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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                       |
|--------------------------------------------------------------------------------------|
| ** **                                                                           |
| **x**                                                                                | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                           |
| **For the quarterly period ended  June 30, 2009**                               |
| ** **                                                                           |
| **OR**                                                                               |
| ** **                                                                           |
| **o**                                                                                | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                           |
| **For the transition period from        to** |

 

**COMMISSION FILE NUMBER 001-32363**

 

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

(Exact name of registrant asspecified in its charter)

 

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

 

**135 North Church Street**

**Spartanburg, South Carolina 29306**

(Address of principalexecutive offices) (Zip Code)

 

**864-342-5600**

(Registrant’s telephonenumber, including area code)

 

**None**

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

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

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

 

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

 

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

 

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

 
| **Class**                               | ** ** | **Outstanding  as of August 7, 2009** |
|-----------------------------------------|------------|--------------------------------------------|
| Common Stock, par value  $.01 per share |       | 61,649,535 shares                          |

 

 

 

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

**Form 10-Q**

**For the three months and six months ended June 30, 2009**

 
| ** **                     | ** **                                                                                                              | **Page** |
|--------------------------------|-------------------------------------------------------------------------------------------------------------------------|----------|
| **FORWARD-LOOKING STATEMENTS** |                                                                                                                    |
| ** **                     |                                                                                                                    |     |
| **PART I.**               | **FINANCIAL  INFORMATION**                                                                                              | 4        |
| Item 1.                   | Financial Statements                                                                                                    | 4        |
|                           | Unaudited  Consolidated Balance Sheets December 31, 2008 and June 30, 2009                                    | 4        |
|                           | Interim Unaudited Consolidated Statements of Income  Three Months and Six Months Ended June 30, 2008 and 2009 | 5        |
|                           | Interim Unaudited Consolidated Statement of  Stockholders’ Equity Six Months Ended June 30, 2009              | 6        |
|                           | Interim Unaudited Consolidated Statements of Cash  Flows Six Months Ended June 30, 2008 and 2009                   | 7        |
|                           | Notes to  Interim Unaudited Consolidated Financial Statements                                                           | 8        |
| Item 2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 22       |
| Item 3.                   | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 44       |
| Item 4.                   | Controls  and Procedures                                                                                                | 45       |
|                           |                                                                                                                    |     |
| **PART II.**              | **OTHER INFORMATION**                                                                                                   | 45       |
| Item 1.                   | Legal  Proceedings                                                                                                      | 45       |
| Item 1A.                  | Risk Factors                                                                                                            | 45       |
| Item 4.                   | Submission  of Matters to a Vote of Security Holders                                                                    | 45       |
| Item 6.                   | Exhibits                                                                                                                | 46       |
|                           |                                                                                                                    |     |
| **SIGNATURES**                 | 47                                                                                                                      |
| ** **                     |                                                                                                                    |
| **INDEX  TO EXHIBITS**         | 48                                                                                                                      |
|                                |                                                                                                                         |          |  |

 

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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, 2008and in “Part II. Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q,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. FINANCIAL STATEMENTS**

 

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

 

**Unaudited Consolidated Balance Sheets**

 

**December 31, 2008 and June 30, 2009**

 

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

 
| ** **                                                                                                                                                                                     | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                                                                     |       |                        |       |                    |       |
| Current assets                                                                                                                                                                                 |       |                        |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                      |       | $                           | 16,017     |                    | $          | 14,754 |   |
| Advances and fees  receivable, net                                                                                                                                                             |       | 220,115                     |       | 194,785                 |       |
| Deferred income taxes                                                                                                                                                                          |       | 13,008                      |       | 13,008                  |       |
| Other current assets                                                                                                                                                                           |       | 15,721                      |       | 23,761                  |       |
| Total current assets                                                                                                                                                                           |       | 264,861                     |       | 246,308                 |       |
| Restricted cash                                                                                                                                                                                |       | 4,633                       |       | 7,681                   |       |
| Property and equipment,  net                                                                                                                                                                   |       | 46,091                      |       | 37,466                  |       |
| Goodwill                                                                                                                                                                                       |       | 126,661                     |       | 127,182                 |       |
| Other assets                                                                                                                                                                                   |       | 4,764                       |       | 4,366                   |       |
| Total assets                                                                                                                                                                                   |       | $                           | 447,010    |                    | $          | 423,003 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                 |       |                        |       |                    |       |
| Current liabilities                                                                                                                                                                            |       |                        |       |                    |       |
| Accounts payable                                                                                                                                                                               |       | $                           | 13,977     |                    | $          | 12,085 |   |
| Accrued liabilities                                                                                                                                                                            |       | 33,917                      |       | 30,369                  |       |
| Income taxes payable                                                                                                                                                                           |       | 1,625                       |       | —                  |       |
| Accrual for third-party  lender losses                                                                                                                                                         |       | 3,960                       |       | 3,853                   |       |
| Current portion of  long-term debt                                                                                                                                                             |       | 545                         |       | 563                     |       |
| Total current liabilities                                                                                                                                                                      |       | 54,024                      |       | 46,870                  |       |
| Revolving credit facility                                                                                                                                                                      |       | 189,817                     |       | 158,235                 |       |
| Long-term debt                                                                                                                                                                                 |       | 4,590                       |       | 4,356                   |       |
| Deferred income taxes                                                                                                                                                                          |       | 22,311                      |       | 22,311                  |       |
| Deferred revenue                                                                                                                                                                               |       | 4,791                       |       | 3,671                   |       |
| Other liabilities                                                                                                                                                                              |       | 218                         |       | 277                     |       |
| Total liabilities                                                                                                                                                                              |       | 275,751                     |       | 235,720                 |       |
| Commitments and  contingencies (Note 5)                                                                                                                                                   |       |                        |       |                    |       |
| Stockholders’ equity                                                                                                                                                                      |       |                        |       |                    |       |
| Preferred stock, par value  $.01 per share, 25,000 shares authorized; no shares issued and outstanding                                                                                         |       | —                      |       | —                  |       |
| Common stock, par value  $.01 per share, 250,000 shares authorized; 96,821 shares issued and 61,087  and 61,649 outstanding as of December 31, 2008 and June 30, 2009,  respectively |       | 968                         |       | 968                     |       |
| Paid in capital                                                                                                                                                                                |       | 288,635                     |       | 289,498                 |       |
| Retained earnings                                                                                                                                                                              |       | 143,961                     |       | 158,042                 |       |
| Accumulated other  comprehensive loss                                                                                                                                                          |       | (2,585                      | )          | (1,663                  | )          |
| Common stock in treasury (35,734 and 35,172 shares  at cost at December 31, 2008 and June 30, 2009, respectively)                                                                    |       | (259,720                    | )          | (259,562                | )          |
| Total stockholders’ equity                                                                                                                                                                |       | 171,259                     |       | 187,283                 |       |
| Total liabilities and  stockholders’ equity                                                                                                                                               |       | $                           | 447,010    |                    | $          | 423,003 |   |

 

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**

 

**Three Months and Six Months Ended June 30, 2008 and 2009**

 

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

 
| ** **                                         | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **2008**                               | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** |
| **Total  Revenues**                                |       | $                                      | 162,142    |                                 | $          | 150,124 |   | $ | 327,598 |   | $ | 306,517 |   |
| **Center  Expenses:**                              |       |                                   |       |                                 |       |   |   |   |   |
| Salaries and related  payroll costs                |       | 49,305                                 |       | 45,404                               |       | 100,706 |   | 92,917 |   |
| Provision for doubtful  accounts                   |       | 30,225                                 |       | 33,012                               |       | 51,005 |   | 54,110 |   |
| Occupancy costs                                    |       | 24,605                                 |       | 23,247                               |       | 50,029 |   | 48,020 |   |
| Center depreciation  expense                       |       | 4,228                                  |       | 3,260                                |       | 8,523 |   | 6,983 |   |
| Advertising expense                                |       | 6,844                                  |       | 8,935                                |       | 9,990 |   | 11,116 |   |
| Other center expenses                              |       | 11,041                                 |       | 11,606                               |       | 25,636 |   | 24,312 |   |
| Total center expenses                              |       | 126,248                                |       | 125,464                              |       | 245,889 |   | 237,458 |   |
| Center gross profit                                |       | 35,894                                 |       | 24,660                               |       | 81,709 |   | 69,059 |   |
| **Corporate  and Other Expenses (Income):**        |       |                                   |       |                                 |       |   |   |   |   |
| General and administrative  expenses               |       | 16,009                                 |       | 13,798                               |       | 32,384 |   | 27,869 |   |
| Corporate depreciation  expense                    |       | 792                                    |       | 679                                  |       | 1,560 |   | 1,367 |   |
| Interest expense                                   |       | 2,529                                  |       | 1,595                                |       | 5,217 |   | 3,294 |   |
| Interest income                                    |       | (29                                    | )          | (17                                  | )          | (70 | ) | (34 | ) |
| (Gain)/Loss on disposal of  property and equipment |       | 92                                     |       | (80                                  | )          | 218 |   | (47 | ) |
| Loss on impairment of  assets                      |       | —                                 |       | —                               |       | 236 |   | 2,209 |   |
| Income before income taxes                         |       | 16,501                                 |       | 8,685                                |       | 42,164 |   | 34,401 |   |
| Income tax expense                                 |       | 7,227                                  |       | 2,043                                |       | 18,086 |   | 12,616 |   |
| Net income                                         |       | $                                      | 9,274      |                                 | $          | 6,642 |   | $ | 24,078 |   | $ | 21,785 |   |
| Net income per common  share:                      |       |                                   |       |                                 |       |   |   |   |   |
| Basic                                              |       | $                                      | 0.14       |                                 | $          | 0.11 |   | $ | 0.36 |   | $ | 0.36 |   |
| Diluted                                            |       | $                                      | 0.14       |                                 | $          | 0.11 |   | $ | 0.36 |   | $ | 0.35 |   |
| Dividends declared per  common share               |       | $                                      | 0.125      |                                 | $          | 0.0625 |   | $ | 0.25 |   | $ | 0.125 |   |
| Weighted average number of  shares outstanding:    |       |                                   |       |                                 |       |   |   |   |   |
| Basic                                              |       | 64,508                                 |       | 60,865                               |       | 67,586 |   | 60,862 |   |
| Diluted                                            |       | 64,512                                 |       | 61,657                               |       | 67,607 |   | 61,545 |   |

 

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 ofStockholders’ Equity**

 

**Six Months Ended June 30, 2009**

 

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

 
|                                                    |   | **Common  Stock** | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated  Other** | ** ** | **Common Stock**  | ** ** | ** **      |       |
|---------------------------------------------------------|--------|-------------------|------------|------------|------------|-------------|------------|------------------------|------------|-------------------|------------|-----------------|------------|
|                                                    |   | ** **        | ** ** | **Par**    | ** ** | **Paid-In** | ** ** | **Retained**           | ** ** | **Comprehensive** | ** ** | **In Treasury** | ** ** | ** ** |   |
|                                                    |   | **Shares**        | ** ** | **Value**  | ** ** | **Capital** | ** ** | **Earnings**           | ** ** | **Loss**          | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Total** |   |
| **Balances, December 31, 2008**                    |   | 96,821            |       | $          | 968        |        | $          | 288,635                |       | $                 | 143,961    |            | $          | (2,585 | ) | (35,734 | ) | $ | (259,720 | ) | $ | 171,259 |   |
| Comprehensive income:                                   |   |              |       |       |       |        |       |                   |       |              |       |            |       |   |   |   |   |
| Net income                                              |   | —            |       | —     |       | —      |       | 21,785                 |       | —            |       | —          |       | — |   | 21,785 |   |
| Foreign currency translation                            |   | —            |       | —     |       | —      |       | —                 |       | 922               |       | —          |       | — |   | 922 |   |
| Total comprehensive income                              |   |              |       |       |       |        |       |                   |       |              |       |            |       |   |   | 22,707 |   |
| Dividends paid ($0.125 per share)                       |   | —            |       | —     |       | —      |       | (7,623                 | )          | —            |       | —          |       | — |   | (7,623 | ) |
| Dividends payable                                       |   | —            |       | —     |       | —      |       | (81                    | )          | —            |       | —          |       | — |   | (81 | ) |
| Purchases of treasury stock                             |   | —            |       | —     |       | —      |       | —                 |       | —            |       | (3              | )          | (5 | ) | (5 | ) |
| Issuance of restricted stock                            |   | —            |       | —     |       | —      |       | —                 |       | —            |       | 564             |       | — |   | — |   |
| Vesting  of restricted stock issued from treasury stock |   | —            |       | —     |       | (132        | )          | —                 |       | —            |       | —          |       | 132 |   | — |   |
| Forfeitures of restricted stock                         |   | —            |       | —     |       | —      |       | —                 |       | —            |       | (3              | )          | — |   | — |   |
| Amortization of restricted stock                        |   | —            |       | —     |       | 404         |       | —                 |       | —            |       | —          |       | — |   | 404 |   |
| Stock option expense                                    |   | —            |       | —     |       | 615         |       | —                 |       | —            |       | —          |       | — |   | 615 |   |
| Issuance  of common stock to director in lieu of cash   |   | —            |       | —     |       | (24         | )          | —                 |       | —            |       | 4               |       | 31 |   | 7 |   |
| **Balances, June 30, 2009**                        |   | 96,821            |       | $          | 968        |        | $          | 289,498                |       | $                 | 158,042    |            | $          | (1,663 | ) | (35,172 | ) | $ | (259,562 | ) | $ | 187,283 |   |

 

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 CashFlows**

 

**Six Months Ended June 30, 2008 and 2009**

 

**(in thousands)**

 
| ** **                                                                                            | ** ** | **2008** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows  from operating activities**                                                             |       |     |       |     |       |
| Net income                                                                                            |       | $        | 24,078     |     | $          | 21,785 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities, net of acquisition |       |     |       |     |       |
| Depreciation and  amortization                                                                        |       | 10,101   |       | 8,380    |       |
| Non-cash interest expense                                                                             |       | 393      |       | 320      |       |
| Provision for doubtful  accounts                                                                      |       | 51,005   |       | 54,110   |       |
| Deferred income taxes                                                                                 |       | 2,355    |       | —   |       |
| (Gain)/Loss on disposal of  property and equipment                                                    |       | 218      |       | (47      | )          |
| Loss on impairment of  assets                                                                         |       | 236      |       | 2,209    |       |
| Amortization of restricted  stock                                                                     |       | 440      |       | 404      |       |
| Stock option expense                                                                                  |       | 650      |       | 615      |       |
| Common stock issued to  director in lieu of cash                                                      |       | 46       |       | 7        |       |
| Changes in operating assets  and liabilities                                                          |       |     |       |     |       |
| Fees receivable, net                                                                                  |       | (4,886   | )          | (11,713  | )          |
| Other current assets                                                                                  |       | (14,494  | )          | (7,947   | )          |
| Other assets                                                                                          |       | 268      |       | 98       |       |
| Accounts payable                                                                                      |       | (500     | )          | 348      |       |
| Accrued liabilities                                                                                   |       | (1,081   | )          | (3,644   | )          |
| Income taxes payable                                                                                  |       | 91       |       | (1,625   | )          |
| Deferred revenue                                                                                      |       | 5,819    |       | (1,119   | )          |
| Other liabilities                                                                                     |       | 38       |       | —   |       |
| Net cash provided by  operating activities                                                            |       | 74,777   |       | 62,181   |       |
| **Cash flows  from investing activities**                                                             |       |     |       |     |       |
| Changes in advances receivable                                                                        |       | (21,298  | )          | (17,060  | )          |
| Changes in restricted cash                                                                            |       | 304      |       | (3,048   | )          |
| Acquisition of business,  net of cash acquired                                                        |       | (769     | )          | —   |       |
| Proceeds from sale of  property and equipment                                                         |       | 22       |       | 219      |       |
| Purchases of property and  equipment                                                                  |       | (5,789   | )          | (1,874   | )          |
| Net cash used in investing  activities                                                                |       | (27,530  | )          | (21,763  | )          |
| **Cash flows  from financing activities**                                                             |       |     |       |     |       |
| (Payments on)/proceeds from  revolving credit facility, net                                           |       | 45,626   |       | (31,582  | )          |
| Payments on mortgage  payable                                                                         |       | (203     | )          | (218     | )          |
| Payments on note payable                                                                              |       | (64      | )          | (68      | )          |
| Proceeds from overdraft  facility, net                                                                |       | —   |       | 68       |       |
| Payments of financing costs                                                                           |       | (1,585   | )          | —   |       |
| Purchases of treasury stock                                                                           |       | (79,896  | )          | (5       | )          |
| Payments of dividends                                                                                 |       | (16,779  | )          | (7,623   | )          |
| Changes in book overdrafts                                                                            |       | (525     | )          | (2,326   | )          |
| Net cash used in financing  activities                                                                |       | (53,426  | )          | (41,754  | )          |
| Effect of exchange rate  changes on cash and cash equivalents                                         |       | (32      | )          | 73       |       |
| Net decrease in cash and  cash equivalents                                                            |       | (6,211   | )          | (1,263   | )          |
| Cash and cash equivalents,  beginning of period                                                       |       | 28,251   |       | 16,017   |       |
| Cash and cash equivalents,  end of period                                                             |       | $        | 22,040     |     | $          | 14,754 |   |
|                                                                                                  |       |     |       |     |       |
| Supplemental disclosures of  cash flow information:                                                   |       |     |       |     |       |
| Cash paid during the period  for:                                                                     |       |     |       |     |       |
| Interest                                                                                              |       | $        | 5,149      |     | $          | 3,107 |   |
| Income taxes                                                                                          |       | 25,142   |       | 20,307   |       |
| Supplemental schedule of  non-cash investing and financing activity:                                  |       |     |       |     |       |
| Property and equipment  purchases included in accounts payable and accrued expenses                   |       | 151      |       | 8        |       |
| Restricted stock dividends  payable                                                                   |       | 67       |       | 81       |       |
| Net assets acquired through  acquisition of business                                                  |       | 61       |       | —   |       |

