanding** | ** **    | **Exercisable** | ** ** |
|------------------------------------------------------|------------|-----------------|---------------|-----------------|------------|
| Number of stock options                              |       | 2,006,336       |          | 992,333         |       |
| Range of exercise prices                             |       | $               | 1.14 - $14.70 |            | $          | 8.48 - $14.70 |   |
| Weighted average exercise price                      |       | $               | 9.45          |            | $          | 11.13 |   |
| Aggregate intrinsic value (in thousands)             |       | $               | —        |            | $          | — |   |
| Weighted average remaining contractual term  (years) |       | 6.2             |          | 6.3             |       |

 

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A summary of the Company’s restricted stock activity for the threemonths ended March 31, 2010 and the weighted average grant date fairvalues follows:

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|-------------------------------------|------------|------------|------------|-----------------------------------|------------|
| Nonvested at December 31, 2009 |       | 722,743    |       | $                                 | 3.10       |   |
| Granted                             |       | 591,702    |       | 5.29                              |       |
| Vested                              |       | (174,587   | )          | 1.62                              |       |
| Forfeited                           |       | (51,908    | )          | 1.57                              |       |
| Nonvested at March 31, 2010    |       | 1,087,950  |       | $                                 | 4.92       |   |

 

The total grant date fair value of restricted shares vested during thethree months ended March 31, 2009 and 2010 was approximately$0.2 million and $0.3 million, respectively, and the total market valueof these shares on the dates vested was approximately $26,000 and $0.9million, respectively.

 

A summary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three months ended March 31, 2009 and 2010 follows (in thousands):

 
| ** **                             | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Restricted stock                       |       | $        | 197        |     | $          | 332 |   |
| Stock options                          |       | 313      |       | 298      |       |
| Total stock-based compensation expense |       | $        | 510        |     | $          | 630 |   |

 

As of March 31, 2010, the total compensation cost not yetrecognized related to nonvested stock awards under the Company’s plans isapproximately $7.3 million. The weighted average period over which thisexpense is expected to be recognized is approximately three 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 cash advances or related fees that arenot collected from those customers.

 

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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 threemonths ended March 31, 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 March 31, 2009 and 2010, the third-party lender’soutstanding cash advances and interest receivable, which were not recorded onthe Company’s balance sheet, totaled approximately $14.4 million and $14.7million, 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 NSF fees andlate fees on these advances.

 

Because of the Company’s economic exposure for losses related to thethird-party lender’s advances and interest receivable, the Company hasestablished an accrual for third-party lender losses to reflect the Company’sestimated probable losses related to uncollectible third-party lender cash advances.The accrual for third-party lender losses that was reported in the Company’sbalance sheet at March 31, 2009 and 2010 was approximately$3.2 million and $3.4 million, respectively, and was established on abasis similar to the allowance for 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 the Board of Directors,for his support of government relations initiatives on the Company’s behalf inIllinois and Washington, D.C.  Includedin general and administrative expenses, for the three months ended March 31,2009, are payments of approximately $51,000 related to this consultingarrangement.  In addition, in connectionwith his appointment to the Board of Directors in February 2009, Mr. Collettiwas granted 15,000 shares of restricted stock with a fair market value of$16,650 and a three year vesting period. During the three months ended March 31, 2009 and 2010,approximately $1,000 and $1,388, respectively, is included in general andadministrative expense related to the amortization of this restricted stockgrant.

 

Included in general and administrative expenses are expenses withrelated parties, relating primarily to aircraft operating expenses, legalexpenses, operating leases for office and warehouse space and contributions, of$57,000 and $144,746 for the three months ended March 31, 2009 and 2010, respectively.

 

Under a time-share arrangement, the Company’s current Chairman andformer Chairman have used the Company’s aircraft for private purposes inexchange for the Company’s use of an identical aircraft owned by the Company’sformer Chairman and formerly owned, in part, by the Company’s current Chairman.Included in accounts receivable at March 31, 2010 is a $4,000 netreceivable related to this arrangement.

 

In addition, on July 13, 2009, the Company entered into a one-yearAircraft Dry Lease Agreement with Carabo Capital, LLC, an entity of which theCompany’s current Chairman is a member. Under the Aircraft Dry Lease, the Company may use Carabo’s aircraft fromtime to time in exchange for one dollar and the Company’s fulfillment of itsobligations under the Aircraft Dry Lease.

 

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 us certain routine legal services. During the three months ended March 31,2010, we incurred costs and expenses of approximately $11,000 for thoseservices.

 

The Company incurred costs and expenses of approximately zero and$93,882 for the three months ended March 31, 2009 and 2010, respectively,for the advancement of the expenses incurred by certain of the Company’scurrent and former officers and directors in connection with their responses torequests for information and subpoenas as part of an investigation by theUnited States Securities and Exchange Commission (“SEC”) into alleged insidertrading by third parties in the Company’s securities.  These costs were incurred by the Companypursuant to indemnification agreements that require the Company to advanceexpenses to, and may require the Company to indemnify its current and formerofficers and directors for damages, incurred by them in responding to thepending SEC investigation or defending against any related enforcementproceedings, including the “Wells Notice” issued by the SEC to the Company’sChief Executive Officer on July 22, 2009.

 

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**10. RevolvingCredit Facility and Long-Term Debt**

 

In March 2008, the Company amended and restated its priorrevolving credit facility with a syndicate of banks. This credit facility nowprovides the Company with a $270 million revolving line of credit, which amountincludes the 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.

 

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 default couldprohibit the Company from accessing otherwise available borrowings, or couldcause all amounts outstanding under the revolving credit facility to become dueand payable. The Company was in compliance with all financial covenants at March 31,2010.

 

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 March 31, 2010, theapplicable margin for the prime-based rate was 1.75% and the applicable marginfor the LIBOR-based rate was 2.75%.

 

Asof March 31, 2010, the Company had $75.2 million outstanding on therevolving portion of the credit facility and $0.7 million of unutilizedletters 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 March 31, 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 $4.5 million at December 31, 2009 and March 31,2010, 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 $4.5 million at December 31,2009 and March 31, 2010, respectively.

 

The fair market value of our long-term debt is estimated using adiscounted cash flow analysis and was approximately $5.9 million at December 31,2009 and $5.7 million at March 31, 2010.

 

**11.  Income Taxes**

 

The effective income tax rate as a percentage of income before incometaxes was 41.1% and 44% for the three months ended March 31, 2009 and2010, 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 March 31,2010, 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 March 31, 2010,is primarily attributable to the accrual of another three months of interestand the accrual of the current year’s uncertain positions.

 

The Company’s continuing practice is to recognize interest andpenalties related to income tax matters in income tax expense. As of March 31,2010, the Company had approximately $0.1 million accrued for interest, of whichapproximately 

 

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$13,000was a current period expense.  TheCompany has determined that it is possible that the total amount ofunrecognized tax benefits that relate to various state examinations willsignificantly increase or decrease within twelve months of the reporting date.However, at this time, a reasonable estimate of the range of possible changecannot be made until further correspondence has been conducted with the statetaxing 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 has completed its examinations and issued a proposed assessment for taxyears 2005 through 2008. In consideration of the proposed assessment, the totalgross unrecognized tax benefit was increased by $0.9 million through March 31,2010. At this time, it is too early to predict the final outcome of thismatter.