 

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 FinancialStatements**

 

**1. Summaryof Significant Accounting Policies**

 

**Basis ofPresentation**

 

The accompanying interimunaudited consolidated financial statements of Advance America, Cash AdvanceCenters, Inc.  (“AACACI”) and itswholly owned 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 the U.S.Securities and Exchange Commission (the “SEC”). They do not include all information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  Although management believesthat the disclosures are adequate to prevent the information from beingmisleading, the interim unaudited consolidated financial statements should beread in conjunction with the Company’s audited financial statements in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008 filed with the SEC.  In the opinionof the Company’s management, all adjustments, consisting of normal recurringaccruals considered necessary for a fair statement of the Company’s financialcondition, have been included.  Theresults of operations for the six months ended June 30, 2009 are notnecessarily indicative of the results that may be expected for future interimperiods or the entire year ending December 31, 2009.

 

**Description of Business**

 

The Company conductsbusiness under the authority of a variety of enabling state statutes includingpayday advance, deferred presentment, check-cashing, small loan, credit serviceorganization and other state laws whereby advances are made directly tocustomers.  The Company’s operations inthe United Kingdom are conducted in accordance with applicable English law.  The Company’s operations in Canada areconducted in accordance with applicable Canadian federal and provincial law.

 

**Revenue Recognition**

 

Revenues can becharacterized as fees and/or interest depending on the Company’s businessoperations and product offerings under enabling regulations.  Revenue is recognized on a constant-yieldbasis ratably over the term of each advance.

 

In Virginia, we offer a lineof credit product with a 25-day billing cycle. Customers are not charged interest on any outstanding borrowings duringa billing cycle if they have a zero balance at the close of business on theirbilling cycle end date.  Revenue for thisproduct is recorded when it is charged to the customer’s account and thereforeit is not recognized on a ratable basis.

 

The Company has entered intoa long-term services contract for which the 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.

 

**Concentration of Risk**

 

For the three months ended June 30,2008 and 2009, total revenues within the Company’s five largest states(measured by total revenues) accounted for approximately 48% of the Company’stotal revenues.  For the six months endedJune 30, 2008 and 2009, total revenues within the Company’s five largeststates (measured by total revenues) accounted for approximately 48% and 49%,respectively, of the Company’s total revenues.

 

**Financial Instrument Assets andLiabilities for Which Carrying Values Equal or Approximate Fair Value**

 

Financial assets and liabilities for whichcarrying values equal or approximate fair values include cash and cashequivalents, advances, fees, interest, installment loans, lines of creditreceivable, certain other assets, accounts payable, accrued liabilities, andcertain other liabilities.  For theseassets and liabilities, the carrying values approximate fair value due to theirshort-term nature.

 

**IncomeTaxes**

 

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying value of existing assets and liabilities and theirrespective tax bases, and for operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which the related temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date. Deferred tax assets and liabilities are adjusted on an annual basis.

 

**Earnings Per Share**

 

Basic earnings per share iscomputed by dividing net income by the weighted average number of common sharesoutstanding for the period excluding unvested restricted stock.  Diluted earnings per share is computed bydividing net income by the weighted average number of common shares outstandingfor the period, after adjusting for the dilutive effect of unvested restrictedstock and outstanding stock options.  Forthe three months ended June 30, 2008 and 2009, 285,613 and 219,851restricted shares, respectively, were not included in the computation ofdiluted earnings per share because the effect of including them would beanti-dilutive.  For the six months ended June 30,2008 and 2009, 243,613 and 219,851 restricted shares, respectively, were notincluded in the computation of diluted earnings per share because the effect ofincluding them 

 

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would be anti-dilutive.  For the three and six months ended June 30,2008, options to purchase 1,612,500 shares of common stock were not included inthe computation of diluted earnings per share because the effect of includingthem would be anti-dilutive.  For thethree and six months ended June 30, 2009, options to purchase 1,567,500shares of common stock were not included in the computation of diluted earningsper share because the effect of including them would be anti-dilutive.

 

The following table presentsthe reconciliation of the denominator used in the calculation of basic anddiluted earnings per share for the three and six months ended June 30,2008 and 2009 (in thousands):

 
| ** **                                                         | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                    | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** |
| Reconciliation of  denominator:                                    |       |                                        |       |                                 |       |   |   |   |   |
| Weighted average number of  common shares outstanding—basic   |       | 64,508                                      |       | 60,865                               |       | 67,586 |   | 60,862 |   |
| Effect of dilutive  unvested restricted stock                      |       | 4                                           |       | 421                                  |       | 21 |   | 386 |   |
| Effect of dilutive  outstanding stock options                      |       | —                                      |       | 371                                  |       | — |   | 297 |   |
| Weighted average number of  common shares outstanding—diluted |       | 64,512                                      |       | 61,657                               |       | 67,607 |   | 61,545 |   |

 

**Recently Issued Accounting Pronouncements**

 

In December 2007, the FASB issued SFAS No. 141(R) (revised2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) modifiesthe accounting for business combinations and requires, with limited exceptions,the acquirer in a business combination to recognize 100 percent of theassets acquired, liabilities assumed, and any non-controlling interest in theacquiree at the acquisition-date fair value. In addition, SFAS 141(R) requires the expensing of acquisition-relatedtransaction and restructuring costs and requires that certain contingent assetsand liabilities acquired, as well as contingent consideration, be recognized atfair value.  SFAS 141(R) alsomodifies the accounting for certain acquired income tax assets and liabilities.  SFAS 141(R) is effective foracquisitions consummated on or after January 1, 2009.  The adoption of SFAS 141(R) did not havea material impact on the Company’s financial position or results of operations.

 

In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “NoncontrollingInterest in Consolidated Financial Statements, an amendment of ARB No. 51,”which establishes accounting and reporting standards for a noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 clarifies that a noncontrollinginterest in a subsidiary, which is sometimes referred to as minority interest,is an ownership interest in the consolidated entity that should be reported asa component of equity in the consolidated financial statements.  Among other requirements, SFAS 160requires consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interest.  It also requires disclosure, on the face of theconsolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest.  SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008.  Theadoption of SFAS 160 did not have a material impact on the Company’s financialposition or results of operations.

 

In December 2008, the FASB issued Staff Position No. FAS 140-4and FIN 46(R)-8, “Disclosures by Public Entities about Transfers ofFinancial Assets and Interests in Variable Interest Entities” (“FSPFAS 140-4 and FIN 46(R)-8”).  ThisStaff Position amends FASB Statement No. 140 “Accounting for Transfers andServing of Financial Assets and Extinguishments of Liabilities” to requirepublic entities to provide additional disclosures about transfers of financialassets.  It also amends FASBInterpretation No. 46 “Consolidation of Variable Interest Entities”, as revised,to require public entities to provide additional disclosures about theirinvolvement with Variable Interest Entities (“VIEs”).  FSP FAS 140-4 and FIN 46(R)-8 wereeffective for the Company’s fiscal year ended December 31, 2008.  The Company has adopted the disclosurerequirements of FSP FAS 140-4 and FIN 46(R)-8, with no materialimpact on the Company’s financial position or results of operations.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB28-1”).  FSP FAS 107-1 and APB 28-1 amend the disclosure requirements inSFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS107”), and APB Opinion No. 28, “Interim Financial Reporting”, to requiredisclosures about the fair value of financial instruments, including disclosureof the method and significant assumptions used to estimate the fair value offinancial instruments, in interim financial statements as well as in annualfinancial statements.  The Company hasadopted the disclosure requirements of FSP FAS 107-1 and APB 28-1, with nomaterial impact on the Company’s financial position or results of operations.

 

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In May 2009, the FASB issued SFAS 165, “SubsequentEvents,” which establishes general standards of accounting for disclosure ofevents that occur after the balance sheet date but before the financialstatements are issued or are available to be issued.  SFAS 165 provides guidance on the periodafter the balance sheet date during which management of a reporting entityshould evaluate events or transactions that may occur for potential recognitionor disclosure in the financial statements, the circumstances under which anentity should recognize events or transactions occurring after the balancesheet date in its financial statements, and the disclosures the entity shouldmake about events or transactions that occurred after the balance sheetdate.  The Company has adopted SFAS 165during the second quarter of 2009, and its application had no material impacton the Company’s financial position or results of operations.  We evaluated subsequent events through thedate the accompanying financial statements were issued, which was August 10,2009.

 

In June 2009, the FASB issued SFAS 166, “NewGuidance for Transfers of Financial Assets, a revision to SFAS Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities”.  SFAS 166 will requiremore information about the transfer of financial assets, includingsecuritization transactions, where entities have continuing exposure to therisks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,”changes the requirements for derecognizing financial assets, and requiresadditional disclosures.  SFAS 166 will beeffective of a reporting entity’s first fiscal year beginning after November 15,2009 or January 1, 2010, for a calendar year-end entity.  Management does not presently believe SFAS166 will have a material impact on the Company’s financial position or resultsof operations.

 

In June 2009, the FASB issued SFAS 167, “NewConsolidation Guidance for Variable Interest Entities, a revision to SFASInterpretation No. 46 (Revised December 2003), Consolidation ofVariable Interest Entities”.  SFAS 167changes how a reporting entity determines whether an entity that isinsufficiently capitalized or is not controlled through voting (or similarrights) should be consolidated.  Thedetermination of whether a reporting entity is required to consolidate anotherentity is based on, among other things, the other entity’s purpose and designand the reporting entity’s ability to direct the activities of the other entitythat most significantly impact the other entity’s performance.  SFAS 167 will be effective of a reportingentity’s first fiscal year beginning after November 15, 2009 or January 1,2010, for a calendar year-end entity. Management has not yet evaluated the impact of SFAS 167 on the Company’sfinancial position or results of operations.

 

In June 2009, the FASB issued SFAS 168, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles, a replacement of SFAS 162”.  SFAS 168 established two levels of U.S.generally accepted accounting principles (GAAP) — authoritative andnonauthoritative.  The FASB AccountingStandards Codification (ASC) will become the source of authoritative,nongovernmental GAAP, except for rules and interpretive releases of theSecurities and Exchange Commission (SEC). SFAS 168 is effective for financial statements issued for interim andannual periods ending after September 15, 2009, and will be adopted by theCompany in the third quarter of 2009. The adoption of SFAS 168 will not have any impact on the Company’sfinancial position or statement of operations.

 

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

 

Advances and feesreceivable, net, consisted of the following (in thousands):

 
| ** **                         | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Advances receivable                |       | $                           | 215,577    |                    | $          | 192,071 |   |
| Fees and interest  receivable      |       | 33,633                      |       | 33,842                  |       |
| Returned items receivable          |       | 42,996                      |       | 35,047                  |       |
| Other                              |       | 3,751                       |       | 5,533                   |       |
| Allowance for doubtful  accounts   |       | (59,441                     | )          | (56,910                 | )          |
| Unearned revenues                  |       | (16,401                     | )          | (14,798                 | )          |
| Advances and fees  receivable, net |       | $                           | 220,115    |                    | $          | 194,785 |   |

 

Included in the advances and fees andinterest receivables are amounts that may be past due that do not have bankpresentment authorizations.

 

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

 

Changes in the allowance fordoubtful accounts for the three and six months ended June 30, 2008 and2009 were as follows (in thousands):

 

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| ** **                       | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2008**                               | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** |
| Beginning balance                |       | $                                      | 49,877     |                                 | $          | 53,254 |   | $ | 61,306 |   | $ | 59,441 |   |
| Provision for doubtful  accounts |       | 30,101                                 |       | 32,319                               |       | 51,975 |   | 54,217 |   |
| Charge-offs                      |       | (31,828                                | )          | (34,862                              | )          | (75,503 | ) | (71,405 | ) |
| Recoveries                       |       | 5,346                                  |       | 6,199                                |       | 15,718 |   | 14,657 |   |
| Ending balance                   |       | $                                      | 53,496     |                                 | $          | 56,910 |   | $ | 53,496 |   | $ | 56,910 |   |

 

Changes in the accrual forthird-party lender losses for the three and six months ended June 30, 2008and 2009 were as follows (in thousands):

 
| ** **                       | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2008**                               | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** |
| Beginning balance                |       | $                                      | 3,493      |                                 | $          | 3,160 |   | $ | 4,587 |   | $ | 3,960 |   |
| Provision for doubtful  accounts |       | 124                                    |       | 693                                  |       | (970 | ) | (107 | ) |
| Ending balance                   |       | $                                      | 3,617      |                                 | $          | 3,853 |   | $ | 3,617 |   | $ | 3,853 |   |

 

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The total changes in theallowance for doubtful accounts and the accrual for third-party lender lossesfor the three and six months ended June 30, 2008 and 2009 were as follows(in thousands):

 
| ** **                       | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2008**                               | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** |
| Beginning balance                |       | $                                      | 53,370     |                                 | $          | 56,414 |   | $ | 65,893 |   | $ | 63,401 |   |
| Provision for doubtful  accounts |       | 30,225                                 |       | 33,012                               |       | 51,005 |   | 54,110 |   |
| Charge-offs                      |       | (31,828                                | )          | (34,862                              | )          | (75,503 | ) | (71,405 | ) |
| Recoveries                       |       | 5,346                                  |       | 6,199                                |       | 15,718 |   | 14,657 |   |
| Ending balance                   |       | $                                      | 57,113     |                                 | $          | 60,763 |   | $ | 57,113 |   | $ | 60,763 |   |

 

**4. Other Current Assets**

 

Other current assets include approximately$1.6 million and $7.6 million in prepaid income taxes as of December 31,2008 and June 30, 2009, respectively.