 

**12. Subsequent Events**

 

On April 28, 2010, the Company’s Board of Directors declared acash dividend of $0.0625 per share of common stock, payable on June 4,2010 to shareholders of record on May 25, 2010.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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.Financial Statements.” This discussion contains forward-looking statements thatinvolve risks and uncertainties such as our plans, objectives, expectations andintentions. Our actual results could differ materially from those anticipatedby these forward-looking statements. Please see “Part II. Item 1A.Risk Factors” of this Quarterly Report and “Forward-Looking Statements” at the endof this section for further discussion of the uncertainties, risks andassumptions 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 March 31,2010, we operated 2,461 centers in 32 states in the United States, 21 centers inthe United Kingdom, and 13 centers in Canada.

 

Our industry has been significantly affected by increasing regulatorychallenges. Legislation that negatively impacts cash advances 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 includecash advances, installment loans, and lines of credit. However, we continue toexpand our cash advance services and to offer additional complimentary productsand 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 assume the responsibility of servicing as an agent to aregulated lender. In Texas, where we operate as a Credit Services Organization(“CSO”), we offer a fee-based credit services package to assist customers intrying to improve their credit and in obtaining an extension of consumer creditthrough a third-party lender. Under the terms of our agreement with thislender, we process customer applications and are contractually obligated forall losses. The permitted size of a cash advance varies by jurisdiction andranges from $50 to $5,000. However, our typical cash advance ranges from $50 to$1,000. The finance charges on cash advance services currently offered alsovary by jurisdiction 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) byvisiting our website, beginning the application process online, then visitingone of our centers in person to complete the application and receive a cashadvance; or (3) by visiting our website, completing an application online,and receiving a cash advance from a third-party lender that is directlydeposited 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 originationfees, annual participation fees, fees for returned checks, late fees, and otherfees as permitted by applicable law. Currently, none of the cash advanceservices we offer include annual participation fees. Origination fees on cashadvance services currently offered by us range from $15 to $30, but future cashadvance services may have higher or lower origination fees depending onapplicable state law. Fees for returned checks or electronic debits that aredeclined for non-sufficient funds (“NSF”) vary by state and range up to $30,and late fees vary by state and range up to $50.  In Texas and online, the third-party lenderscharge NSF fees and late fees in accordance with applicable law.

 

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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 loans. When a third-partylender provides the cash advance, such as in Texas and online, the applicablethird-party lender decides whether to approve a cash advance and establishesall of the underwriting criteria and terms, conditions, and features of thecustomer 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 applicablefees, including late and NSF fees due, and may deposit the customer’s personalcheck or 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 by our centers.

 

***Approval Process***

 

Although there are numerous differences under the various enablingregulations, the application and approval process, underwriting criteria,delivery method, repayment and collection practices, customer and marketcharacteristics and underlying economics of our principal products and servicesgenerally are substantially 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;

 

·                  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;

 

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·                  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 cashadvances. When a third-party lender provides the cash advance, such as in Texasand online, 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. Nordoes the third-party lender in Texas offer a Payment Plan for advances to itscustomers. The third-party internet lenders offer Payment Plans as required bystate law.

 

***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 typicallymay proceed 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 three months ended March 31,2010, we deposited customer checks or presented an ACH authorization forapproximately 5.9% of all customer checks we received and approximately 30% and37%, respectively, of these deposited customer checks or presented ACH’scleared.  If the customer’s check or ACHdebit does not clear and is returned because of non-sufficient funds in thecustomer’s account or because of a closed account or a stop-payment order, webegin additional collection efforts. These additional collection efforts arecarried out by center employees and typically include contacting the customerby telephone or in person to obtain payment or a promise to pay and attemptingto exchange the customer’s check for a cashier’s check, if funds becomeavailable. We also send out a series of collection letters, which areautomatically distributed from a central location based on a set ofpre-determined criteria.

 

In the case of cash advances in the form of lines of credit, if acustomer fails to make 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.

 

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***Selected Operating Data***

 

The following table presents key operating data for our business:

 
| ** **                                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                               | ** ** | **2010** | ** ** |
| Number of centers open at end of period                                                                 |       | 2,740                                  |       | 2,495 |   |
| Number of customers served—all credit products  (thousands)                                        |       | 741                                    |       | 739 |   |
| Number of cash advances originated (thousands) (1)                                                      |       | 2,423                                  |       | 2,285 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                 |       | $                                      | 874,363    |   | $ | 838,988 |   |
| Average amount of each cash advance originated (1)                                                      |       | $                                      | 361        |   | $ | 367 |   |
| Average charge to customers for providing and  processing a cash advance (1)                            |       | $                                      | 53         |   | $ | 55 |   |
| Average duration of a cash advance (days) (1, 2)                                                        |       | 17.4                                   |       | 18.0 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 34                                     |       | 16 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                      | 19,373     |   | $ | 5,032 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                      | 571        |   | $ | 301 |   |
| Number of installment loans originated (thousands)  (4)                                                 |       | 7                                      |       | 7 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                             |       | $                                      | 2,787      |   | $ | 3,373 |   |
| Average principal amount of each installment loan  originated (4)                                       |       | $                                      | 425        |   | $ | 472 |   |

 

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(1)                                Excludes linesof credit and installment loans.

 

(2)                                Excludes theimpact of extended payment plans.

 

(3)                                We beganoffering lines of credit in Virginia in November 2008 and ceased offeringnew lines of credit to customers in Virginia in February 2010.

 

(4)                                The installmentloan activity reflects loans 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, and Accrualfor 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 judgment regardingoverall accuracy. The analytical models take into account several factorsincluding the number of transactions customers complete and charge-off andrecovery 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.

 

The provision for doubtful accounts decreased from 13.5% of revenues or$21.1 million for the three months ended March 31, 2009 to 8.8% ofrevenues or $12.7 million for the same period in 2010. This decrease isdue primarily to an improvement in the loss rates in Virginia and a reductionof approximately $22.2 million in receivables related to the line of creditproduct in Virginia at March 31, 2010 compared to March 31,2009.  During the three months ended March 31,2009 and 2010, we received proceeds from the sale of receivables in the amountof zero and $0.5 million, respectively.

 

***Income Taxes***

 

The effective income tax rate as a percentage of income before incometaxes was 41.1% and 44% for the three months ended March 31, 2009 and2010, respectively.

 

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We adopted FASB ASC 740-10 on January 1, 2007. As a result of theimplementation of FASB ASC 740-10, we recognized no adjustments to the January 1,2007 balance of retained earnings. At the adoption date, we did not have anyunrecognized tax benefits and did not have any interest or penalties accrued.As of December 31, 2009 and March 31, 2010, we had $0.7 million and$0.9 million of total gross unrecognized tax benefits including interest, respectively.Of this total approximately $0.7 million and $0.9 million, respectively,represents the amount of unrecognized tax benefits that are permanent in natureand, if recognized, would affect the annual effective tax rate. The increase inthe total gross unrecognized tax benefit including interest during the threemonths, ending March 31, 2010, is primarily attributable to the accrual ofanother three months of interest and the accrual of the current year’suncertain positions.

 

Our continuing practice is to recognize interest and penalties relatedto income tax matters in income tax expense. As of March 31, 2010, we hadapproximately $100,000 accrued for interest, of which approximately $13,000 wasa current period expense. We have determined that it is possible that the totalamount of unrecognized tax benefits that relate to various state examinationswill significantly increase or decrease within twelve months of the reportingdate. However, at this time, a reasonable estimate of the range of possiblechange cannot be made until further correspondence has been conducted with thestate taxing authorities.

 

We are subject to U.S. income taxes, as well as various other foreign,state and local jurisdictions. With few exceptions, we are no longer subject toU.S. federal, state and local, or non-U.S. income tax examinations by taxauthorities for years before the tax year ended September 30, 2005,although carry forward attributes that were generated prior to 2005 may stillbe adjusted upon examination by the taxing authorities if they either have beenused or will be used in a future period. The income tax returns for the years2005 through 2008 are under examination by a state taxing authority that 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 March 31,2010. At this time, it is too early to predict the final outcome of thismatter.

 

***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 2008 and 2009, bills wereintroduced at the Federal level that would have placed a cap of 36% on theeffective annual percentage rate (“APR”) on all consumer loantransactions.  Another bill would have placed a 15-cent-per-dollarborrowed ($0.15/$1.00) cap on fees for cash advances and implemented otherconsumer protections.  Recently, Senator Kay Hagan introduced a bill thatseeks a limit of six cash advances that a consumer would be permitted toreceive in any twelve-month period.  Additionally, Congress has beendebating the creation of a Consumer Finance Protection Agency (“CFPA”), whichwould establish additional regulatory restrictions on consumer financetransactions and could expressly restrict cash advance transactions. At thestate level, a 2009 law in Virginia prompted us to change our cash advanceproduct and to offer an open-ended line of credit product.  However, asubsequent Virginia Corporation Commission ruling and additional legislationlimits 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.  Also, on January 1, 2010, alaw became effective in the State of Washington that places a number ofrestrictions on our cash advance product including limiting the number of cashadvances a customer may take to eight advances in any one year. As a result, weexpect that our revenues and profits in Washington will be significantlyreduced. If we are unable to operate profitably in Washington, we may ceaseoperating in that state. New laws in each of South Carolina and Kentucky havebecome effective during the first half of 2010 that will, among other things,implement a statewide database in each state to monitor the number of loansmade to customers within that state. Similar legislation is likely to become effective in Wisconsin in thethird quarter of 2010. Further, legislation permitting cash advances in Arizonaand Mississippi is scheduled to expire in 2010 and 2012, respectively. Thislegislation may not be renewed or could be modified in a manner that affectsour operations negatively. We are regularly refining our cash advance servicesand developing new products and services or operations to address recent oranticipated legislative and regulatory changes. Some of these legislative andregulatory changes may result in our discontinuing operations, while otherchanges may result in less significant short-term or long-term changes,interruptions in revenues, and lower operating margins. We generally cannotestimate what effect, if any, operational changes we make in response tolegislative and regulatory changes may have on our financial results until weare able to develop legal and financially viable alternative products andservices.

 

***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 closed some of our centers in Ohio.In the third quarter of 2009, we stopped offering small loans and began tooffer cash advances pursuant to the Ohio Second Mortgage Act as a registered secondmortgage lender.  A rule issued bythe Ohio Division of Financial Institutions in the first quarter of 2010, andtemporarily stayed by the Ohio courts, has restricted certain activities bylicensed check cashers and could have a further negative impact on ouroperations in Ohio.

 

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During the three months ended March 31, 2010, we closed fourcenters in Ohio.  For the three monthsended March 31, 2010, closing costs of $0.1 million are included in theincome statement as an increase in other center expenses and other relatedpayroll costs.

 

For the three months ended March 31, 2009 and 2010, 5.2%, and7.0%, 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):

 
| ** **                 | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Total revenues             |       | $        | 8,074      |     | $          | 10,067 |   |
| Total center expenses      |       | 9,156    |       | 7,408    |       |
| Center gross profit (loss) |       | $        | (1,082     | )        | $          | 2,659 |   |

 

***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 conformance with thenew regulations, and between November 2008 and February 2010 alsooffered an open-ended line of credit product. However, a subsequent Virginia Corporation Commission ruling limited ourability to offer the open-ended lines of credit effective March 1,2010.  As a result, we ceased offeringnew open-ended lines of credit in February 2010 and have continued toservice existing lines of credit since that time.  Because of additional legislation that waspassed in 2010, we also will stop providing new draws on existing lines ofcredit on or before October 1, 2010.

 

During the three months ended March 31, 2010, we closed 53 centersin Virginia. For the three months ended March 31, 2010, closing costs of$1.3 million are included in the income statement as an increase in othercenter expenses of $0.9 million, a loss on disposal of property and equipmentof $0.1 million, and other related payroll cost of $0.3 million.

 

If it is not economically viable for us to continue operations inVirginia and we decide to close our remaining Virginia centers, our estimatedclosing costs, including severance, center tear-down costs, lease terminationcosts, and the write-down of fixed assets would range from $2.8 million to$7.4 million, and the collectability of advances and fees receivable inVirginia most likely would be impaired. As of March 31, 2010, the net advancesand fees receivable balance in Virginia was approximately $13.1 million.At this time, we are not able to determine the amount of goodwill impairment,if any, that would result from the cessation of operations in Virginia.

 

For the three months ended March 31, 2009 and 2010, 12.6%, and4.9%, respectively, of our total revenues were generated from our operations inVirginia. The following is a summary of financial information for ouroperations in Virginia for those periods (in thousands):

 
| ** **                 | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Total revenues             |       | $        | 19,689     |     | $          | 7,081 |   |
| Total center expenses      |       | 15,948   |       | 6,051    |       |
| Center gross profit (loss) |       | $        | 3,741      |     | $          | 1,030 |   |

 

***Operations in Arizona***

 

Legislation permitting cash advances in Arizona is scheduled to expireon June 30, 2010. If the law is not renewed or extended and it is noteconomically viable for us to continue operations in Arizona and we decide toclose our remaining Arizona centers, we estimate the range of closing costs,including severance, center tear-down costs, lease termination costs, and thewrite-down of fixed assets would range from $1.2 million to$3.7 million, and the collectability of advances and fees receivable inArizona most likely would be impaired. As of March 31, 2010, the netadvances and fees receivable balance in Arizona was approximately$4.6 million. At this time we are not able to determine the amount ofgoodwill impairment, if any, that would result from the cessation of operationsin Arizona. 

 

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For the three months ended March 31, 2009 and 2010, 2.3%, and2.6%, respectively, of our total revenues were generated from our operations inArizona. The following is a summary of financial information for our operationsin Arizona for those periods (in thousands):

 
| ** **                 | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Total revenues             |       | $        | 3,589      |     | $          | 3,707 |   |
| Total center expenses      |       | 2,444    |       | 2,188    |       |
| Center gross profit (loss) |       | $        | 1,145      |     | $          | 1,519 |   |

 

***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. Webelieve this law will negatively impact our revenue and profitability in thatstate and, as a result, we may close or consolidate some or all of our centersin Washington.

 

During the three months ended March 31, 2010, the Company closedeight centers in Washington. For the three months ended March 31, 2010,closing costs of $0.2 million are included in the income statements as othercenter expense and other related payroll expense.

 

If the Company closes all of its remaining centers in Washington, ourestimated closing costs, including severance, center tear-down costs, leasetermination costs, and the write-down of fixed assets would range from$2.1 million to $7.5 million, and the collectability of advances andfees receivable in Washington most likely would be impaired. As of March 31,2010, the net advances and fees receivable balance in Washington wasapproximately $7.1 million. At this time we are not able to determine theamount of goodwill impairment, if any, that would result from cessation of ouroperations in Washington.

 

For the three months ended March 31, 2009 and 2010, 4.1%, and1.5%, respectively, of our total revenues were generated from our operations inWashington. The following is a summary of financial information for ouroperations in Washington for those periods (in thousands):

 
| ** **                 | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Total revenues             |       | $        | 6,411      |     | $          | 2,208 |   |
| Total center expenses      |       | 4,804    |       | 3,611    |       |
| Center gross profit (loss) |       | $        | 1,607      |     | $          | (1,403 | ) |

 

***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. We believethis law will negatively impact our revenue and profitability in SouthCarolina. Although we expect this law to have a negative impact on ouroperations in South Carolina, we currently believe operations will remaineconomically viable in this state.