 

**5. Accrued Liabilities**

 

Accrued liabilitiesconsisted of the following (in thousands):

 
| ** **                           | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Employee compensation                |       | $                           | 13,533     |                    | $          | 12,127 |   |
| Workers’ compensation           |       | 4,851                       |       | 4,682                   |       |
| Lease smoothing                      |       | 3,011                       |       | 2,526                   |       |
| Advertising                          |       | 584                         |       | 143                     |       |
| Construction in progress             |       | 99                          |       | 8                       |       |
| Center closing costs                 |       | 871                         |       | 1,543                   |       |
| Accounting and tax                   |       | 1,158                       |       | 1,050                   |       |
| Property, sales and  franchise taxes |       | 558                         |       | 718                     |       |
| Legal                                |       | 1,128                       |       | 1,362                   |       |
| Severance                            |       | 374                         |       | 400                     |       |
| Deferred revenue                     |       | 1,830                       |       | 1,752                   |       |
| Legal settlements                    |       | 2,600                       |       | 1,607                   |       |
| Other                                |       | 3,320                       |       | 2,451                   |       |
| Total                                |       | $                           | 33,917     |                    | $          | 30,369 |   |

 

**6.Commitments and Contingencies**

 

The Company is involved in a number of activelawsuits, including lawsuits filed by private litigants and those arising outof actions taken by state regulatory authorities, and is involved in variousother legal proceedings with state and federal regulators.  In addition, the Company is obligated toadvance expenses, and, in certain circumstances, indemnify for damages,incurred by each of its officers and directors responding toinquiries, or defending against claims or proceedings, arising by reason of thefact that such person is or was an officer or director of the Company.  Unlessotherwise stated below, the Company is vigorously defending against actionsbrought against it.  The amount of lossesand/or the probability of an unfavorable outcome, if any, cannot be reasonablyestimated for these legal proceedings unless otherwise stated below.

 

**LegalProceedings**

 

*BrendaMcGinnis v. Advance America Servicing of Arkansas, Inc. et al.*

 

On February 27, 2007, Brenda McGinnis filed a putative classaction in the Circuit Court of Clark County, Arkansas alleging violations ofthe Arkansas usury law, the Arkansas Deceptive Trade Practices Act, and a 2001class action settlement agreement entered into by the Company’s priorsubsidiary in Arkansas.  The complaintalleges that the Company’s current subsidiary made usurious loans under theArkansas Check Cashers Act and seeks compensatory damages in an amount equal 

 

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totwice the interest paid on the deferred presentment transactions made from 2001to present (which would total approximately $21.4 million for deferredpresentment transactions made during that time or approximately$87 million in damages for all transactions originated, processed, and servicedduring that time) as well as a declaration that the contracts are void,enforcement of the 2001 class action settlement agreement, attorneys’ fees, andcosts.  The trial court has denied theCompany’s motion to compel arbitration and the class was certified in April 2008. The Company’s appeals of both decisionswere denied.  The plaintiff has filed amotion for summary judgment which the Company has opposed.  The parties are currently engaged insettlement negotiations.

 

*Magee andJohnson v. Advance America Servicing of Arkansas, Inc.*

 

On October 13, 2008, Gary Neil Magee and Charlotte Johnson filed aputative class action in the Circuit Court of Clark County, Arkansas allegingthat the Company’s Arkansas subsidiary violated the Arkansas usury law and theArkansas Deceptive Trade Practices Act.  Thecomplaint alleges that the fees charged by the Company’s subsidiary to cashchecks were interest on consumer loans and usurious under state law.  The parties seek compensatory damages in anamount equal to twice the combined interest plus unrelated check cashing feeson the loans from April 2008 to October 2008, and a declaration thatthe transactions are void, plus attorneys’ fees and costs.  The Company removed the case from state tofederal court where the court granted the Company’s motion to compel individualarbitration.  The parties have agreed tosettle this case for an immaterial amount. The Company expects that settlementwill be effected within the third quarter and that the Company will be releasedfrom all claims.

 

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

 

On July 18, 2008, Kerri Stone filed a putative class actioncomplaint in the Superior Court of California in San Diego against the Companyand its California subsidiary alleging violations of the California DeferredDeposit Transaction Law, the California Unfair Competition Law, and theCalifornia Consumer Legal Remedies Act.  Thecase has been removed to the U.S. District Court for the Southern District ofCalifornia.  The putative class actioncomplaint seeks trebling of compensatory damages, disgorgement of profits,attorneys’ fees, punitive damages, and an order enjoining enforcement of classaction waiver clauses in cash advance contracts.  The parties are engaged in jurisdictionaldiscovery.

 

*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.  Thisputative class action alleges that McKenzie, by and through the actions ofcertain officers, directors and employees, engaged in unfair and deceptivetrade practices and violated Florida’s criminal usury statute, the FloridaConsumer Finance Act, and the Florida Racketeer Influenced and CorruptOrganizations Act.  The suit seeksunspecified damages, and the named defendants could be required to refund feesand/or interest collected, refund the principal amount of cash advances, paymultiple damages, and pay other monetary penalties.  Ms. Reuter’s claim has been held to besubject to binding arbitration, which the Company expects to proceed inparallel with this case.  However, thetrial court has denied the defendants’ motion to compel arbitration of Ms. Kelly’sclaims, the substituted named plaintiff, and the resulting appeal has beendismissed by the Florida court of appeals.  The Company has sought review of thearbitration issue by the Florida Supreme Court.

 

*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.  The allegations, relief sought, and theCompany’s defenses in this lawsuit are nearly identical to those alleged in thefirst *Betts and Reuter* lawsuitdescribed above.  The Company andindividual defendants appealed the trial court’s denial of certain defendants’motion to dismiss for lack of personal jurisdiction.  The appellate court affirmed the trialcourt’s ruling.  A petition forcertiorari has been filed in the Florida Supreme Court on behalf of theindividual Advance America defendants, but the case will proceed against theCompany.

 

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

 

On August 6, 2004, Tahisha King and James E. Strong, who werecustomers of BankWest, the lending bank for which the Company previouslymarketed, processed and serviced cash advances in Georgia, filed a putativeclass action lawsuit in the State Court of Cobb County, Georgia against theCompany, William M. Webster IV, the Company’s Chairman, and other unnamedofficers, directors, owners and “stakeholders,” alleging various causes ofaction including that the 

 

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Georgiasubsidiary made illegal cash advance loans in Georgia in violation of Georgia’susury law, the Georgia Industrial Loan Act, and Georgia’s Racketeer Influencedand Corrupt Organizations Act.  Thecomplaint alleges that BankWest was not the “true lender” and that the Companywas the “de facto” lender.  The complaintseeks compensatory damages, attorneys’ fees, punitive damages, and the treblingof any compensatory damages.

 

On February 9, 2009, the parties signed a settlement agreement forthe purpose of resolving all claims in connection with the class action.  On May 22, 2009, the court conducted afairness hearing and approved the settlement agreement.  The Company will pay a minimum ofapproximately $2.0 million from which (1) a settlement pool will beestablished to cover payment of claims, individually varying from $30 to $90,and (2) payment of all costs and fees, including attorneys’ fees, relatedto the litigation and settlement administration of the class action will bemade.  If claims made plus costs exceedapproximately $2.0 million, the Company will be required to pay additionalfunds into the settlement pool up to an aggregate cap of approximately$3.7 million.  All named defendantswill be released from all claims in connection with originating, marketing, orservicing loans in Georgia.

 

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

 

The Company’s Georgia subsidiary is involved in another case in Georgiathat, although not a class action lawsuit, contains essentially the sameallegations as the *King and Strong*case described above.  On March 10,2003, Angela Glasscock, a customer of BankWest, filed an adversary proceedingin the U.S. Bankruptcy Court for the Southern District of Georgia alleging thatthe Company’s Georgia subsidiary was making cash advances in Georgia inviolation of the Georgia Industrial Loan Act.  BankWest intervened into the case andsubsequently both the subsidiary and BankWest filed a motion for summaryjudgment, which was granted in September 2005.  In April 2007, on appeal, the UnitedStates District Court overturned the U.S. Bankruptcy Court’s grant of summaryjudgment.  The parties have settled thiscase for an immaterial amount and the Company has been released from allclaims.

 

*Trejo v. Advance America, CashAdvance Centers of Illinois, Inc.*

 

OnMarch 4, 2009, Martha Trejo filed a putative class action lawsuit in theCircuit Court of Cook County against the Company’s Illinois subsidiary, AdvanceAmerica, Cash Advance Centers of Illinois, Inc.  The complaint alleges that the Illinoissubsidiary’s practices violate the Illinois Payday Reform Act, the IllinoisInterest Act, the Illinois Consumer Installment Loan Act, and the Illinois WageAssignment Act.  The complaint seeks certification of a class ofindividuals for the alleged violations as well as a declaration that all loansmade to class members are unenforceable, injunctive relief, and monetarydamages in an unspecified amount.  The Company removed the case to UnitedStates District Court for the Northern District of Illinois and filed a motionto dismiss or, in the alternative, to compel arbitration.  The court granted the Company’s motion tocompel individual arbitration in June 2009.

 

*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 our Missouri subsidiary, Advance America,Cash Advance Centers of Missouri, Inc.  The action alleges that the arbitration clauseand class action waiver in the Company’s subsidiary’s loan agreement isunconscionable, that the Company’s subsidiary’s practices violate the Missouristatutes governing unfair and deceptive trade practices, interest rates, loanrenewals, debt reduction, and consideration of borrower’s ability to repay.  The lawsuit seeks certification as a classaction, unspecified monetary damages, a declaratory judgment that thearbitration clause and class action waiver is unconscionable, and injunctiverelief.  The trial court denied theCompany’s motion to compel arbitration and the Company is appealing the denialof that motion.  The parties arecurrently engaged in settlement 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 prior Chief Executive Officer,alleging, among other things, that the relationship between the Company’s NorthCarolina subsidiary and Republic was a “rent a charter” relationship andtherefore Republic was not the “true lender” of the cash advances it offered.  The lawsuit also claims that the cash advanceswere made, administered, and collected in violation of numerous North Carolinaconsumer 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 to

 

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theplaintiff class since August 2001, the return of any interest or feesassociated with those advances, treble damages, attorneys’ fees, and otherunspecified costs.  The Company sought toenforce the arbitration provisions in the customer agreements and in June 2009,the trial court ruled that the arbitration clause is unenforceable.  The Company intends to appeal this ruling andseek a stay of the underlying action pending resolution of the appeal.

 

*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 ofBanks ordered that the Company’s North Carolina subsidiary immediately ceaseand desist operating. In accordance with the Commissioner of Banks’ order, theCompany’s North Carolina subsidiary ceased all business operations on December 22,2005.  The Company appealed theCommissioner’s order.  The case has beenstayed until the third quarter of 2009, at which time the Company’s appeal willbe heard by the Court.

 

*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 lines ofcredit 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, the court determined thatcertain aspects of the Company’s Choice Line of Credit required the Company tobe licensed under Pennsylvania’s Consumer Discount Company Act (“CDCA”) andenjoined the Company from continuing its lending activities in Pennsylvania forso long as the CDCA violations continued and from collecting monthlyparticipation fees.  The Company appealedto the Pennsylvania Supreme Court and, in May 2008, the PennsylvaniaSupreme Court upheld the lower court’s ruling.  The Pennsylvania Department of Bankingsubsequently amended its complaint to add the Pennsylvania Attorney General asa plaintiff and 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 could total approximately $135 million,plus civil penalties of $1,000 for each violation of the Pennsylvania ConsumerProtection Law and an additional $2,000 for violations against customers overthe age of 60, and attorneys’ fees and costs.  The matter is proceeding before the trial court. The Company has filed a motion todismiss the amended complaint and will continue to vigorously defend againstthe lawsuit.

 

*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.  The complaint seeks, among other things, adeclaratory judgment that the monthly participation fee charged to customerswith a line of credit is illegal, an injunction prohibiting the collection ofthe monthly participation fee and the payment by the Company of damages equalto three times the monthly participation fees paid by customers since June 2006,which could total approximately $135 million in damages, plus attorneys’fees and costs.  In January 2008,the trial court entered an order compelling the purported class representativesto arbitrate their claims on an individual basis, unless determined otherwiseby the arbiter.  All parties haveappealed this 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, the lending bank for which the Company previouslymarketed, processed and serviced cash advances in Pennsylvania, filed aputative class action lawsuit in the United States District Court, EasternDistrict of Pennsylvania alleging various causes of action, including that the Company’sPennsylvania subsidiary made illegal cash advance loans in Pennsylvania inviolation of Pennsylvania’s usury law, the Pennsylvania Consumer DiscountCompany Act, the Pennsylvania Unfair Trade Practices and Consumer ProtectionLaw, the Pennsylvania Fair Credit Extension Uniformity Act and the PennsylvaniaCredit Services Act.  The complaintalleges that BankWest was not the “true lender” and that the Company’sPennsylvania subsidiary was the “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 enteredan order compelling the purported class representatives to arbitrate theirclaims on an individual basis, unless determined otherwise by the arbiter.  All parties have appealed this order.

 

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*Clerk v. NCAS of Delaware, LLC, d/b/a Advance America, CashAdvance Centers, Inc., et al.*

 

OnApril 21, 2009, Yulon Clerk, a former customer, filed a putative classaction lawsuit in the Philadelphia County Court of Common Pleas against theCompany’s subsidiaries, Advance America, Cash Advance Centers of Pennsylvania, Inc.,and NCAS of Delaware, LLC.  The complaintalleges that the practices of the Company’s subsidiaries violated thePennsylvania Consumer Discount Protection Act, the Pennsylvania Loan InterestProtection Law, and Pennsylvania Consumer Protection Laws.  The complaint seeks certification of a classof individuals for the alleged violations, a declaration that all loans made toclass members are unenforceable, injunctive relief, 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 the UnitedStates District Court and filed a motion to compel arbitration and stay theunderlying action’s proceedings.

 

*Class Actions Against South Carolina Subsidiary*

 

Eight separate putative class actions have been filed in South Carolinaagainst the Company’s subsidiary, Advance America, Cash Advance Centers ofSouth Carolina, Inc., and several other unaffiliated defendants.  John and Rebecca Morgan filed a complaint on August 27,2007 in the Horry County Court of Common Pleas; Margaret Horne filed acomplaint on September 6, 2007 in the Spartanburg County Court of CommonPleas; Tawan Smalls filed a complaint on September 10, 2007 in theCharleston County Court of Commons Pleas; Chadric and Lisa Wiley filed a complainton September 27, 2007 in the Richland County Court of Common Pleas;Mildred Weaver filed a complaint on September 27, 2007 in the DarlingtonCounty Court of Common Pleas; Lisa Johnson and Gilbert Herbert filed acomplaint on October 2, 2007 in the Georgetown County Court of CommonPleas; Kimberly Kinney filed a complaint on October 12, 2007 in the MarionCounty Court of Common Pleas; and Carl G. Ferrell filed a complaint on October 30, 2008.  The allegations and relief sought are similarin each case.  Plaintiffs allege that theCompany’s South Carolina subsidiary violated the South Carolina DeferredPresentment Services Act and the Consumer Protection Code by failing to performa credit check and evaluate a customer’s ability to repay the advance.  Each complaint seeks an injunction toprohibit the Company from continuing its operations, the return of fees andinterest, unspecified actual damages, punitive damages, and attorneys’ fees andcosts.  Each of the lawsuits had beenremoved to United States District Court for the District of South Carolina,which subsequently remanded all of the class actions to state court.  The Company appealed these rulings and theappellate court has remanded all of the cases to state court.  The Company has joined ongoing litigation inthe South Carolina state court system pursuant to an order of the SouthCarolina Supreme Court consolidating all cases brought against the industry.

 

*OtherMatters*

 

The Company is also involved in other litigation and administrative proceedingsthat are incidental to its business, including, without limitation, regulatoryenforcement matters, individual consumer claims, contractual disputes, employeeclaims for workers’ compensation, wrongful termination, harassment,discrimination, payment of wages due, and customer claims relating tocollection practices and violations of state and/or federal consumer protectionlaws.

 

**Changes in Legislation**

 

*OhioLegislation*

 

On November 24, 2008, the State of Ohio capped interest rates oncash advance loans and limited the number of cash advances a customer may takein any one year.  As a result of thislegislation, the Company began offering small loans pursuant to the Ohio SmallLoan Act and check-cashing services.  Thesmall loan product generates less revenue than the Company’s former cashadvance product and, as a result, the Company has closed some of its centers inOhio.

 

During the six months ended June 30, 2009, the Company closed 63centers in Ohio.  The estimated cost toclose these centers, including an impairment charge of approximately $0.9million, is approximately $2.2 million, of which $1.2 million and $2.1 millionwas recognized in the three and six months ended June 30, 2009,respectively.  For the three months endedJune 30, 2009 these amounts are included in the income statement as anincrease in other center expenses of $1.1 million and an increase in centersalaries and related payroll costs of $0.1 million.  For the six months ended June 30, 2009these amounts are included in the income statement as an increase in othercenter expenses of $1.1 million, a loss on impairment of assets of $0.9million, and an increase in center salaries and related payroll costs of $0.1million.  If the Company’s financialperformance in Ohio does not improve, the Company may choose to closeadditional Ohio centers.

 

If it is not economically viable to continue operating in Ohio and theCompany closes its remaining Ohio centers, the estimated range of closingcosts, including severance, center tear-down costs, lease termination costs,and the write-down of fixed assets would be approximately $5.2 million to$13.8 million, and the collectability of advances and fees receivable inOhio most likely would be impaired.  Asof June 30, 2009, the net receivable balance in Ohio was approximately 

 

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$18.6 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 Ohio.

 

*WashingtonLegislation*

 

A new Washington law willbecome effective on January 1, 2010 that will limit the number of cashadvances a customer may take in any one year, limit the advance amount that canbe taken out at any one time, and implement a statewide database to monitor thenumber of loans.  The Company believesthis law will negatively impact its revenue and profitability.  The Company may close or consolidate some orall of its centers in Washington.  

 

If the Company closes allof its centers in Washington, the estimated range of closing costs, includingseverance, center tear-down costs, lease termination costs, and the write-downof fixed assets would be approximately $3.0 million to $7.5 million, and the collectibility of advances and feesreceivable in Washington most likely would be impaired.  As of June 30, 2009, the net receivable balance inWashington was approximately $8.6 million. At this time the Company is not able to determine the amount of goodwillimpairment, if any, that would result from the cessation of operations inWashington.

 

**OtherCommitments and Contingencies**

 

At June 30, 2009, the Company had approximately $1.5 million inunfunded commitments to lend to customers in Virginia under the line of creditproduct.

 

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

 

In July 2008, theCompany completed the repurchase of its common stock under its stock repurchaseprogram that the Company’s Board of Directors approved on May 4, 2005 andtwice extended, once on August 16, 2006 and again on February 13,2008, for a total of $225.0 million in authorized repurchases.  During the three months ended June 30,2008, the Company repurchased 5,455,018 shares of its common stock at acost of approximately $43.1 million pursuant to its stock repurchaseprogram.  During the three months ended June 30,2009, the Company did not repurchase any shares pursuant to its stockrepurchase program.  During the sixmonths ended June 30, 2008 and 2009, the Company repurchased 10,214,340and 3,272 shares of its common stock, respectively, at a cost ofapproximately $79.9 million and $5,200, respectively.  For the six months ended June 30, 2008and 2009, these amounts include 3,272 shares of common stock that weresurrendered by employees to satisfy their tax obligations with respect to thevesting of shares of restricted stock awarded pursuant to the Company’s 2004Omnibus Stock Plan.

 

In 2004, the Company adoptedStatement of Financial Accounting Standards No. 123 (Revised), “Share-BasedPayment” (“SFAS 123(R)”).  Accordingly,the Company measures the cost of its stock-based employee compensation at fairvalue on the grant date and recognizes such cost in the financial statements ona straight-line basis over the requisite service period of the awards, which isgenerally the vesting period.

 

The Company’s 2004 OmnibusStock Plan provides for the granting of restricted stock, stock options, andother stock awards to certain directors, officers, and other key employees ofthe Company.  Additionally, during 2005,the Company granted stock options and shares of restricted stock to itsPresident and Chief Executive Officer under a Nonqualified Stock OptionAgreement and a Restricted Stock Agreement, respectively.  Both of these agreements are separate from theCompany’s 2004 Omnibus Stock Plan.

 

Restricted stock grantsunder the Company’s stock-based compensation plans generally vest in equalannual installments over three, five, or eight years from the date of grant.Stock option grants under the Company’s stock-based compensation plans aregenerally exercisable in equal annual installments over three, five, or eightyears from the date of grant and generally expire ten years after the date ofgrant.

 

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

 

All stock options were granted with an exercise price equal to themarket value of the Company’s common stock on 

 

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thedates of grant.  The Company estimatedthe fair value of stock options on the date of grant using the Black-Scholesoption pricing 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 its determination of theexpected term by giving consideration to the contractual terms of the stockoption awards, vesting schedules, expectations of future employee behavior andpublished academic research regarding exercise behavior.  For the options granted in the first quarterof 2009, the Company assumed that the options would be exercised on theirexercise date because the high dividend rate on the grant date relative to thestrike 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.  TheCompany based its estimated volatility on its historical stock price volatilityand the stock price volatility of other public companies in its industry, whichthe Company believes is representative of its expected future volatility overthe expected term of its options.

 

·                  *Expecteddividends*—The Company used its historic dividend yield as anestimate for its expected dividend yield as of the 2008 stock option grantdate.  The Company assumed this dividendyield was continuous over the life of the option in its Black-Scholes optionpricing model.  For the 2009 stock optiongrants, the Company used its current dividend rate of $0.0625 per share perquarter and assumed discreet quarterly dividend dates consistent with pastpractices over the 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 stockoption’s weighted average fair value on the grant dates, the following weightedaverage assumptions were used in the Black-Scholes option pricing model for allstock options granted during the six months ended June 30, 2008 and 2009:

 
| ** **                 | ** ** | **2008** | ** ** | **2009** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Expected term (years)      |       | 5.42     |       | 2.00     |       |
| Expected volatility        |       | 48       | %          | 66       | %          |
| Expected dividends (yield) |       | 4.1      | %          | 21.9     | %          |
| Risk-free rate             |       | 2.93     | %          | 1.03     | %          |

 

The weighted average grantdate fair values of options granted during the six months ended June 30,2008 and 2009 were $2.70 per option and $0.12 per option, respectively, and arebeing expensed ratably over each award’s respective vesting period.

 

The following table providescertain information with respect to stock options outstanding and exercisableat June 30, 2009 under the Company’s stock-based compensation plans:

 
| ** **                                          | ** ** | **Outstanding**                                                                                                     | ** ** | **Exercisable**                                                                                                     | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| Number of stock options                             |       | 2,107,000                                                                                                           |       | 615,332                                                                                                             |       |
| Range of exercise prices                            |       | $1.14 – $14.70                                                                                            |       | $8.48 – $14.70                                                                                            |       |
| Weighted average exercise price                     |       | $               9.10                     |       | $             12.51                                |       |
| Aggregate intrinsic value (in thousands)            |       | $                  — |       | $                  — |       |
| Weighted average remaining contractual term (years) |       | 7.7                                                                                                                 |       | 6.8                                                                                                                 |       |

 

A summary of the Company’sauthorized and available shares, activity for the six months ended June 30,2009, and the weighted average stock option exercise prices under itsstock-based compensation plans follows:

 
| ** **                | ** ** | ** **     | ** ** | **Outstanding**       | ** ** | ** **         | ** ** | **Weighted  Average**    | ** ** |
|---------------------------|------------|----------------|------------|-----------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                | ** ** | **Authorized** | ** ** | **Restricted  Stock** | ** ** | **Stock  Options** | ** ** | **Available  For Grant** | ** ** | **Stock  Option  Exercise Price** | ** ** |
| At December 31, 2008 |       | 5,200,000      |       | 549,988               |       | 1,582,500          |       | 3,067,512                |       | $ | 11.81 |   |
| Authorized                |       | —         |       | —                |       | —             |       | —                   |       | — |   |
| Granted                   |       | —         |       | 564,500               |       | 539,500            |       | (1,104,000               | )          | 1.14 |   |
| Exercised                 |       | —         |       | —                |       | —             |       | —                   |       | — |   |
| Canceled                  |       | —         |       | (3,334                | )          | (15,000            | )          | 18,334                   |       | 8.60 |   |
| At June 30, 2009     |       | 5,200,000      |       | 1,111,154             |       | 2,107,000          |       | 1,981,846                |       | $ | 9.10 |   |

 

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A summary of the Company’srestricted stock activity for the six months ended June 30, 2009 and theweighted average grant date fair values follows:

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Nonvested at December 31, 2008 |       | 241,363    |       | $                                      | 10.30      |   |
| Granted                             |       | 564,500    |       | 1.14                                   |       |
| Vested                              |       | (18,177    | )          | 11.89                                  |       |
| Forfeited                           |       | (3,334     | )          | 14.76                                  |       |
| Nonvested at June 30, 2009     |       | 784,352    |       | $                                      | 3.41       |   |

 

The total grant date fairvalue of restricted shares vested during the six months ended June 30,2008 and 2009 was approximately $0.1 million and $0.2 million,respectively, and the total market value of these shares on the dates vestedwas approximately $0.1 million and $26,000, respectively.

 

A summary of the stock-basedcompensation cost included in general and administrative expenses in theaccompanying consolidated statements of income for the three and six monthsended June 30, 2008 and 2009 follows (in thousands):

 
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Restricted stock                       |       | $                                               | 224        |                                          | $          | 207 |   | $ | 440 |   | $ | 404 |   |
| Stock options                          |       | 327                                             |       | 302                                           |       | 650 |   | 615 |   |
| Total stock-based compensation expense |       | $                                               | 551        |                                          | $          | 509 |   | $ | 1,090 |   | $ | 1,019 |   |

 

As of June 30, 2009,the total compensation cost not yet recognized related to nonvested stockawards under the Company’s plans is approximately $5.9 million.  The weighted average period over which thisexpense is expected to be recognized is approximately 3.6 years.

 

**8. Transactions with Variable Interest Entities**

 

The Company conducts business in Texas through a wholly ownedsubsidiary registered as a Credit Services Organization (“CSO”) under Texaslaw. In connection with operating as a CSO, the Company has entered into acredit services organization agreement (“CSO Agreement”) with an unaffiliatedthird-party lender.  The agreementgoverns the terms by which the Company refers customers in Texas to thatlender, on a non-exclusive basis, for a possible extension of credit. TheCompany processes loan applications and commits to reimburse the lender for anyloans or related fees that are not collected from those customers.

 

The Company has determined that the lender is a variable interestentity (“VIE”) but that the Company is not the primary beneficiary of this VIE. Therefore, the Company has notconsolidated the lender as of and for the three and six months ended June 30,2008 and 2009.

 

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 loans and certain related fees that are not collected from thecustomers.  As of June 30, 2008 and2009, the third-party lender’s outstanding advances and interest receivable(which were not recorded on the Company’s balance sheet) totaled approximately$16.9 million and $17.5 million, respectively, which is the amount theCompany would be obligated to pay the third-party lender if these amounts wereto become uncollectible.  Additionally,if these advances were to become uncollectible, the Company would also berequired to pay the third-party lender all related NSF fees and late fees onthese advances.

 

Because of the Company’s economic exposure for losses related to thethird-party lender’s advances and interest receivable, the Company hasestablished an accrual for third-party lender losses to reflect the Company’sestimated probable losses related to uncollectible third-party lender advances. The accrual for third-party lenderlosses that was reported in the Company’s balance sheet at June 30, 2008and 2009 was approximately $3.6 million and $3.9 million, respectively,and was established on a basis similar to the allowance for doubtful accounts.

 

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**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 and six months ended June 30,2009, are payments of approximately $70,000 and $121,000 respectively, relatedto this consulting arrangement.  Inaddition, in connection with his appointment to the Board of Directors in February 2009,Mr. Colletti was granted 15,000 shares of restricted stock with a fairmarket value of $16,650 and a three year vesting period.  During the three and six months ended June 30,2009, approximately $1,000 and $2,000, respectively, was included in generaland administrative expense related to the amortization of this restricted stockgrant.

 

Included in center expensesare expenses for center leases with related parties of $0 for the three monthsended June 30, 2008 and 2009, and approximately $5,000 and $0 for the sixmonths ended June 30, 2008 and 2009, respectively. Included in general andadministrative expenses are expenses with related parties, relating primarilyto aircraft operating expenses and legal fees, of approximately $86,000 and$67,000 for the three months ended June 30, 2008 and 2009, respectively,and approximately $173,000 and $124,000 for the six months ended June 30,2008 and 2009, respectively.

 

In addition, under atime-share arrangement, the Company’s current Chairman and former Chairman haveused the Company’s aircraft for private purposes in exchange for the Company’suse of an identical aircraft owned by the Company’s former Chairman andformerly owned, in part, by the Company’s current Chairman. Included inaccounts receivable at June 30, 2009 is approximately $4,000 netreceivable related to this arrangement.

 

The Company incurred costsand expenses of approximately $74,000 and $158,000 for the three- and six-monthperiods ended June 30, 2009, respectively, for the advancement of the expensesincurred by certain of the Company’s officers and directors in connection withtheir responses to requests for information and subpoenas as part of aninvestigation by the United States Securities and Exchange Commission (“SEC”)into alleged insider trading by third parties in the Company’s securities.  These costs were incurred by the Companypursuant to indemnification agreements between the Company and certain officersand directors, which agreements require the Company to advance expenses, andmay require the Company to indemnify those persons for damages, incurred bythem in responding to the pending SEC investigation or defending against anyrelated enforcement proceedings, including the “Wells Notice” issued by the SECto the Company’s Chief Executive Officer on July 22, 2009.

 

**10. Revolving Credit Facility**

 

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 $270.0 million revolving line of credit, whichincludes the ability to issue up to $25.0 million in letters of credit.This revolving credit facility matures on March 24, 2013. The Company hasthe option to increase the revolving credit facility by an additional$95.0 million, subject to compliance with the credit agreement’s covenantsand conditions and upon receipt of sufficient commitments from lenders in thelending syndicate.

 

The credit facility is collateralized by substantially all of theCompany’s assets and contains various financial covenants that require, amongother things, the maintenance of a minimum net worth, certain leverage andfixed charge coverage ratios, and charge-off ratios and also restricts theencumbrance of assets and the creation of indebtedness. A breach of a covenantor an event of default could prohibit the Company from accessing otherwiseavailable borrowings, or could cause all amounts outstanding under therevolving credit facility to become immediately due and payable. The Companywas in compliance with all financial covenants at June 30, 2009.

 

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 June 30, 2009, theapplicable margin for the prime-based rate was 1.75% and the applicable marginfor the LIBOR-based rate was 2.75%.

 

Asof June 30, 2009, the Company had $158.2 million outstanding on therevolving portion of the credit facility and $1.4 million of unutilizedletters of credit outstanding. Borrowings under the revolving credit facilityare subject to compliance with certain covenants and conditions.

 

In connection with this amended and restated credit facility, theCompany incurred approximately $1.6 million in loan origination costsduring the year ended December 31, 2008 that were capitalized in otherassets and are being amortized over the remaining term of the credit facility.

 

The carrying value of the credit facility approximated its fair valueat December 31, 2008 and June 30, 2009.

 

In October 2008, our United Kingdom operations entered into anoverdraft facility. The maximum borrowings under 

 

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thisfacility are GBP 400,000, which is equivalent to approximately $661,000 at June 30,2009. The interest rate on any borrowings under this overdraft facility is theBank of England base rate plus 1.75%. This facility is repayable upon demand bythe lender. The Company had an outstanding balance of approximately $68,000 onthis facility at June 30, 2009.  Thecarrying value of this overdraft facility approximates its fair value at June 30,2009.