 

For the three months ended March 31, 2009 and 2010, 5.2%, and4.1%, respectively, of our total revenues were generated from our operations inSouth Carolina. The following is a summary of financial information for ouroperations in South Carolina for those periods (in thousands):

 
| ** **                 | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Total revenues             |       | $        | 8,118      |     | $          | 5,965 |   |
| Total center expenses      |       | 5,132    |       | 4,655    |       |
| Center gross profit (loss) |       | $        | 2,986      |     | $          | 1,310 |   |

 

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***Operations in Kentucky***

 

A new law in Kentucky became effective in the second quarter of 2010that, 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 loans made to customers within that state. We believe this lawwill negatively impact our revenue and profitability in Kentucky. Although weexpect this law to have a negative impact on our operations in Kentucky, wecurrently believe operations will remain economically viable in this state.

 

For the three months ended March 31, 2009 and 2010, 1.2%, and1.4%, respectively, of our total revenues was generated from our operations inKentucky. The following is a summary of financial information for ouroperations in Kentucky for those periods (in thousands):

 
| ** **                 | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Total revenues             |       | $        | 1,883      |     | $          | 1,987 |   |
| Total center expenses      |       | 1,448    |       | 1,440    |       |
| Center gross profit (loss) |       | $        | 435        |     | $          | 547 |   |

 

***Closings***

 

*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 costs associated with closing our New Hampshire operations wererecognized during 2008, and the remaining $0.6 million was recognized duringthe first quarter of 2009. The cessation of our New Hampshire operations didnot result in any impairment of goodwill.

 

The following is a summary of financial information for our operationsin New Hampshire for the three months ended March 31, 2009 and 2010 (inthousands):

 
| ** **                 | ** ** | **2009** | ** ** | **2010** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Total revenues             |       | $        | 125        |     | $          | — |   |
| Total center expenses      |       | 1,100    |       | —   |       |
| Center gross profit (loss) |       | $        | (975       | )        | $          | — |   |

 

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***Centers***

 

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

 
| **State**           | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** |
|---------------------|------------|-----------------------------|------------|--------------------------|------------|
| Alabama             |       | 142                         |       | 140                      |       |
| Arizona             |       | 48                          |       | 48                       |       |
| California          |       | 282                         |       | 282                      |       |
| Colorado            |       | 62                          |       | 60                       |       |
| Delaware            |       | 16                          |       | 15                       |       |
| Florida             |       | 241                         |       | 241                      |       |
| Idaho               |       | 7                           |       | 6                        |       |
| Illinois            |       | 65                          |       | 63                       |       |
| Indiana             |       | 100                         |       | 95                       |       |
| Iowa                |       | 34                          |       | 34                       |       |
| Kansas              |       | 53                          |       | 53                       |       |
| Kentucky            |       | 44                          |       | 44                       |       |
| Louisiana           |       | 84                          |       | 81                       |       |
| Michigan            |       | 151                         |       | 151                      |       |
| Mississippi         |       | 61                          |       | 61                       |       |
| Missouri            |       | 86                          |       | 85                       |       |
| Montana             |       | 2                           |       | 2                        |       |
| Nebraska            |       | 22                          |       | 20                       |       |
| Nevada              |       | 13                          |       | 12                       |       |
| North Dakota        |       | 6                           |       | 6                        |       |
| Ohio                |       | 181                         |       | 177                      |       |
| Oklahoma            |       | 67                          |       | 66                       |       |
| Rhode Island        |       | 21                          |       | 20                       |       |
| South Carolina      |       | 140                         |       | 139                      |       |
| South Dakota        |       | 11                          |       | 11                       |       |
| Tennessee           |       | 62                          |       | 62                       |       |
| Texas               |       | 244                         |       | 242                      |       |
| Utah                |       | 6                           |       | 6                        |       |
| Virginia            |       | 139                         |       | 86                       |       |
| Washington          |       | 91                          |       | 83                       |       |
| Wisconsin           |       | 62                          |       | 60                       |       |
| Wyoming             |       | 10                          |       | 10                       |       |
| Total United States |       | 2,553                       |       | 2,461                    |       |
| Canada              |       | 13                          |       | 13                       |       |
| United Kingdom      |       | 21                          |       | 21                       |       |
| Total               |       | 2,587                       |       | 2,495                    |       |

 

***New centers***

 

We opened four and zero new centers during the three months ended March 31,2009 and 2010, respectively.

 

***Closed centers***

 

We closed 61 and 92 centers during the three months ended March 31,2009 and 2010, respectively. We recorded expenses related to center closuresand scheduled center closings of approximately, $3.4 million and $1.8million for the three months ended March 31, 2009 and 2010, respectively.The costs are included in the income statements for the three months ended March 31,2009 and 2010, as shown below.

 
| ** **                                 | ** ** | **March 31,  2009** | ** ** | **March 31,  2010** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                       |       |                     |       |                     |       |
| Salaries and related payroll costs         |       | $                        | 181        |                     | $          | 310 |   |
| Occupancy costs                            |       | 1,175                    |       | 1,493                    |       |
| Other center expenses                      |       | (161                     | )          | (89                      | )          |
| Loss on disposal of property and equipment |       | (2                       | )          | 126                      |       |
| Loss on impairment of assets               |       | 2,209                    |       | —                   |       |
|                                       |       | $                        | 3,402      |                     | $          | 1,840 |   |

 

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***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 the remainderof 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, Allowancefor Doubtful Accounts, and Accrual 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 cash advanceswe make directly to customers and an accrual for third-party lender losses forestimated probable losses on cash advances and certain related fees for loansthat we process for the third-party lender in Texas. See “Off-Balance SheetArrangement with Third-Party Lender” in this section. Our advances and feesreceivable, net, on our balance sheet, do not include the advances and interestreceivable for loans processed by us for the third-party lender in Texasbecause these loans are owned by the third-party lender.

 

The provision for doubtful accounts decreased from 13.5% of revenues or$21.1 million for the three months ended March 31, 2009 to 8.8% ofrevenues or $12.7 million for the same period in 2010. This decrease isdue primarily to an improvement in the loss rates in Virginia and a reductionof approximately $22.2 million in receivables related to the line of creditproduct in Virginia at March 31, 2010 compared to March 31, 2009.  During the three months ended March 31,2009 and 2010, we received proceeds from the sale of receivables in the amountof zero and $0.5 million, 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.

 

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Unpaid advances and the related fees and/or interest are generallycharged off 60 days after the date a customer’s check was returned, theACH was rejected by the customer’s bank, or the default date, unless thecustomer has paid at least 15% of the total of his or her cash advance plus allapplicable fees, or 15% of the outstanding balance and related interest andfees for our line of credit and installment loan products. Unpaid cash advancesor cash advances of customers who file for bankruptcy are charged off uponreceipt of the bankruptcy notice. Although management uses the best informationavailable to make evaluations, future adjustments to the allowance for doubtfulaccounts and accrual for third-party lender losses may be necessary ifconditions differ substantially from our assumptions used in assessing theiradequacy.

 

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 4% to 7% from a typical Thursday toa typical Friday. The first quarter of 2009 began on a Thursday and ended on aTuesday. The first quarter of 2010 began on a Friday and ended on a Wednesday.