 

The Company owns its headquarters building and related land subject toa mortgage loan, the principal amount of which was approximately$5.0 million and $4.8 million at December 31, 2008 and June 30,2009, respectively. The mortgage loan is payable to an insurance company and iscollateralized by our corporate headquarters building and related land. The mortgageloan is payable in 180 monthly installments of approximately $66,400,including principal and interest, and bears interest at a fixed rate of 7.30%over its term. The mortgage loan matures on June 10, 2017. The carryingamount of our corporate headquarters (land, land improvements, and building)was approximately $4.7 million and $4.6 million at December 31, 2008and June 30, 2009, respectively.

 

The fair market value of our long-term debt is estimated using adiscounted cash flow analysis and was approximately $5.8 million and $5.7million at December 31, 2008 and June 30, 2009, respectively.

 

**11. Income Taxes**

 

The effective income taxrate as a percentage of income before income taxes was 43.8% and 23.5% for thethree months ended June 30, 2008 and 2009, respectively. The effectiveincome tax rate as a percentage of income before income taxes was 42.9% and36.7% for the six months ended June 30, 2008 and 2009, respectively. Thedecrease in the effective tax rate in the current year is primarily due to claimsfiled for recovery of taxes recognized in prior periods in the amount of $2.6million and $3.5 million for the three and six months ended June 30, 2009,respectively.

 

**12. Loss on Impairment of Assets**

 

During the first quarter of 2009, the Company identified approximately170 centers to be closed, in addition to its 24 New Hampshire centers.  The impairment charge related to these 170 centerswas approximately $2.2 million, which represents the write-down of theundepreciated costs of the fixed assets in these centers. The estimated cost toclose these centers, including the impairment charge, is approximately $5.8million, of which approximately $1.7 million and $5.1 million were recognizedduring the three and six months ended June 30, 2009, respectively.  For the three months ended June 30,2009, these amounts are included in the income statement as a $1.6 millionincrease in other center expenses and a $0.1 million increase in centersalaries and related payroll costs.  Forthe six months ended June 30, 2009, these amounts are included in theincome statement as a $2.6 million increase in other center expenses, $2.2million in loss on impairment of assets, and $0.3 million increase in centersalaries and related payroll costs.

 

The Company has approximately $4.6 million of goodwill in its UnitedKingdom operations.  As of June 30,2009, these operations have cumulatively generated negative cash flow and havenot reached break-even at the center gross profit level.  The Company’s expansion efforts in the UnitedKingdom began during the third quarter of 2007. The goodwill impairment model projects future positive cash flowssufficient to support the goodwill and long-lived asset base.

 

**13. Subsequent Events**

 

On July 29, 2009, theCompany’s Board of Directors declared a cash dividend of $0.0625 per share ofcommon stock, payable on September 4, 2009 to shareholders of record on August 25,2009.

 

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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 theend of this section for further discussion of the uncertainties, risks andassumptions associated with these statements.*

 

**Overview**

 

Headquartered in Spartanburg, South Carolina, we are the largestprovider of cash advance services in the United States as measured by thenumber of centers operated. Our centers provide short-term, unsecured cashadvances that are typically due on the customers’ next payday. As of June 30,2009, we operated 2,604 centers in 33 states in the United States, 21 centersin the United Kingdom, and 10 centers in Canada, and had 78 limited licenseesin the United Kingdom.

 

***Cash AdvanceServices***

 

In most states where we operate, we originate cash advance servicesunder the authority of different state-governed enabling statutes that allowfor cash advances ranging from single and multiple installment closed-end termsto revolving lines of credit with open-ended terms.  We refer to these products and servicescollectively as cash advance services. The particular cash advance services offered in any given location maychange from time to time depending upon changes in state and federal law.  Additionally, where permitted by applicablelaw, we may assume the responsibility of serving as an agent to a regulatedlender.  In Texas, where we operate as acredit services organization (“CSO”), we offer a fee-based credit servicespackage to assist customers in trying to improve their credit and in obtainingan extension of consumer credit through a third-party lender. Under the termsof our agreement with this lender, we process customer applications and arecontractually obligated for all losses.

 

We provide cash advance services as specified by the laws of thejurisdictions where we operate. Loans made by the third-party lender in Texasare governed by Texas law.  Online cashadvances made by a third-party lender are governed by the laws of the statewhere the customer resides.  Thepermitted size of an advance varies by jurisdiction and ranges from $50 to$5,000. However, our typical cash advance will range from $50 to $1,000.  The finance charges on cash advance servicescurrently offered by us also vary by jurisdiction and range up to 22% of theamount of a cash advance.

 

Additional fees that we may collect include origination fees, annualparticipation fees, fees for returned checks, late fees, and other fees aspermitted by applicable law. Presently, none of the cash advance services weoffer include annual participation fees. Origination fees on services currently offered by us range from $15 to$30, but future cash advance services may have higher or lower origination feesdepending on applicable state law.  Feesfor returned checks or electronic debits that are declined for non-sufficientfunds (“NSF”) vary by state but are generally in amounts up to $30.  In Texas, the third-party lender charges anNSF fee and a late fee on its loans in accordance with Texas law.

 

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 funding;or (3) by visiting our website, completing an application online andreceiving a cash advance from a third-party lender that is directly depositedin the customer’s bank account. Each new customer must provide us with certainpersonal information such as his or her name, address, phone number, employmentinformation or source of income, and references. This information is enteredinto our information system and that of the applicable lender. In order for anew customer to be approved for a cash advance, we must be able to verify hisor her identification and he or she is required to have a bank account and aregular source of income, such as a job.

 

Except for cash advances completed by third-party lenders, we determinewhether to approve a cash advance to our customers in every jurisdiction. Thethird-party lenders decide whether to approve the loan or cash advance andestablish all of the underwriting criteria and terms, conditions, and featuresof the customer agreement. We require proof of identification, bank account,and income source, as described above, and we primarily consider the customer’sincome in determining the amount of the cash advance. We do not perform creditchecks through consumer reporting agencies.

 

After the documents presented by the customer have been reviewed forcompleteness and accuracy, copied for record-keeping purposes, and the advancehas been approved, the customer enters into an agreement governing the terms of

 

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theadvance. The customer then provides a personal check or an Automated ClearingHouse (“ACH”) authorization, which enables electronic payment from the customer’saccount, to cover the amount of the cash advance plus charges for applicablefees and/or interest and/or the balance due under the agreement, and makes anappointment to return on a specified due date, typically his or her nextpayday, to repay the advance plus the applicable charges. However, in somestates, customers are not required to provide us with a personal check or ACHauthorization, and payment cycles may vary depending upon state law and producttype. At the specified due date, the customer is required to make theapplicable payment, usually payment in full of the cash advance plus fees andinterest, if applicable. Payment is usually made in person in cash at thecenter where the cash advance was initiated or issued unless the cash advancewas completed on the internet, in which case the customer makes payment by ACHauthorization.

 

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 advance or loan in full on or before the due date, we will seekto collect from the customer the amount of the advance or loan and anyapplicable fees, including late and NSF fees due, and may deposit the customer’spersonal check or initiate the electronic payment from the customer’s bankaccount.

 

***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 service atour centers pursuant to an agreement with the third party. For example, wecurrently offer pre-paid debit cards, money orders, and money transmission andbill payment services.  During the taxreturn season, we also offer tax preparation services by a third party.

 

Our Advance America branded pre-paid Visa debit card is issued by afederally chartered bank and regulated by the Office of Thrift Supervision. Thecard allows a cardholder to load cash onto the card and use the card whereverVISA debit cards are accepted. We are compensated under an agreement with thebank based on a number of factors related to the bank’s revenue from purchasesand subsequent cardholder activity, such as charges for loads, ATM withdrawals,account maintenance/plan charges and purchases. In the third and fourthquarters of 2007, we began selling money orders, and providing money transferservices and bill payment services as an agent of a licensed third-party moneytransmitter. We are compensated by the money transmitter based upon the numberand value of money transfers, money orders and bill payments made by ourcenters. Finally, in 2008, we began facilitating the offering of taxpreparation services by a third-party tax preparation provider. We receive apercentage of the tax preparation provider’s fees from customers related solelyto tax preparation services.

 

Our industry has been significantly affected by increasing regulatorychallenges. Legislation that negatively impacts cash advances and similarservices, whether through preclusions, interest rate ceilings, fee reductions,mandatory extensions of term length, limits on the amount or term of ourproducts and services, or limits on consumers’ use of our products and servicescould materially and adversely affect our business. We are very active inmonitoring and evaluating regulatory initiatives in all of the states and areclosely involved with the efforts of the Community Financial ServicesAssociation of America (“CFSA”).

 

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 andservices generally are substantially similar in most jurisdictions.

 

***Approval Process***

 

To obtain a cash advance, acustomer 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;

 

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

 

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

 

We determine whether to approve a cash advance to our customers (exceptthat the third-party lenders make this determination in Texas and for advancesdirectly deposited to bank accounts of online 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 Virginia, we require the customer to grant us a security interestin a motor vehicle to qualify for an open-ended line of credit.

 

***Repayment and Collection Process***

 

Repayment terms vary depending upon state law, the type of cash advanceservices offered, and whether the cash advance was completed online or in oneof our centers.  Generally, as part ofthe closing process, we explain the customer’s repayment obligations andestablish the expectation that the customer will pay us in cash on or beforethe due date in accordance with their agreement with us.  The day before the due date, we generallycall the customer to confirm their payment.

 

If a customer does not pay the amount due, then our management has thediscretion to either: (1) commence past-due collection efforts, whichtypically may proceed for up to 14 days in most states, or (2) depositthe customer’s personal check or debit their bank account in accordance withtheir ACH authorization. If 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 unable to meet his or her payment obligations, the customer mayqualify for an extended payment plan (“Payment Plan”). In most states, theterms of our Payment Plan conform to the CFSA Best Practices for extendedpayment plans. Certain states have specified their own terms and eligibilityrequirements for Payment Plans. Generally, a customer may enter into a PaymentPlan for no additional fee once every twelve months.  The Payment Plan will call for scheduledpayments that coincide with the customer’s next four paydays. In some states, acustomer may enter into a Payment Plan more frequently. We do not engage incollection efforts while a customer is enrolled in a Payment Plan, however, ifa customer misses a scheduled payment under a Payment Plan we may resume normalcollection procedures. We do not offer a Payment Plan for multiple installmentloans or lines of credit, nor does the third-party lender in Texas offer aPayment Plan for advances to its customers. The third-party internet lender offers Payment Plans as required bystate law.

 

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 is thendeposited or their ACH authorization is processed. Additional collectionefforts are not required if the customer’s deposited check or our ACH debitclears. For the year ended December 31, 2008 and the six months ended June 30,2009, we deposited or presented for debit approximately 5.9% and 5.7%,respectively, of all customer checks or ACH authorizations we received, andapproximately 25% and 31%, respectively, of deposited customer checks or ACH debitscleared, excluding our installment loan and line of credit products.  If the customer’s check or the ACH debit doesnot clear and is returned because of non-sufficient funds in the customer’saccount or because of a closed account or a stop-payment order, additionalcollection efforts begin. These additional collection efforts are carried outby center employees and typically include contacting the customer by telephoneor in person to obtain payment or a promise to pay and, in cases where we holda check, attempting to exchange the customer’s check for a cashier’s check, iffunds become available. We also send out a series of collection letters, whichare automatically 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, then management may close the line of credit and acceleratethe maturity date or work with the customer to bring his or her payments current.  If we close the line of credit and acceleratethe maturity date, we stop charging interest on the outstanding amount andbegin collection efforts as described above.

 

***Selected Operating Data***

 

The following table presents key operating data for our business:

 

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| ** **                                                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Number of centers open at end of period                                                                      |       | 2,856                                           |       | 2,635                                         |       | 2,856 |   | 2,635 |   |
| Number of customers served—all credit products  (thousands)                                             |       | 820                                             |       | 743                                           |       | 1,042 |   | 944 |   |
| Number of payday cash advances originated  (thousands)                                                       |       | 2,864                                           |       | 2,553                                         |       | 5,645 |   | 4,975 |   |
| Aggregate principal amount of payday cash advances  originated (thousands)                                   |       | $                                               | 1,045,174  |                                          | $          | 916,093 |   | $ | 2,065,964 |   | $ | 1,789,462 |   |
| Average amount of each payday cash advance  originated                                                       |       | $                                               | 365        |                                          | $          | 359 |   | $ | 366 |   | $ | 360 |   |
| Average charge to customers for providing and  processing a payday cash advance                              |       | $                                               | 56         |                                          | $          | 53 |   | $ | 56 |   | $ | 53 |   |
| Average duration of a payday cash advance (days)                                                             |       | 16.7                                            |       | 17.5                                          |       | 16.7 |   | 17.4 |   |
| Average number of lines of credit outstanding during  the period (thousands) (1)                        |       | —                                          |       | 26                                            |       | — |   | 30 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (1) |       | $                                               | —     |                                          | $          | 11,363 |   | $ | — |   | $ | 15,341 |   |
| Average principal amount on each line of credit  outstanding during the period (1)                      |       | $                                               | —     |                                          | $          | 421 |   | $ | — |   | $ | 497 |   |
| Number of installment loans originated (thousands)  (2)                                                      |       | 8                                               |       | 9                                             |       | 14 |   | 16 |   |
| Aggregate principal amount of installment loans  originated (thousands) (2)                                  |       | $                                               | 4,049      |                                          | $          | 3,938 |   | $ | 6,374 |   | $ | 6,723 |   |
| Average principal amount of each installment loan  originated (2)                                            |       | $                                               | 482        |                                          | $          | 436 |   | $ | 460 |   | $ | 431 |   |

 

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(1)                                  We beganoffering lines of credit in Virginia in November 2008.

 

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

 

***Revenues and Expenses***

 

Our revenues consist of feesand/or interest paid to us directly by our customers. Our expenses relateprimarily to the operation of our centers. These expenses include salaries andrelated payroll costs, occupancy expense related to our leased centers, centerdepreciation expense, advertising expense, and other center expenses thatconsist principally of costs related to center closings, communications,delivery, supplies, travel, bank charges, various compliance and collectioncosts, and costs associated with theft.

 

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

 

Our provision for doubtful accounts and accrual for third-party lenderlosses are primarily based upon models that analyze specific portfoliostatistics and also reflect, to a lesser extent, management’s judgmentregarding overall accuracy.  The analyticalmodels take into account several factors including the number of transactionscustomers complete, and charge-off and recovery rates.  Additional factors, such as changes in statelaws, center closings, length of time centers have been open in a state,relative mix of new centers within a state, and other relevant factors are alsoevaluated to determine whether the results from the analytical models should berevised.

 

Theprovision for doubtful accounts increased to 22.0% of revenues for the threemonths ended June 30, 2009 versus 18.6% for the same period in 2008.  During the three months ended June 30, 2009and 2008, we received proceeds from the sale of receivables in the amountof  $2.2 million and $0.5 million,respectively. We launched our line of credit product in Virginia during thefourth quarter of 2008.  This product hasexperienced a higher loss rate than our payday and installment loan products.Excluding the sale of receivables and the applicable revenue and loss rates forthe Virginia line of credit product, the provision for doubtful accounts forthe three months ended June 30, 2009 and 2008 would have been 19.6% and 18.9%,respectively.

 

Theprovision for doubtful accounts increased to 17.7% of revenues for the sixmonths ended June 30, 2009 versus 15.6% for the same period in 2008.During the six months ended June 30, 2009 and 2008, we received proceedsfrom the sale of receivables in the amount of $2.2 million and $0.5 million, respectively.  Excluding the sale of receivables and the applicablerevenue and loss rates for the Virginia line of credit product, the provisionfor doubtful accounts for the six months ended June 30, 2009 and 2008would have been 16.9% and 15.7%, respectively.

 

***Income Taxes***

 

The effective income taxrate as a percentage of income before income taxes was 43.8% and 23.5% for thethree months ended June 30, 2008 and 2009, respectively. The effectiveincome tax rate as a percentage of income before income taxes was 42.9% and36.7% for the six months ended June 30, 2008 and 2009, respectively. Thedecrease in the effective tax rate in the current period is primarily due toclaims filed for recovery of taxes recognized in prior periods in the amount of$2.6 million and $3.5 million for the three and six months ended June 30,2009, respectively.  We anticipate oureffective tax rate for the current year will be in the range of 40% to 42%.

 

***Changes in Legislation***

 

Duringthe last few years, legislation that prohibits or severely restricts ourproducts and services has been introduced or adopted in a number of states andat the federal level, and we expect that trend to continue in other states forthe foreseeable future. Legislation was adopted in New Hampshire in 2008 thateffectively prohibits us from offering cash advances to consumers in thatstate. As a result, in February 2009, we decided to close all of ourcenters in New Hampshire.  In April 2009, the Governor of Virginiasigned a bill into law that restricts us from offering both our cash advanceproduct 

 

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andour open-ended line of credit product at the same center unless the line ofcredit is secured by a motor vehicle.  Thislimitation could reduce our customer base and lower our revenues and profits inVirginia.  In May 2009, a bill was signed into law in the State ofWashington that places a number of restrictions on our cash advance productincluding limiting the number of cash advances a customer may take to eightadvances in any one year.  Once the law becomes effective on January 1,2010, our revenues and profits in Washington will be significantlyreduced.  If we are unable to operate profitably in Washington, we maycease operating in that state.  Further, legislation permitting cashadvances in Arizona and Mississippi is scheduled to expire in 2010 and 2012,respectively. This legislation may not be renewed or could be modified in amanner that affects our operations negatively. We are regularly refining ourcash advance services and developing new products and services or operations toaddress recent or anticipated legislative and regulatory changes. Some of theselegislative and regulatory changes may result in our discontinuing operationsin a state, while other changes may result in less significant short-term orlong-term changes, interruptions in revenues, and lower operating margins. Wegenerally cannot estimate what effect, if any, operational changes we make inresponse to legislative and regulatory changes may have on our financial resultsuntil we are able to develop legal and financially-viable alternative productsand services.

 

***Operations in Ohio***

 

On November 24, 2008, the State of Ohio capped interest rates oncash advance loans and limited the number of cash advances a customer may takein any 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 generates less revenue than our former cash advance product and, as aresult, we have closed some of our centers in Ohio.

 

During the six months ended June 30, 2009, we closed 63 centers inOhio.  The estimated cost to close thesecenters, including an impairment charge of approximately $0.9 million, isapproximately $2.2 million, of which $1.2 million and $2.1 million wasrecognized in the three and six months ended June 30, 2009,respectively.  For the three months endedJune 30, 2009, these amounts are included in the income statement as anincrease in other center expenses of $1.1 million and an increase in centersalaries and related payroll costs of $0.1 million.  For the six months ended June 30, 2009,these amounts are included in the income statement as an increase in othercenter expenses of $1.1 million, a loss on impairment of assets of $0.9million, and an increase in center salaries and related payroll costs of $0.1million.  If our financial performance inOhio does not improve, we may choose to close additional Ohio centers.

 

If it is not economically viable to continue operations in Ohio and wedecide to close our remaining Ohio centers, our estimated range of closingcosts, including severance, center tear-down costs, lease termination costs andthe write-down of fixed assets would be approximately $5.2 million to $13.8million, and the collectibility of advances and fees receivable in Ohio mostlikely would be impaired. As of June 30, 2009, the net receivable balancein Ohio was approximately $18.6 million. At this time we are not able todetermine the amount of goodwill impairment, if any, that would result from thecessation of operations in Ohio.

 

***Operations in Washington***

 

A new Washington law will become effective on January 1,2010, that will limit the number of cash advances a customer may take in anyone year, limit the advance amount that can be taken out at any one time, and implement a statewide database tomonitor the number of loans.  We believethis law will negatively impact our revenue and profitability in thatstate.  We may close or consolidate some orall of our centers in Washington.  

 

If we decide to close our Washington centers, ourestimated range of closing costs, including severance, center tear-down costs,lease termination costs, and the write-down of fixed assets would beapproximately $3.0 million to $7.5 million, and the collectibility of advances and fees receivablein Washington most likely would be impaired. As of June 30, 2009, the net receivable balance in Washington wasapproximately $8.6 million.  At this timewe are not able to determine the amount of goodwill impairment, if any, thatwould result from cessation of operations in Washington.

 

Forthe three months ended June 30, 2008 and 2009, 4.1% and 4.3%, respectively,of our total revenues were generated from our operations in Washington. For thesix months ended June 30, 2008 and 2009, 3.9% and 4.2%, respectively, ofour total revenues were generated from our operations in Washington.  The following is a summary of financialinformation for our operations in Washington for the three and six months endedJune 30, 2008 and 2009 (in thousands):

 

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| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total revenues             |       | $                                               | 6,613      |                                          | $          | 6,396 |   | $ | 12,926 |   | $ | 12,807 |   |
| Total center expenses      |       | 5,418                                           |       | 4,867                                         |       | 11,099 |   | 9,671 |   |
| Center gross profit (loss) |       | $                                               | 1,195      |                                          | $          | 1,529 |   | $ | 1,827 |   | $ | 3,136 |   |

 

***Changes in Other States***

 

New laws in South Carolina and Kentucky, both effective on January 1,2010, require the implementation of state databases in order to limit thenumber of cash advances customers may have outstanding at any one timestatewide.  Although we expect thesechanges to have a negative impact on our operations, we believe operations inthese states will continue to be economically viable.

 

***Closings***

 

During the first quarter of 2009, the Company identified approximately170 centers to be closed, in addition to our 24 New Hampshire centers.  The impairment charge related to these 170 centerswas approximately $2.2 million, which represents the write-down of theundepreciated costs of the fixed assets in these centers. The estimated cost toclose these centers, including the impairment charge, is approximately $5.8million, of which approximately $1.7 million and $5.1 million were recognizedduring the three and six months ended June 30, 2009, respectively.  For the three months ended June 30,2009, these amounts are included in the income statement as a $1.6 millionincrease in other center expenses and a $0.1 million increase in centersalaries and related payroll costs.  Forthe six months ended June 30, 2009, these amounts are included in theincome statement as a $2.6 million increase in other center expenses, $2.2million in loss on impairment of assets, and $0.3 million increase in centersalaries and related payroll costs.

 

*Closing of Operations in New Mexico.*  Legislation in New Mexico became effective in2007 that limits fees and interest on all consumer loans and gives borrowers a130 day interest-free and fee-free extension. As a result of thislegislation, we determined that it was not economically viable to continueoperating in New Mexico. As a result, we closed our remaining nine centers inNew Mexico in August 2008. The closing costs associated with closing ouroperations in New Mexico were approximately $0.1 million.  These costs are included in the incomestatement as an increase in other center expenses of $0.1 million.  The cessation of our New Mexico operationsdid not result in any impairment of goodwill.

 

The following is a summary of financial information for our operationsin New Mexico for the three and six months ended June 30, 2008 and 2009(in thousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total revenues             |       | $                                               | 124        |                                          | $          | — |   | $ | 224 |   | $ | — |   |
| Total center expenses      |       | 318                                             |       | 3                                             |       | 649 |   | 5 |   |
| Center gross profit (loss) |       | $                                               | (194       | )                                             | $          | (3 | ) | $ | (425 | ) | $ | (5 | ) |

 

*Closing of Operations in Arkansas.*  In March 2008, we received a letter fromthe Arkansas Attorney General demanding that we stop offering deferred presentmenttransactions under the Arkansas Check Cashers Act. In response, we compliedwith the Attorney General’s demands and began offering consumer loans atinterest rates below the applicable Arkansas usury cap. In September 2008, wereceived a notice from the Arkansas State Board of Collections that the Boardhad determined that consumer lenders who accept account withdrawalauthorizations would be deemed by the Board to be engaged in the business ofmaking deferred presentment transactions. During this same time, we were indiscussions with the Arkansas Attorney General to address certain itemsregarding our operations in Arkansas. The Attorney General agreed that if we discontinued our operations inArkansas, he would not bring suit against us. Although we believe we havealways operated in compliance with Arkansas law, we concluded that avoidingpotentially costly litigation in this circumstance was in the best interest ofour stockholders. As a result, we closed all 30 centers in Arkansas on or beforeOctober 31, 2008. The costs associated with closing our Arkansasoperations were approximately $1.8 million, including $1.1 milliondue to the write-down of receivables.   These costs are included in the incomestatement as increases of $1.1 million in the provision for doubtful accounts,$0.4 million in other center expenses, $0.2 million in center salaries andrelated payroll costs, and $0.1 million in loss on disposal of property andequipment.  The cessation of our Arkansasoperations did not result in any impairment of goodwill.

 

The following is a summaryof financial information for our operations in Arkansas for the three and sixmonths ended June 30, 2008 and 2009 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2008**                                        | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total revenues             |       | $                                               | 822        |                                 | $          | 2 |   | $ | 2,351 |   | $ | 5 |   |
| Total center expenses      |       | 1,398                                           |       | 38                                   |       | 2,749 |   | 132 |   |
| Center gross profit (loss) |       | $                                               | (576       | )                                    | $          | (36 | ) | $ | (398 | ) | $ | (127 | ) |

 

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*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 noteconomically viable to continue operating in New Hampshire. As a result, weclosed 23 centers in New Hampshire in the first half of 2009 and will close theremaining center during the second half of 2009.  The costs associated with closing our NewHampshire operations are estimated to be approximately $1.4 million,including $0.5 million due to the write-down of receivables. Approximately$0.7 million of these expenses were recognized during 2008, including a $0.5million increase in the provision for doubtful accounts and $0.2 million in theloss on impairment of assets.  During thethree and six months ended June 30, 2009, zero and $0.6 million of theseexpenses were recognized, respectively.  The$0.6 million included in the income statement for the six months ended June 30,2009 is included as an increase in other center expenses of $0.5 million and anincrease in center salaries and related payroll costs of $0.1 million.  The cessation of our New Hampshire operationsdid not result in any impairment of goodwill.

 

The following is a summaryof financial information for our operations in New Hampshire for the three andsix months ended June 30, 2008 and 2009 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2008**                                        | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** |
| Total revenues             |       | $                                               | 1,967      |                                 | $          | 9 |   | $ | 3,887 |   | $ | 134 |   |
| Total center expenses      |       | 1,005                                           |       | 90                                   |       | 2,039 |   | 1,190 |   |
| Center gross profit (loss) |       | $                                               | 962        |                                 | $          | (81 | ) | $ | 1,848 |   | $ | (1,056 | ) |

 

***Acquisition in the United Kingdom***

 

During the six months ended June 30, 2008, weacquired two centers in the United Kingdom for an aggregate purchase price,including transaction-related costs, of approximately $0.8 million in cashand an increase in goodwill of approximately $0.7 million.

 

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***Centers***

 

The following table illustrates the composition of ourcenter network at December 31, 2008 and June 30, 2009:

 
| **State**           | ** ** | **December 31,  2008** | ** ** | **June 30,  2009** | ** ** |
|---------------------|------------|-----------------------------|------------|-------------------------|------------|
| Alabama             |       | 144                         |       | 142                     |       |
| Arizona             |       | 53                          |       | 51                      |       |
| California          |       | 290                         |       | 285                     |       |
| Colorado            |       | 68                          |       | 66                      |       |
| Delaware            |       | 16                          |       | 16                      |       |
| Florida             |       | 257                         |       | 248                     |       |
| Idaho               |       | 10                          |       | 8                       |       |
| Illinois            |       | 80                          |       | 71                      |       |
| Indiana             |       | 113                         |       | 104                     |       |
| Iowa                |       | 35                          |       | 34                      |       |
| Kansas              |       | 59                          |       | 56                      |       |
| Kentucky            |       | 44                          |       | 44                      |       |
| Louisiana           |       | 85                          |       | 84                      |       |
| Michigan            |       | 152                         |       | 151                     |       |
| Mississippi         |       | 61                          |       | 61                      |       |
| Missouri            |       | 91                          |       | 87                      |       |
| Montana             |       | 5                           |       | 4                       |       |
| Nebraska            |       | 24                          |       | 22                      |       |
| Nevada              |       | 14                          |       | 13                      |       |
| New Hampshire (1)   |       | 24                          |       | 1                       |       |
| North Dakota        |       | 8                           |       | 7                       |       |
| Ohio                |       | 244                         |       | 181                     |       |
| Oklahoma            |       | 68                          |       | 67                      |       |
| Rhode Island        |       | 21                          |       | 21                      |       |
| South Carolina      |       | 138                         |       | 137                     |       |
| South Dakota        |       | 12                          |       | 12                      |       |
| Tennessee           |       | 63                          |       | 62                      |       |
| Texas               |       | 252                         |       | 248                     |       |
| Utah                |       | 6                           |       | 6                       |       |
| Virginia            |       | 151                         |       | 147                     |       |
| Washington          |       | 102                         |       | 96                      |       |
| Wisconsin           |       | 67                          |       | 62                      |       |
| Wyoming             |       | 10                          |       | 10                      |       |
| Total United States |       | 2,767                       |       | 2,604                   |       |
| Canada              |       | 10                          |       | 10                      |       |
| United Kingdom      |       | 20                          |       | 21                      |       |
| Total               |       | 2,797                       |       | 2,635                   |       |

 

----

(1) We stopped offering cash advances in NewHampshire in the first quarter of 2009.

 

***New centers***

 

We opened nine and zero newcenters during the three months ended June 30, 2008 and 2009,respectively. We opened 36 and four new centers during the six months ended June 30,2008 and 2009, respectively.

 

***Closed centers***

 

We closed eight and 105 centers during the three months ended June 30,2008 and 2009, respectively. We closed 14 and 166 centers during the sixmonths ended June 30, 2008 and 2009, respectively. The expenses related toclosing centers typically include the undepreciated costs of fixtures andsignage that cannot be moved and reused at another center, moving costs,severance payments, and any lease cancellation costs. We recorded expensesrelated to center closures of approximately $0.2 million and$1.7 million in the three months ended June 30, 2008 and 2009,respectively. We recorded expenses related to center closures of approximately$1.1 million and $5.1 million in the six months ended June 30,2008 and 2009, 

 

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respectively.  For the three months ended June 30, 2008,these amounts are included in the income statement as a $0.2 million increasein other center expenses.   For the three months ended June 30, 2009,these amounts are included in the income statement as a $1.6 million increasein other center expenses and a $0.1 million increase in center salaries andrelated payroll costs.  For the sixmonths ended June 30, 2008, these amounts are included in the incomestatement as a $0.7 million in increase in other center expenses, a $0.2million increase in center salaries and related payroll costs, and $0.2 millionin loss on impairment of assets.  For thesix months ended June 30, 2009, these amounts are included in the incomestatement as a $2.6 million increase in other center expenses, $2.2 million inloss on impairment of assets, and $0.3 million increase in center salaries andrelated payroll costs.

 

**Critical Accounting Policies and Use of Estimates**

 

The preparation of our financial statements, in conformity withgenerally accepted accounting principles in the United States (“GAAP”),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 the allowancefor doubtful accounts and accrual for third-party lender losses. Theseestimates and assumptions are monitored and periodically adjusted ascircumstances warrant. These amounts may be adjusted based on higher or loweractual loss experience. Although there is greater risk with respect to theaccuracy of these estimates and assumptions because of the period over whichactual results may emerge, such risk is mitigated by the ability to makechanges to these estimates and assumptions over the same period.

 

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

 

***Provision for Doubtful Accounts,Allowance for Doubtful Accounts 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 advanceswe make directly to customers and an accrual for third-party lender losses forestimated probable losses on loans and certain related fees for loans that weprocess for the third-party lender in Texas (See “Off-Balance Sheet Arrangementwith Third-Party Lender” in this section). Our advances and fees receivable,net on our balance sheet do not include the advances and interest receivablefor loans processed by us for the third-party lender in Texas because theseloans are owned by the third-party lender. 