 

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 March 31, 2010, if theestimated rates used in calculating our allowance for doubtful accounts and third-partylender losses were 5% higher or lower, it would have increased or decreased ourprovision for doubtful accounts by approximately $2.2 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 sixacquisitions in the United Kingdom, resulting in additional goodwill ofapproximately $5.4 million. As of March 31, 2010, the carrying valueof goodwill was $126.8 million due to the amortization of goodwill priorto the adoption of ASC 350-20-35, “Goodwill—Subsequent Measurement”, and thechange in the exchange rate for our United Kingdom assets. Due to thesignificance of goodwill and the reduction of net income that would occur ifgoodwill were impaired, we assess the impairment of our long-lived andintangible assets annually, during the fourth quarter of each year, or wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. Factors that could trigger an impairment review includesignificant underperformance relative to historical or projected future cashflows, significant changes in the manner of use of the acquired assets or thestrategy of the overall business, and significant negative industry trends. Areporting unit is an operating segment, or under certain circumstances, acomponent of an operating segment that constitutes a business. Our 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’sgoodwill over the implied fair value of that goodwill. In determining theestimated future discounted cash flows, we consider current and projectedfuture levels of income, as well as business trends, prospects, and market andeconomic conditions. Impairment tests involve the use of judgments andestimates related to the fair market value of the business operations withwhich goodwill is associated, taking into consideration both historicaloperating performance and anticipated future earnings. We believe that theestimates of future cash flows and fair value are reasonable. Changes inestimates of those cash flows and fair value, however, could affect theevaluation, and any impairment would lower our net income.

 

We have approximately $4.2 million of goodwill in our UnitedKingdom operations. As of March 31, 2010, these operations havecumulatively generated negative cash and have not reached break-even at thecenter gross profit level. Our expansion efforts in the United Kingdom began inthe third quarter of 2007. Our goodwill impairment model projects futurepositive cash flows sufficient to support the goodwill and long-lived assetbase in our United Kingdom operations. If the United Kingdom operationscontinue to generate negative cash flow and do not break-even an impairmentcharge related to its goodwill is possible.

 

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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. LegalProceedings” loss contingencies are not both probable and estimable in the viewof management, 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 our consolidatedfinancial position or liquidity, but may be material to our results ofoperations for any particular reporting period.

 

***Accrued Workers’ CompensationExpenses***

 

Accrued liabilities in our December 31, 2009 and March 31,2010, financial statements include accruals of approximately $5 millionand $4.9 million, respectively, for workers’ compensation. The costs ofboth reported 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’compensation loss development factors change, or other assumptions used bymanagement do not prevail, our expense and related accrued liabilities couldincrease or decrease.

 

***Income Taxes***

 

We use certain assumptions and estimates in determining income taxespayable or refundable for the current year, deferred income tax liabilities andassets for events recognized differently in our financial statements and incometax returns, and income tax expense. Determining these amounts requiresanalysis of certain transactions and interpretation of tax laws andregulations. We exercise considerable judgment in evaluating the amount andtiming of recognition of the resulting income tax liabilities and assets. Thesejudgments and estimates are re-evaluated on a continual basis as regulatory andbusiness factors change.

 

No assurance can be given that neither our tax returns nor the incometax reported on our Consolidated Financial Statements will be adjusted as a resultof 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 March 31, 2010, the totalcompensation expense not yet recognized related to nonvested stock awards underour stock-based employee compensation plans is approximately $7.3 million.The weighted average period over which this expense is expected to berecognized is approximately three years. See “Item 1. FinancialStatements — Notes to Interim Unaudited Consolidated FinancialStatements—Note 7. Stock-Based Compensation Plans” for a description ofour restricted stock and stock option awards and the assumptions used tocalculate the fair value of such awards, including the expected volatilityassumed in valuing our stock option grants.

 

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***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 March 31, 2009 Compared to Three Months Ended March 31,2010***

 

The following tables set forth our results of operations for the threemonths ended March 31, 2009 compared to the three months ended March 31,2010:

 
| ** **                                  | ** ** | **Three Months Ended March 31,**                 | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                              | ** ** | **2010** | ** ** | **Variance  Favorable/(Unfavorable)** | ** ** |
| ** **                                  | ** ** | **Dollars**                                           | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Total Revenues**                          |       | $                                                     | 156,393    |   | 100.0 | % | $ | 144,398 |   | 100 | % | $ | (11,995 | ) | (7.7 | )% |
| **Center Expenses:**                        |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs          |       | 47,513                                                |       | 30.4 | % | 47,585 |   | 33.0 | % | (72 | ) | (0.2 | )% |
| Provision for doubtful accounts             |       | 21,098                                                |       | 13.5 | % | 12,734 |   | 8.8 | % | 8,364 |   | 39.6 | % |
| Occupancy costs                             |       | 24,773                                                |       | 15.8 | % | 23,472 |   | 16.3 | % | 1,301 |   | 5.3 | % |
| Center depreciation expense                 |       | 3,723                                                 |       | 2.4 | % | 2,696 |   | 1.9 | % | 1,027 |   | 27.6 | % |
| Advertising expense                         |       | 2,181                                                 |       | 1.4 | % | 3,635 |   | 2.5 | % | (1,454 | ) | (66.7 | )% |
| Other center expenses                       |       | 12,706                                                |       | 8.1 | % | 11,511 |   | 8.0 | % | 1,195 |   | 9.4 | % |
| Total center expenses                       |       | 111,994                                               |       | 71.6 | % | 101,633 |   | 70.5 | % | 10,361 |   | 9.3 | % |
| Center gross profit                         |       | 44,399                                                |       | 28.4 | % | 42,765 |   | 29.5 | % | (1,634 | ) | (3.7 | )% |
| **Corporate and Other Expenses  (Income):** |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses         |       | 14,071                                                |       | 9.0 | % | 16,679 |   | 11.6 | % | (2,608 | ) | (18.5 | )% |
| Corporate depreciation expense              |       | 688                                                   |       | 0.4 | % | 690 |   | 0.5 | % | (2 | ) | (0.3 | )% |
| Interest expense                            |       | 1,699                                                 |       | 1.1 | % | 1,177 |   | 0.8 | % | 522 |   | 30.7 | % |
| Interest income                             |       | (17                                                   | )          | — | % | (13 | ) | — | % | (4 | ) | (23.5 | )% |
| Loss on disposal of property and equipment  |       | 33                                                    |       | — | % | 168 |   | 0.1 | % | (135 | ) | (409.1 | )% |
| Loss on impairment of assets                |       | 2,209                                                 |       | 1.4 | % | — |   | — | % | 2,209 |   | 100.0 | % |
| Total corporate and other expenses          |       | 18,683                                                |       | 11.9 | % | 18,701 |   | 13.0 | % | (18 | ) | (0.1 | )% |
| Income before income taxes                  |       | 25,716                                                |       | 16.5 | % | 24,064 |   | 16.5 | % | (1,652 | ) | (6.4 | )% |
| Income tax expense                          |       | 10,573                                                |       | 6.8 | % | 10,577 |   | 7.3 | % | (4 | ) | — | % |
| Net income                                  |       | $                                                     | 15,143     |   | 9.7 | % | $ | 13,487 |   | 9.2 | % | $ | (1,656 | ) | (10.9 | )% |