 

Theprovision for doubtful accounts increased to 22.0% of revenues for the threemonths ended June 30, 2009 versus 18.6% for the same period in 2008.  During the three months ended June 30, 2009and 2008, we received proceeds from the sale of receivables in the amount of $2.2million and $0.5 million, respectively. We launched our line of credit productin Virginia during the fourth quarter of 2008. This product has experienced a higher loss rate than our payday andinstallment loan products. Excluding the sale of receivables and the applicablerevenue and loss rates for the Virginia line of credit product, the provisionfor doubtful accounts for the three months ended June 30, 2009 and 2008would have been 19.6% and 18.9%, respectively.

 

Theprovision for doubtful accounts increased to 17.7% of revenues for the sixmonths ended June 30, 2009 versus 15.6% for the same period in 2008.During the six months ended June 30, 2009 and 2008, we received proceedsfrom the sale of receivables in the amount of $2.2 million and $0.5 million, respectively.  Excluding the sale of receivables and theapplicable revenue and loss rates for the Virginia line of credit product, theprovision for doubtful accounts for the six months ended June 30, 2009 and2008 would have been 16.9% and 15.7%, respectively.

 

The allowance for doubtful accounts and accrual for third-party lenderlosses are primarily based upon models that analyze specific portfolio statisticsand also reflect, to a lesser extent, management’s judgment regarding overallaccuracy. The analytical models take into account several factors including thenumber of transactions customers complete and charge-off and recovery rates.Additional factors such as new products, changes in state laws, centerclosings, length of time centers have been open in a state, relative mix of newcenters within a state, and other relevant factors 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) to the allowance for doubtful accounts.

 

Unpaid advances and the related fees and/or interest are generallycharged off 60 days after the date the check was returned by the customer’sbank for non-sufficient funds, or the ACH debit was not cleared, or otherreasons, unless the customer has paid at least 15% of the total of his or herloan plus the original fee, or 60 days from the default date for our line ofcredit and installment loan products. Unpaid advances of customers who file forbankruptcy are charged off upon receipt of the bankruptcy notice. Althoughmanagement uses the best information available to make evaluations, futureadjustments to the allowance for doubtful accounts and accrual for third-partylender losses may be necessary if conditions differ substantially from ourassumptions used in assessing their adequacy.

 

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

 

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

 

In addition to the seasonal fluctuations, the receivable balances canfluctuate throughout a week, generally being at 

 

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theirhighest levels on a Wednesday or Thursday and at their lowest levels on aFriday. In general, receivable balances decrease approximately 4% to 7% from atypical Thursday to a typical Friday. The second quarter of 2008 began on aTuesday (a relative low point in weekly receivable balances) and ended on aMonday (a relative low point in weekly receivable balances). The second quarterof 2009 began on a Wednesday (a relative high point in weekly receivablebalances) and ended on a Tuesday (a relative low point in weekly receivablebalances).

 

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 June 30, 2009, if the estimated ratesused in calculating our allowance for doubtful accounts and third-party lenderlosses were 5% higher or lower, it would have increased or decreased ourprovision for doubtful accounts by approximately $3.0 million.

 

***Intangible Assets***

 

As a result of our acquisition of the National Cash Advance group ofaffiliated companies in October 1999, we recorded approximately$143.0 million of goodwill. During 2007 and 2008, we completed sixacquisitions in the United Kingdom, resulting in additional goodwill ofapproximately $5.4 million. As of June 30, 2009, the carrying valueof goodwill was $127.2 million due to the amortization of goodwill priorto the adoption of SFAS 142 and the change in the exchange rate for ourUnited Kingdom assets. Due to the significance of goodwill and the reduction ofnet income that would occur if goodwill were impaired, we assess the impairmentof our long-lived and intangible assets annually, as of September 30, orwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. 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. When estimatedfuture cash flows are less than the carrying value of the net assets andrelated goodwill, an impairment test is performed to measure and recognize theamount of the impairment loss, if any. Impairment losses, which are limited to the carrying value of goodwill,represent the excess of the carrying amount of a reporting unit’s goodwill overthe implied fair value of that goodwill. In determining the estimated future discounted cash flows, we considercurrent and projected future levels of income, as well as business trends,prospects, and market and economic conditions. Impairment tests involve the use of judgments and estimates related tothe fair market value of the business operations with which goodwill isassociated, taking into consideration both historical operating performance andanticipated financial position and future earnings.  We believe that the estimates of future cashflows and fair value are reasonable. Changes in estimates of those cash flows and fair value, however, couldaffect the evaluation, and any impairment would lower our net income.

 

We have approximately $4.6 million of goodwill in our United Kingdomoperations. As of June 30, 2009, these operations have cumulativelygenerated negative cash and have not reached break-even at the center grossprofit level. Our expansion efforts in the United Kingdom began in the thirdquarter of 2007. Our goodwill impairment model projects future positive cashflows sufficient to support the goodwill and long-lived asset base in our UnitedKingdom operations.

 

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.

 

***Accrued Workers’ Compensation Expenses***

 

Accrued liabilities in our December 31, 2008 and June 30,2009 financial statements include accruals of approximately $4.9 millionand $4.7 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.

 

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No assurance can be given that neither our tax returns nor the incometax reported on our Consolidated Financial Statements will be adjusted as aresult of adverse rulings by the U.S. Tax Court, changes in the tax code, orassessments made by the Internal Revenue Service (“IRS”). We are subject topotential adverse adjustments, including but not limited to, an increase in thestatutory federal or state income tax rates, the permanent nondeductibility 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 Employee Compensation***

 

In 2004, we adopted Statement of Financial Accounting Standards No. 123(Revised), Share-Based Payment (“SFAS 123(R)”). Accordingly, we measurethe cost of our stock-based employee compensation at the grant date based onfair value and recognize such cost in the financial statements over each award’srequisite service period. As of June 30, 2009, the total compensation costnot yet recognized related to nonvested stock awards under our stock-basedemployee compensation plans is approximately $5.9 million. The weightedaverage period over which this expense is expected to be recognized isapproximately 3.6 years. See “Item 1. Financial Statements—Notes toInterim Unaudited Consolidated Financial Statements—Note 7. Capital Stockand Stock-Based Compensation Plans” for a description of our restricted stockand stock option awards and the assumptions used to calculate the fair value ofsuch awards, including the expected volatility assumed in valuing our stockoption grants.

 

***Recently Issued Accounting Pronouncements***

 

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

 

**Results of Operations**

 

***Three Months Ended June 30,2008 Compared to Three Months Ended June 30, 2009***

 

The following tables setforth our results of operations for the three months ended June 30, 2008compared to the three months ended June 30, 2009:

 
| ** **                                        | ** ** | **Three  Months Ended June 30,**                  | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                               | ** ** | **2009** | ** ** | **Variance  Favorable/(Unfavorable)** | ** ** |
| ** **                                        | ** ** | **Dollars**                                            | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **(Dollars in  thousands, except center information)** | ** ** |
| **Total Revenues**                                |       | $                                                      | 162,142    |   | 100.0 | % | $ | 150,124 |   | 100.0 | % | $ | (12,018 | ) | (7.4 | )% |
| **Center Expenses:**                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and related payroll costs                |       | 49,305                                                 |       | 30.4 | % | 45,404 |   | 30.2 | % | 3,901 |   | 7.9 | % |
| Provision for doubtful accounts                   |       | 30,225                                                 |       | 18.6 | % | 33,012 |   | 22.0 | % | (2,787 | ) | (9.2 | )% |
| Occupancy costs                                   |       | 24,605                                                 |       | 15.2 | % | 23,247 |   | 15.5 | % | 1,358 |   | 5.5 | % |
| Center depreciation expense                       |       | 4,228                                                  |       | 2.6 | % | 3,260 |   | 2.2 | % | 968 |   | 22.9 | % |
| Advertising expense                               |       | 6,844                                                  |       | 4.2 | % | 8,935 |   | 6.0 | % | (2,091 | ) | (30.6 | )% |
| Other center expenses                             |       | 11,041                                                 |       | 6.8 | % | 11,606 |   | 7.7 | % | (565 | ) | (5.1 | )% |
| Total center expenses                             |       | 126,248                                                |       | 77.8 | % | 125,464 |   | 83.6 | % | 784 |   | 0.6 | % |
| Center gross profit                               |       | 35,894                                                 |       | 22.2 | % | 24,660 |   | 16.4 | % | (11,234 | ) | (31.3 | )% |
| **Corporate and Other Expenses  (Income):**       | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative expenses               |       | 16,009                                                 |       | 9.9 | % | 13,798 |   | 9.2 | % | 2,211 |   | 13.8 | % |
| Corporate depreciation expense                    |       | 792                                                    |       | 0.5 | % | 679 |   | 0.4 | % | 113 |   | 14.3 | % |
| Interest expense                                  |       | 2,529                                                  |       | 1.6 | % | 1,595 |   | 1.0 | % | 934 |   | 36.9 | % |
| Interest income                                   |       | (29                                                    | )          | — |   | (17 | ) | — |   | (12 | ) | (41.4 | )% |
| (Gain)/Loss on disposal of property and equipment |       | 92                                                     |       | — |   | (80 | ) | — |   | 172 |   | 187.0 | % |
| Total corporate and other expenses                |       | 19,393                                                 |       | 12.0 | % | 15,975 |   | 10.6 | % | 3,418 |   | 17.6 | % |
| Income before income taxes                        |       | 16,501                                                 |       | 10.2 | % | 8,685 |   | 5.8 | % | (7,816 | ) | (47.4 | )% |
| Income tax expense                                |       | 7,227                                                  |       | 4.5 | % | 2,043 |   | 1.4 | % | 5,184 |   | 71.7 | % |
| Net income                                        |       | $                                                      | 9,274      |   | 5.7 | % | $ | 6,642 |   | 4.4 | % | $ | (2,632 | ) | (28.4 | )% |

 

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| ** **                                                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2008**                                        | ** ** | **2009** | ** ** |
| **Center Information:**                                                                                      | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Number of centers open at beginning of period                                                                |       | 2,854                                           |       | 2,740 |   |
| Opened                                                                                                       |       | 9                                               |       | — |   |
| Acquired                                                                                                     |       | 1                                               |       | — |   |
| Closed                                                                                                       |       | (8                                              | )          | (105 | ) |
| Number of centers open at end of period                                                                      |       | 2,856                                           |       | 2,635 |   |
| Weighted average number of centers open during the  period                                                   |       | 2,856                                           |       | 2,681 |   |
| Number of customers served—all credit products  (thousands)                                             |       | 820                                             |       | 743 |   |
| Number of payday cash advances originated  (thousands)                                                       |       | 2,864                                           |       | 2,553 |   |
| Aggregate principal amount of payday cash advances  originated (thousands)                                   |       | $                                               | 1,045,174  |   | $ | 916,093 |   |
| Average amount of each payday cash advance  originated                                                       |       | $                                               | 365        |   | $ | 359 |   |
| Average charge to customers for providing and  processing a payday cash advance                              |       | $                                               | 56         |   | $ | 53 |   |
| Average duration of a payday cash advance (days)                                                             |       | 16.7                                            |       | 17.4 |   |
| Average number of lines of credit outstanding during  the period (thousands) (1)                        |       | —                                          |       | 26 |   |
| Average amount of aggregate principal on lines of  credit outstanding during the period (thousands) (1) |       | $                                               | —     |   | $ | 11,363 |   |
| Average principal amount on each line of credit  outstanding during the period (1)                      |       | $                                               | —     |   | $ | 421 |   |
| Number of installment loans originated (thousands)  (2)                                                      |       | 8                                               |       | 9 |   |
| Aggregate principal amount of installment loans  originated (thousands) (2)                                  |       | $                                               | 4,049      |   | $ | 3,938 |   |
| Average principal amount of each installment loan  originated (2)                                            |       | $                                               | 482        |   | $ | 436 |   |

 

----

(1)                                  We beganoffering lines of credit in Virginia in November 2008.

 

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

 
| ** **                                                                            | ** ** | **Three  Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                              | ** ** | **2009** | ** ** | **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                                                                       |       | $                                     | 56.8       |   | 100.0 | % | $ | 56.0 |   | 100.0 | % | $ | (0.8 | ) | (1.4 | )% |
| Center expenses:                                                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       | 17.4                                  |       | 30.4 | % | 16.9 |   | 30.2 | % | 0.5 |   | 2.9 | % |
| Provision for doubtful accounts                                                       |       | 10.6                                  |       | 18.6 | % | 12.3 |   | 22.0 | % | (1.7 | ) | (16.0 | )% |
| Occupancy costs                                                                       |       | 8.6                                   |       | 15.2 | % | 8.7 |   | 15.5 | % | (0.1 | ) | (1.2 | )% |
| Center depreciation expense                                                           |       | 1.5                                   |       | 2.6 | % | 1.2 |   | 2.2 | % | 0.3 |   | 20.0 | % |
| Advertising expense                                                                   |       | 2.4                                   |       | 4.2 | % | 3.3 |   | 6.0 | % | (0.9 | ) | (37.5 | )% |
| Other center expenses                                                                 |       | 3.9                                   |       | 6.8 | % | 4.3 |   | 7.7 | % | (0.4 | ) | (10.3 | )% |
| Total center expenses                                                                 |       | 44.4                                  |       | 77.8 | % | 46.7 |   | 83.6 | % | (2.3 | ) | (5.2 | )% |
| Center gross profit                                                                   |       | $                                     | 12.4       |   | 22.2 | % | $ | 9.3 |   | 16.4 | % | $ | (3.1 | ) | (25.0 | )% |

 

***Revenue Analysis***

 

Total revenues decreased approximately $12.0 million during thethree months ended June 30, 2009 compared to the same period in 2008.Total revenues for the 2,609 centers opened prior to April 1, 2008and still open as of June 30, 2009 decreased $6.3 million, from $154.2million for the three months ended June 30, 2008 to $147.9 millionfor the same period in 2009. Centers opened prior to April 1, 2008 were atleast three months and fifteen months old as of June 30, 2008 and 2009,respectively. Total revenues for the 26 centers opened or acquired after April 1,2008 and still open as of June 30, 2009 increased $0.8 million, from$0.1 million for the three months ended June 30, 2008 to$0.9 million for the same period in 2009. Total revenues for the 252centers that closed during that period represented a decrease of approximately$6.5 million for the three months ended June 30, 2009 compared to the sameperiod in 2008. Of this decrease, approximately $0.1 million,

 

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$0.8 million,and $1.9 million were due to the closure of our centers in New Mexico,Arkansas, and New Hampshire, respectively.

 

Changes in legislation havehad a significant impact on our revenues in Ohio and Virginia.  In Ohio, our revenue has decreased by $5.2million or 38.9% for the three months ended June 30, 2009 as compared to thesame period in 2008.  In Virginia, ourrevenue has increased approximately $0.9 million or 7.1% for the three monthsended June 30, 2009 as compared to the same period in 2008.  

 

***Center Expense Analysis***

 

*Salaries and relatedpayroll costs*.  Thedecrease in salaries and related payroll costs for the three months ended June 30,2009 compared to the same period in 2008 was due primarily to a reduction inthe number of centers open during the three months ended June 30, 2009 ascompared to the same period in 2008 as well as a decrease in salary costs percenter.  We averaged approximately 2.03and 1.94 full-time equivalent field employees, including district directors,per center during the three months ended June 30, 2008 and 2009,respectively.

 

*Provisionfor doubtful accounts.*  As apercentage of total revenues, the provision for doubtful accounts increased to22.0% for the three months ended June 30, 2009 from 18.6% for the sameperiod in 2008.  This increase was dueprimarily to higher losses in Virginia related to the introduction of a newopen-ended line of credit product.  Welaunched our line of credit product in Virginia during the fourth quarter of2008.  This product has experienced ahigher loss rate than our payday and installment loan products. During thethree months ended June 30, 2009 and 2008, we received proceeds from thesale of receivables in the amount of  $2.2million and $0.5 million, respectively. Excluding the sale of receivables andthe applicable revenue and loss rates for the Virginia line of credit product,the provision for doubtful accounts for the three months ended June 30,2009 and 2008 would have been 19.6% and 18.9%, respectively.