 
| ** **                                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                              | ** ** | **2009**                               | ** ** | **2010** | ** ** |
| **Center Information:**                                                                                 |       |                                   |       |   |   |
| Number of centers open at beginning of period                                                           |       | 2,797                                  |       | 2,587 |   |
| Opened                                                                                                  |       | 4                                      |       | — |   |
| Acquired                                                                                                |       | —                                 |       | — |   |
| Closed                                                                                                  |       | (61                                    | )          | (92 | ) |
| Number of centers open at end of period                                                                 |       | 2,740                                  |       | 2,495 |   |
| Weighted average number of centers open during the  period                                              |       | 2,774                                  |       | 2,533 |   |
| Number of customers served—all credit products  (thousands)                                        |       | 741                                    |       | 739 |   |
| Number of cash advances originated (thousands) (1)                                                      |       | 2,423                                  |       | 2,285 |   |
| Aggregate principal amount of cash advances  originated (thousands) (1)                                 |       | $                                      | 874,363    |   | $ | 838,988 |   |
| Average amount of each cash advance originated (1)                                                      |       | $                                      | 361        |   | $ | 367 |   |
| Average charge to customers for providing and  processing a cash advance (1)                            |       | $                                      | 53         |   | $ | 55 |   |
| Average duration of a cash advance (days) (1, 2)                                                        |       | 17.4                                   |       | 18.0 |   |
| Average number of lines of credit outstanding  during the period (thousands) (3)                        |       | 34                                     |       | 16 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (3) |       | $                                      | 19,373     |   | $ | 5,032 |   |
| Average principal amount on each line of credit  outstanding during the period (3)                      |       | $                                      | 571        |   | $ | 301 |   |
| Number of installment loans originated (thousands)  (4)                                                 |       | 7                                      |       | 7 |   |
| Aggregate principal amount of installment loans  originated (thousands) (4)                             |       | $                                      | 2,787      |   | $ | 3,373 |   |
| Average principal amount of each installment loan  originated (4)                                       |       | $                                      | 425        |   | $ | 472 |   |

 

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(1)                                Excludes linesof credit and installment loans.

 

(2)                                Excludes theimpact of extended payment plans.

 

(3)                                We beganoffering lines of credit in Virginia in November 2008 and ceased offeringnew lines of credit to customers in Virginia in February 2010.

 

(4)                                The installmentloan activity reflects loans we originated as the lender in Illinois.

 
| ** **                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                            | ** ** | **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                                                                       |       | $                                     | 56.4       |   | 100.0 | % | $ | 57.0 |   | 100.0 | % | $ | 0.6 |   | 1.1 | % |
| Center expenses:                                                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 17.2                                  |       | 30.4 | % | 18.8 |   | 33.0 | % | (1.6 | ) | (9.3 | )% |
| Provision for doubtful accounts                                                       |       | 7.6                                   |       | 13.5 | % | 5.0 |   | 8.8 | % | 2.6 |   | 34.2 | % |
| Occupancy costs                                                                       |       | 8.9                                   |       | 15.8 | % | 9.3 |   | 16.3 | % | (0.4 | ) | (4.5 | )% |
| Center depreciation expense                                                           |       | 1.3                                   |       | 2.4 | % | 1.1 |   | 1.9 | % | 0.2 |   | 15.4 | % |
| Advertising expense                                                                   |       | 0.8                                   |       | 1.4 | % | 1.4 |   | 2.5 | % | (0.6 | ) | (75.0 | )% |
| Other center expenses                                                                 |       | 4.6                                   |       | 8.1 | % | 4.5 |   | 7.9 | % | 0.1 |   | 2.2 | % |
| Total center expenses                                                                 |       | 40.4                                  |       | 71.6 | % | 40.1 |   | 70.4 | % | 0.3 |   | 0.7 | % |
| Center gross profit                                                                   |       | $                                     | 16.0       |   | 28.4 | % | $ | 16.9 |   | 29.6 | % | $ | 0.9 |   | 5.6 | % |

 

***Revenue Analysis***

 

Total revenues decreased approximately $12 million during thethree months ended March 31, 2010 compared to the same period in 2009.Total revenues for the 2,485 centers opened prior to January 1, 2009 andstill open as of March 31, 2010 decreased $2.7 million from$144.9 million for the three months ended March 31, 2009 to$142.1 million for the same period in 2010. Excluding revenues fromVirginia, Washington, and South Carolina for the quarter ended March 31,2010, total revenues for the Company’s centers opened prior to January 1,2009 and still open as of March 31, 2010, increased 9.7% compared to thesame period in 2009. Centers opened prior to January 1, 2009 were at leastthree months and fifteen months old as of March 31, 2009 and 2010,respectively.  Total revenues for the 10centers opened after January 1, 2009 and still open as of March 31,2010 increased $0.3 million from zero for the three months ended March 31,2009 to $0.3 million for the same period in 2010. Total revenues for theremaining 312 centers that closed represented a decrease of approximately $9.6million for the three months ended March 31, 2010 compared to the sameperiod in 2009.

 

***Center Expense Analysis***

 

*Salaries and related payroll costs.*  The increase in salaries and related payrollcosts for the three months ended March 31, 2010 was due to greaterseverance costs resulting from a greater reduction in the number of centersopen during 

 

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thethree months ended March 31, 2010 as compared to the same period in2009.  We averaged approximately 1.97 and2.06 full-time equivalent field employees, including district directors, percenter during the three months ended March 31, 2009 and 2010,respectively.

 

*Provision for doubtful accounts.*  As a percentage of total revenues, theprovision for doubtful accounts decreased from 13.5% of revenues or$21.1 million for the three months ended March 31, 2009 to 8.8% ofrevenues or $12.7 million for the same period in 2010. This decrease isdue primarily to an improvement in the loss rates and a reduction in totalreceivables at March 31, 2010 compared to March 31, 2009. Theimprovement in loss rates resulted from the discontinuation of our line ofcredit in Virginia. During the three months ended March 31, 2009 and 2010,we received proceeds from the sale of receivables in the amount of zero and$0.5 million, respectively.

 

*Occupancy costs.*  The decrease in occupancy costs for the threemonths ended March 31, 2010 compared to the same period in 2009 was dueprimarily to a decrease in the number of centers open during the three monthsended March 31, 2010 as compared to the same period in 2009.

 

*Advertising expense.*  Advertising expense increased for the threemonths ended March 31, 2010 compared to the same period in 2009 dueprimarily to an increase of approximately $0.9 million in direct mailingcampaigns.

 

*Other center expenses.*  The decrease in other center expenses for thethree months ended March 31, 2010 compared to the same period in 2009 wasdue primarily to a decrease in the number of centers open during the threemonths ended March 31, 2010 as compared to the same period in 2009.

 

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

 

*General and administrative expenses.*  The increase in general and administrativeexpenses of approximately $2.6 million for the three months ended March 31,2010 compared to the same period in 2009 was due primarily to:

 

·                  higher legal expenses, netof any insurance reimbursements, of approximately $1.7 million;

 

·                  increase in salaries and personnel costs ofapproximately $0.3 million;

 

·                  higher expenses of approximately $0.3 million relatedto political contributions; and

 

·                  higher expenses of approximately $0.2 million relatedto other professional fees.

 

*Loss on disposal of property and equipment and losson impairment of assets.*  Thedecrease in these expenses for the three months ended March 31, 2010 isdue to our having closed or identified for closure approximately 190 centers inthe first quarter of 2009 as compared to approximately 129 centers for the sameperiod in 2010.

 

*Interest expense.*  The decrease in interest expense for thethree months ended March 31, 2010, as compared to 2009 was due todecreases in the average interest rates and the average outstanding balanceduring the period.

 

*Income Tax Expense.*  The increase in income tax expense for thethree months ended March 31, 2010 as compared to the same period in 2009was primarily due to a reduction in state income taxes recognized at March 31,2009 and other discrete items recognized at March 31, 2010.

 

**Liquidity and CapitalResources**

 

The following table presents a summary of cash flows for the threemonths ended March 31, 2009 and 2010 (dollars in thousands):

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                                    | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Dollars**  | ** ** | **%** | ** ** |
| Cash flows provided by (used in):                             |       |       |       |       |       |         |       |   |   |
| Operating activities                                          |       | $          | 30,731     |       | $          | 17,881       |       | $ | (12,850 | ) | (41.8 | )% |
| Investing activities                                          |       | 25,860     |       | 25,124     |       | (736         | )          | (2.8 | )% |
| Financing activities                                          |       | (58,793    | )          | (69,934    | )          | (11,141      | )          | (18.9 | )% |
| Effect of exchange rate changes on cash and cash  equivalents |       | (52        | )          | (162       | )          | (110         | )          | (211.5 | )% |
| Net decrease in cash and cash equivalents                     |       | (2,254     | )          | (27,091    | )          | (24,837      | )          | (1101.9 | )% |
| Cash and cash equivalents, beginning of period                |       | 16,017     |       | 38,189     |       | 22,172       |       | 138.4 | % |
| Cash and cash equivalents, end of period                      |       | $          | 13,763     |       | $          | 11,098       |       | $ | (2,665 | ) | (19.4 | )% |

 

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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 detailed descriptionof our revolving credit facility. We anticipate that our primary uses of cashwill be to provide working capital, finance capital expenditures, and meet debtservice requirements, fund advances, finance center growth, fund acquisitions,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 and day-to-dayrequirements resulting from making and collecting advances. For example, if amonth ends on a Friday (a typical payday), our borrowings and our cash balanceswill be high compared to a month that does not end on a Friday. This is becausea substantial portion of the advances will be repaid in cash on that day butsufficient time will not yet have passed for the cash to reduce the outstandingborrowings under our revolving credit facility. Our borrowings under ourrevolving credit facility will also increase as the demand for advancesincreases during our peak periods such as the back-to-school and holidayseasons. Conversely, our borrowings typically decrease during the tax refundseason when cash receipts from customers peak or the customer demand for newadvances decreases. Advances and fees receivable, net decreased approximately$6 million, or 3.5%, to $166.8 million at March 31, 2010compared to $172.8 million at March 31, 2009. Advances and feesreceivable, net decreased approximately $37.4 million, or 18.3%, to$166.8 million at March 31, 2010 compared to $204.2 million at December 31,2009 due primarily to tax refund season.

 

During the three months ended March 31, 2009 and 2010, werepurchased 3,272 and 51,908 shares of our common stock, respectively, at acost of approximately $5,200 and $272,669, respectively.  All of these shares were surrendered byemployees to satisfy their tax obligations with respect to the vesting ofshares of restricted stock awarded pursuant to our 2004 Omnibus Stock Plan.

 

During the three months ended March 31, 2009 and 2010, zero and 19,001stock options were surrendered at a cost of zero and approximately $110,179,respectively, in a net settlement in order to satisfy the exercise price andwithholding obligations associated with stock option exercises.

 

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 ofoperations. 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 needs for operations.  However, our ability to make dividends to ourstockholders and repurchases of our common stock has been, and in the futuremay be, restricted under our revolving credit facility.

 

***Cash Flows from Operating Activities***

 

Net cash provided by operating activities decreased approximately 41.8%to $17.9 million for the three months ended March 31, 2010 comparedto $30.7 million for the same period in 2009. The decrease in operating cash flows was primarily attributable to thedecrease in the provision for doubtful accounts of $8.4 million, the decreasein net income of $1.7 million, and the loss on impairment of assets in theprior quarter of $2.2 million. This was partially offset by a decrease in netoperating liabilities of $0.2 million.

 

***Cash Flows from Investing Activities***

 

Net cash provided by investing activities decreased approximately 2.8%to $25.1 million for the three months ended March 31, 2010 compared to$25.9 million for the same period in 2009. The decrease was primarily relatedto decreases in advances receivable of $5.5 million. This was partially offsetby a decrease in restricted cash of $4.8 million.

 

***Cash Flows from Financing Activities***

 

Net cash used in financing activities increased 18.9% to$70 million for the three months ended March 31, 2010 compared to thesame period in 2009. During the three months ended March 31, 2010, theCompany reduced its borrowings under the revolving credit facility byapproximately $65.8 million compared to $52 million for the same period in 2009.This was partially offset by a decrease in our book overdrafts of $3.2 million.

 

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**Capital Expenditures**

 

For each of the three months ended March 31, 2009 and 2010, wespent $1.1 million on capital expenditures. Capital expenditures includedexpenditures for: (1) new centers opened; (2) center remodels; and (3) computerequipment replacements in our centers 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 March 31, 2009 and 2010, the third-party lender’soutstanding advances and interest receivable (which were not recorded on ourbalance sheet) totaled approximately $14.4 million and $14.7 million,respectively. We are obligated to pay the third-party lender to the extentthese amounts become uncollectible. Additionally, if these advances becomeuncollectible, we are also required to pay the third-party lender all relatedNSF fees and late fees 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 March 31, 2009 and 2010was approximately $3.2 million and $3.4 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.Financial Statements—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 March 31,2010, including periodic interest payments, included the following (dollars inthousands):

 
| ** **                                     | ** ** | ** ** | ** ** | **Payment due by December 31,** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| **Contractual Cash Obligations**               | ** ** | **Total**  | ** ** | **2010**                             | ** ** | **2011 and  2012** | ** ** | **2013 and  2014** | ** ** | **2015 and  thereafter** | ** ** |
| Long-term debt obligations:                    |       |       |       |                                 |       |   |   |   |   |   |   |
| Revolving credit facility                      |       | $          | 75,195     |                                 | $          | — |   | $ | — |   | $ | 75,195 |   | $ | — |   |
| Mortgage payable                               |       | 4,474      |       | 361                                  |       | 1,065 |   | 1,232 |   | 1,816 |   |
| Note payable                                   |       | 504        |       | 250                                  |       | 254 |   | — |   | — |   |
| Interest payable on long-term debt obligations |       | 1,311      |       | 243                                  |       | 531 |   | 361 |   | 176 |   |
| Operating lease obligations (1)           |       | 129,576    |       | 44,359                               |       | 72,129 |   | 12,237 |   | 851 |   |
| Purchase obligations                           |       | 8,236      |       | 4,490                                |       | 3,746 |   | — |   | — |   |
| Total                                          |       | $          | 219,296    |                                 | $          | 49,703 |   | $ | 77,725 |   | $ | 89,025 |   | $ | 2,843 |   |

 

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

 

***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 after January 1,2008.

 

As of March 31, 2010, we had approximately $75.2 millionoutstanding on the revolving portion of our credit facility and approximately$0.7 million of commitments under outstanding letters of credit, leavingapproximately $194.1 million available for future borrowings under thiscredit facility, subject to additional limitations based on certain 

 

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financialcovenants. As of March 31, 2010, the senior leverage covenant restrictedthat additional availability to approximately $136.2 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 March 31,2010, 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 capital requirementsand the required notice period for each type of borrowing. LIBOR-based ratescan be selected for one-, two-, three-, or six-month terms. In the case of abase rate loan, we must notify the bank on the requested date of any requiredborrowing and in the case of a LIBOR-based loan, we must notify the bank threebusiness days prior to the date of the requested borrowing. Base rate loans arevariable, and the rates on those loans are changed whenever the underlying ratechanges. LIBOR-based loans bear interest for the term of the loan at the rateset 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 March 31, 2010was approximately $108.3 million. The charge-off ratio, as defined in therevolving credit facility, limits the average of actual charge-offs incurredduring each fiscal month to a maximum of 4.5% of the average amount of adjustedtransaction receivables outstanding at the end of each fiscal month during theprior 12 consecutive months. At March 31, 2010, our charge off ratio was3.8% and was calculated based on average monthly charge-offs of$10 million and average transaction receivables of $278.9 million. Wehad charge-offs of $26.4 million during the three months ended March 31,2010 and could have charged off an additional $21.9 million within thelimits of this covenant for the three months ended March 31, 2010. Therevolving credit facility contains customary covenants, including covenantsthat restrict our ability to, among other things (i) incur liens, (ii) incurcertain indebtedness (including guarantees or other contingent obligations), (iii) engagein mergers and consolidations, (iv) engage in sales, transfers, and otherdispositions of property and assets (including sale-leaseback transactions), (v) makeloans, acquisitions, joint ventures, and other investments, (vi) makedividends and other distributions to, and redemptions and repurchases from,equity holders, (vii) prepay, redeem, or repurchase certain debt, (viii) makechanges in the nature of our business, (ix) amend our organizationaldocuments, or amend or otherwise modify certain of our debt documents, (x) changeour fiscal quarter and fiscal year ends, (xi) enter into transactions withour affiliates, and (xii) issue certain equity interests. The revolvingcredit facility contains customary events of default, including events ofdefault resulting from (i) our failure to pay principal when due orinterest, fees, or other amounts after three or more business days, (ii) covenantdefaults, (iii) our material breach of any representation or warranty, (iv) crossdefaults to any other indebtedness in excess of $1.0 million in theaggregate, (v) bankruptcy, insolvency, or other similar proceedings, (vi) ourinability to pay debts, (vii) monetary judgment defaults in excess of$1 million in the aggregate, (viii) customary ERISA defaults, (ix) actualor asserted 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 March 31,2010. 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

 

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willalso increase as the demand for advances increases during our peak periods suchas the back-to-school and holiday seasons. Conversely, our borrowings typicallydecrease during the tax refund season when cash receipts from customers peak orthe customer demand for new advances decreases.

 

*United  Kingdom OverdraftFacility.*  In October 2008,our United Kingdom operations entered into an overdraft facility. The maximumavailable borrowings under the facility were GBP 400,000, which is equivalentto approximately $637,000 at December 31, 2009. The interest rate on anyborrowings under this facility was the Bank of England base rate plus 1.75%.This facility expired 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 $4.5 million at December 31, 2009 and March 31,2010, 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 $4.5 million at December 31,2009 and March 31, 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, and certain security and office equipment. Thelessor under the aircraft hangar space lease is a company controlled by oraffiliated with Mr. George D. Johnson, Jr., our former Chairman and asignificant stockholder. In addition, on July 13, 2009, the Companyentered into a one-year Aircraft Dry Lease Agreement with Carabo Capital, LLC,an entity of which the Company’s current Chairman is a member. Under theAircraft Dry Lease, the Company may use Carabo’s aircraft from time to time inexchange for one dollar, standard usage expenses, and the Company’s fulfillmentof its obligations under the Aircraft Dry Lease. See “Item 1. FinancialStatements—Notes to Interim Unaudited Consolidated FinancialStatements—Note 9. Related Party Transactions.”

 

***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 March 31,2010, our purchase obligations totaled approximately $8.2 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 thisAnnual Report, including statements regarding our future financial performance,our business strategy, and expected developments in our industry, areforward-looking statements. The words “expect,” “intend,” “plan,” “believe,” “project,”“anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,” “continue,”and similar expressions are intended to identify forward-looking statements.

 

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 which federal,state, local, and foreign governmental regulation of cash advance services,consumer lending, and related financial products and services limits orprohibits the operation of our business;

 

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

 

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·                  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;

 

·                  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;

 

·                  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 other matters set forthunder “Item 1A. Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2009.

 

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 March 31, 2010. The weighted average interestrate on our $141.1 million of variable interest debt as of December 31,2009 was approximately 3.13%. The weighted average interest rate on our$75.2 million of variable interest debt as of March 31, 2010 wasapproximately 3.12%.

 

We had total interest expense of $1.7 million and$1.2 million for the three months ended March 31, 2009 and 2010,respectively. The estimated change in interest expense from a hypothetical 200basis-point change in applicable variable interest rates would have beenapproximately $0.8 million and $0.5 million for the three monthsended March 31, 2009 and 2010, respectively.

 

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***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 March 31,2010.

 

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 and$2.4 million as of December 31, 2009 and March 31, 2010,respectively. These cumulative translation adjustments are included inaccumulated other comprehensive loss as a separate component of stockholders’equity. Due to the immateriality of our current operations in the UnitedKingdom and Canada, a change in foreign currency exchange rates is not expectedto have a significant impact on our consolidated financial position, results ofoperations or cash flows.

 

**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 March 31, 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 ended December 31,2009, which could materially affect our business, results of operations,financial condition, future results and the trading price of our common stock.The following items are changes and additions to the risks and uncertaintiespreviously disclosed.

 

***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.***

 

Various anti-cash advance legislation has beenproposed or introduced in the U.S. Congress. Congressional members continue to receive pressure from consumeradvocates and other industry opposition groups to adopt such legislation.  In 2008 and 2009, bills were introduced thatwould have placed a cap of 36% on the effective annual percentage rate (“APR”)on all consumer loan transactions. Another bill would have placed a15-cent-per-dollar borrowed ($0.15/$1.00) cap on fees for cash advances andwould have implemented other consumer protections.  Recently, Senator Kay Hagan introduced a billthat would limit to six the number of cash advances a consumer would be permittedto receive in any twelve-month period. Additionally, Congress has been debating the creation of a ConsumerFinance Protection Agency (“CFPA”), which would establish additional regulatoryrestrictions on consumer finance transactions and could expressly restrict cashadvance transactions.  Any federallegislative or regulatory action that restricts cash advances and similarservices could have a material adverse effect on our business, prospects,results of operation, and financial condition. Any federal law that would impose a national 36% APR limit or prohibitor severely restrict cash advance services would likely eliminate our abilityto continue our current operations.

 

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS.**

 

The following table sets forth information about our stock repurchasesfor the three months ended March 31, 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)** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| January 1 to January 31   |       | —                                     |       | $                                  | —     |                                                                                         | —     |                                                                                                     | —     |   |
| February 1 to February 28 |       | 50,124                                     |       | 5.22                               |       | —                                                                                       |       | —                                                                                                   |       |
| March 1 to March 31       |       | 1,784                                      |       | 6.18                               |       | —                                                                                       |       | —                                                                                                   |       |
| Total                               |       | 51,908                                     |       | $                                  | 5.25       |                                                                                         | —     |                                                                                                     | —     |   |

 

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(1)                                 Based on tradedate.

 

(2)                                 This columnincludes 51,908 shares surrendered by employees to satisfy their taxobligations with respect to the vesting of shares of restricted stock awardedpursuant to the Company’s 2004 Omnibus Stock Plan.

 

(3)                                 In July 2008,we completed our stock repurchase program, which was initially adopted on May 4,2005 and subsequently extended on August 16, 2006 and on February 13,2008. Except as noted above, we did not repurchase any stock during the threemonths ended March 31, 2010.

 

**ITEM6.  EXHIBITS.**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                    |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Form of  Indemnification Agreement (incorporated by reference to Exhibit 10.11 to  the Company’s Registration Statement on Form S-1, Registration  No. 33-118227).                        |
|        |       |                                                                                                                                                                                                               |
| 10.2        |       | Description  of 2010 Cash Bonus Arrangement for Named Executive Officers (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on February 19, 2010). |
| ** **  | ** ** | ** **                                                                                                                                                                                                         |
| 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. |
|--------------------|---------------------------------------------------|
|               |                                              |
|               |                                              |   |
| May 10,  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                    |       | Form of  Indemnification Agreement (incorporated by reference to Exhibit 10.11 to  the Company’s Registration Statement on Form S-1, Registration No. 33-118227).                         |
|                    |       |                                                                                                                                                                                                               |
| 10.2                    |       | Description  of 2010 Cash Bonus Arrangement for Named Executive Officers (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on February 19, 2010). |
| ** **              | ** ** | ** **                                                                                                                                                                                                         |
| 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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