 

*Occupancycosts.*  The decrease in occupancy costsfor the three months ended June 30, 2009 compared to the same period in2008 was due primarily to a decrease in the number of centers open during the threemonths ended June 30, 2009 as compared to the same period in 2008.

 

*Advertisingexpense.*  Advertisingexpense increased for the three months ended June 30, 2009 compared to thesame period in 2008 due primarily to an increase in direct mailing campaignsduring the three months ended June 30, 2009 as compared to the same periodin 2008.

 

*Othercenter expenses.*  The increasein other center expenses for the three months ended June 30, 2009 comparedto the same period in 2008 was due primarily to an increase in center closingcosts for the three months ended June 30, 2009 compared to the same periodin 2008.

 

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

 

*Generaland administrative expenses.*  The decrease in general and administrativeexpenses for the three months ended June 30, 2009 compared to the sameperiod in 2008 was primarily due to:

 

·                  lower expensesof approximately $1.6 million in public and government relations primarily dueto a reduction in trade association dues, consulting fees, and public relationexpenditures;

 

·                  lower expensesof approximately $0.4 million related to personnel, consulting, and other costsassociated with new product development and management; and

 

·                  lower expensesof approximately $0.3 million related to our field operations.

 

Thedecrease was partially offset by approximately $0.2 million in professionalfees incurred in connection with the recovery of income taxes recognized inprior periods.

 

*(Gain)/Loss on disposal of property.*  The favorable change in this item for thethree months ended June 30, 2009 compared to the same period in 2008 wasprimarily due to insurance proceeds of approximately $0.2 million beingrecognized during the period.

 

*Interest expense.*  The decrease in interest expense for thethree months ended June 30, 2009 compared to the same period in 2008 wasprimarily due to a decrease in the average interest rates and averageoutstanding balance.

 

*Income tax expense.*  The decrease in income tax expense for thethree months ended June 30, 2009 as compared to the same period in 2008was primarily due to claims filed for recovery of income taxes recognized inprior periods of $2.6 million.

 

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**Results of Operations**

 

***Six Months Ended June 30,2008 Compared to Six Months Ended June 30, 2009***

 

The following tables setforth our results of operations for the six months ended June 30, 2008compared to the six months ended June 30, 2009:

 
| ** **                                        | ** ** | **Six Months Ended June 30,**                     | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                               | ** ** | **2009** | ** ** | **Variance  Favorable/  (Unfavorable)** | ** ** |
| ** **                                        | ** ** | **Dollars**                                            | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **% Total  Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands, except center  information)** | ** ** |
| **Total Revenues**                                |       | $                                                      | 327,598    |   | 100.0 | % | $ | 306,517 |   | 100.0 | % | $ | (21,081 | ) | (6.4 | )% |
| **Center Expenses:**                              |       |                                                   |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and related payroll costs                |       | 100,706                                                |       | 30.8 | % | 92,917 |   | 30.3 | % | 7,789 |   | 7.7 | % |
| Provision for doubtful accounts                   |       | 51,005                                                 |       | 15.6 | % | 54,110 |   | 17.7 | % | (3,105 | ) | (6.1 | )% |
| Occupancy costs                                   |       | 50,029                                                 |       | 15.3 | % | 48,020 |   | 15.7 | % | 2,009 |   | 4.0 | % |
| Center depreciation expense                       |       | 8,523                                                  |       | 2.6 | % | 6,983 |   | 2.3 | % | 1,540 |   | 18.1 | % |
| Advertising expense                               |       | 9,990                                                  |       | 3.0 | % | 11,116 |   | 3.6 | % | (1,126 | ) | (11.3 | )% |
| Other center expenses                             |       | 25,636                                                 |       | 7.8 | % | 24,312 |   | 7.9 | % | 1,324 |   | 5.2 | % |
| Total center expenses                             |       | 245,889                                                |       | 75.1 | % | 237,458 |   | 77.5 | % | 8,431 |   | 3.4 | % |
| Center gross profit                               |       | 81,709                                                 |       | 24.9 | % | 69,059 |   | 22.5 | % | (12,650 | ) | (15.5 | )% |
| **Corporate and Other Expenses  (Income):**       |       |                                                   |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative expenses               |       | 32,384                                                 |       | 9.8 | % | 27,869 |   | 9.1 | % | 4,515 |   | 13.9 | % |
| Corporate depreciation expense                    |       | 1,560                                                  |       | 0.5 | % | 1,367 |   | 0.4 | % | 193 |   | 12.4 | % |
| Interest expense                                  |       | 5,217                                                  |       | 1.6 | % | 3,294 |   | 1.1 | % | 1,923 |   | 36.9 | % |
| Interest income                                   |       | (70                                                    | )          | — |   | (34 | ) | — |   | (36 | ) | (51.4 | )% |
| (Gain)/Loss on disposal of property and equipment |       | 218                                                    |       | — |   | (47 | ) | — |   | 265 |   | 121.6 | % |
| Loss on impairment of assets                      |       | 236                                                    |       | 0.1 | % | 2,209 |   | 0.7 | % | (1,973 | ) | (836.0 | )% |
| Total corporate and other expenses                |       | 39,545                                                 |       | 12.0 | % | 34,658 |   | 11.3 | % | 4,887 |   | 12.4 | % |
| Income before income taxes                        |       | 42,164                                                 |       | 12.9 | % | 34,401 |   | 11.2 | % | (7,763 | ) | (18.4 | )% |
| Income tax expense                                |       | 18,086                                                 |       | 5.5 | % | 12,616 |   | 4.1 | % | 5,470 |   | 30.2 | % |
| Net income                                        |       | $                                                      | 24,078     |   | 7.4 | % | $ | 21,785 |   | 7.1 | % | $ | (2,293 | ) | (9.5 | )% |

 

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| ** **                                                                                               | ** ** | **Six Months  Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                               | ** ** | **2008**                             | ** ** | **2009** | ** ** |
| **Center  Information:**                                                                                 |       |                                 |       |   |   |
| Number of centers open at  beginning of period                                                           |       | 2,832                                |       | 2,797 |   |
| Opened                                                                                                   |       | 36                                   |       | 4 |   |
| Acquired                                                                                                 |       | 2                                    |       | — |   |
| Closed                                                                                                   |       | (14                                  | )          | (166 | ) |
| Number of centers open at  end of period                                                                 |       | 2,856                                |       | 2,635 |   |
| Weighted average number of  centers open during the period                                               |       | 2,852                                |       | 2,744 |   |
| Number of customers  served—all credit products (thousands)                                         |       | 1,042                                |       | 944 |   |
| Number of payday cash  advances originated (thousands)                                                   |       | 5,645                                |       | 4,975 |   |
| Aggregate principal amount  of payday cash advances originated (thousands)                               |       | $                                    | 2,065,964  |   | $ | 1,789,462 |   |
| Average amount of each  payday cash advance originated                                                   |       | $                                    | 366        |   | $ | 360 |   |
| Average charge to  customers for providing and processing a payday cash advance                          |       | $                                    | 56         |   | $ | 53 |   |
| Average duration of a  payday cash advance (days)                                                        |       | 16.7                                 |       | 17.4 |   |
| Average number of lines of  credit outstanding during the period (thousands) (1)                         |       | —                               |       | 30 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) (1) |       | $                                    | —     |   | $ | 15,341 |   |
| Average principal amount  on each line of credit outstanding during the period (1)                       |       | $                                    | —     |   | $ | 497 |   |
| Number of installment  loans originated (thousands) (2)                                                  |       | 14                                   |       | 16 |   |
| Aggregate principal amount  of installment loans originated (thousands) (2)                              |       | $                                    | 6,374      |   | $ | 6,723 |   |
| Average principal amount  of each installment loan originated (2)                                        |       | $                                    | 460        |   | $ | 431 |   |

 

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(1)                                  We beganoffering lines of credit in Virginia in November 2008.

 

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

 
| ** **                                                                            | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                            | ** ** | **2009** | ** ** | **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                                                                       |       | $                                   | 114.9      |   | 100.0 | % | $ | 111.7 |   | 100.0 | % | $ | (3.2 | ) | (2.8 | )% |
| Center expenses:                                                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                                                   |       | 35.4                                |       | 30.8 | % | 33.9 |   | 30.3 | % | 1.5 |   | 4.2 | % |
| Provision for doubtful  accounts                                                      |       | 17.9                                |       | 15.6 | % | 19.7 |   | 17.7 | % | (1.8 | ) | (10.1 | )% |
| Occupancy costs                                                                       |       | 17.5                                |       | 15.3 | % | 17.5 |   | 15.7 | % | — |   | — |   |
| Center depreciation  expense                                                          |       | 3.0                                 |       | 2.6 | % | 2.5 |   | 2.3 | % | 0.5 |   | 16.7 | % |
| Advertising expense                                                                   |       | 3.5                                 |       | 3.0 | % | 4.1 |   | 3.6 | % | (0.6 | ) | (17.1 | )% |
| Other center expenses                                                                 |       | 9.0                                 |       | 7.8 | % | 8.9 |   | 7.9 | % | 0.1 |   | 1.1 | % |
| Total center expenses                                                                 |       | 86.3                                |       | 75.1 | % | 86.6 |   | 77.5 | % | (0.3 | ) | (0.3 | )% |
| Center gross profit                                                                   |       | $                                   | 28.6       |   | 24.9 | % | $ | 25.1 |   | 22.5 | % | $ | (3.5 | ) | (12.2 | )% |

 

***Revenue Analysis***

 

Total revenues decreased approximately $21.1 million during thesix months ended June 30, 2009 compared to the same period in 2008. Totalrevenues for the 2,582 centers opened prior to January 1, 2008 and stillopen as of June 30, 2009 decreased $11.2 million, from$310.1 million for the six months ended June 30, 2008 to$298.9 million for the same period in 2009. Centers opened prior to January 1,2008 were at least six months and eighteen months old as of June 30, 2008and 2009, respectively. Total revenues for the 53 centers opened or acquiredafter January 1, 2008 and still open as of June 30, 2009 increased$2.4 million, from $0.5 million for the six months ended June 30,2008 to $2.9 million for the same period in 2009. Total revenues for the252 centers that closed during that period represented a decrease of approximately$12.3 million for the six months ended June 30, 2009 compared to thesame period in 2008. Of this decrease, approximately $0.2 million,$2.4 million, and

 

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$3.8million were due to the closure of our centers in New Mexico, Arkansas, and NewHampshire, respectively.

 

Changes in legislation havehad a significant impact on our revenues in Ohio and Virginia.  In Ohio, our revenue has decreased by $12.7million or 43.9% for the six months ended June 30, 2009 as compared to the sameperiod in 2008.  In Virginia, our revenuehas increased approximately $8.4 million or 34.5% for the six months ended June30, 2009 as compared to the same period in 2008.  

 

***Center Expense Analysis***

 

*Salariesand related payroll costs.*  The decrease in salaries and related payrollcosts for the six months ended June 30, 2009 compared to the same periodin 2008 was due primarily to a reduction in the number of centers open duringthe six months ended June 30, 2009 as compared to the same period in 2008,as well as a decrease in salary and bonus costs per center.  We averaged approximately 2.07 and 1.96full-time equivalent field employees, including district directors, per centerduring the six months ended June 30, 2008 and 2009, respectively.

 

*Provisionfor doubtful accounts.*  As apercentage of total revenues, the provision for doubtful accounts increased to17.7% for the six months ended June 30, 2009 from 15.6% for the sameperiod in 2008.  This increase was dueprimarily to higher losses in Virginia related to the introduction of a newopen-ended line of credit product.  We launched our line of credit product inVirginia during the fourth quarter of 2008. This product has experienced a higher loss rate than our cash advance orinstallment loan product.  During the sixmonths ended June 30, 2009 and 2008, we received proceeds from the sale ofreceivables in the amount of  $2.2 millionand $0.5 million, respectively. Excluding the sale of receivables and the applicable revenue and lossrates for the Virginia line of credit product, the provision for doubtfulaccounts for the six months ended June 30, 2009 and 2008 would have been 16.9%and 15.7%, respectively.

 

*Occupancycosts.*  The decrease in occupancy costsfor the six months ended June 30, 2009 compared to the same period in 2008was primarily due to a decrease in the number of centers open during the sixmonths ended June 30, 2009 as compared to the same period in 2008.

 

*Advertisingexpense.*  Advertisingexpense increased for the six months ended June 30, 2009 compared to thesame period in 2008 primarily due to an increase in direct mailing campaigns duringthe six months ended June 30, 2009 as compared to the same period in 2008.

 

*Othercenter expenses.*  The decreasein other center expenses for the six months ended June 30, 2009 comparedto the same period in 2008 was primarily due to a decrease in office supplies,telephone, and travel expenses, partially offset by an increase in centerclosing costs during the six months ended June 30, 2009 as compared to the sameperiod in 2008.

 

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

 

*Generaland administrative expenses.*  The decrease in general and administrativeexpenses for the six months ended June 30, 2009 compared to the sameperiod in 2008 was due primarily to:

 

·                  lower expensesof approximately $3.0 million in public and government relations primarily dueto a reduction in trade association dues, consulting fees, and public relationexpenditures;

 

·                  lower expensesof approximately $0.8 million related to personnel, consulting, and other costsassociated with new product development and management;

 

·              lower expensesof approximately $0.5 million related to our field operations; and

 

·                  lower expensesof approximately $0.4 million related to our personnel, accounting fees, andother expenses associated with our operations in the United Kingdom;

 

Thedecrease was partially offset by:

 

·                  an increase in informationtechnology expenses of approximately $0.4 million related to consulting fees;and 

 

·                  an increase in professionalfees of approximately $0.4 million incurred in connection with the recovery ofincome taxes recognized in prior periods. 

 

In addition, we received approximately $0.8 million in insuranceproceeds related to the reimbursement of legal expenses recognized in priorperiods that reduced legal expenses during the six months ended June 30,2009.  This was offset by higher legalexpenses during the period.

 

*(Gain)/Loss on disposal of property.* The favorable change in this item for the sixmonths ended June 30, 2009 compared to the same period in 2008 wasprimarily due to insurance proceeds of approximately $0.2 million beingrecognized during the period.

 

*Interest expense.*  The decrease in interest expense for the sixmonths ended June 30, 2009 compared to the same period in 2008 wasprimarily due to a decrease in the average interest rates and averageoutstanding balance.

 

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*Income tax expense.*  The decrease in income tax expense for thesix months ended June 30, 2009 as compared to the same period in 2008 wasprimarily due to a reduction in state taxes as a result of claims filed forrecovery of income taxes recognized in prior periods of $3.5 million.

 

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**Liquidity and Capital Resources**

 

The following table presentsa summary of cash flows for the six months ended June 30, 2008 and 2009(dollars in thousands):

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance**                  | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Favorable/  (Unfavorable)** | ** ** |
| ** **                                                    | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Dollars**                   | ** ** | **%** | ** ** |
| Cash flows provided by  (used in):                            |       |       |       |       |       |                          |       |   |   |
| Operating activities                                          |       | $          | 74,777     |       | $          | 62,181                        |       | $ | (12,596 | ) | (16.8 | )% |
| Investing activities                                          |       | (27,530    | )          | (21,763    | )          | 5,767                         |       | 20.9 | % |
| Financing activities                                          |       | (53,426    | )          | (41,754    | )          | 11,672                        |       | 21.8 | % |
| Effect of exchange rate  changes on cash and cash equivalents |       | (32        | )          | 73         |       | 105                           |       | 328.1 | % |
| Net decrease in cash and  cash equivalents                    |       | (6,211     | )          | (1,263     | )          | 4,948                         |       | 79.7 | % |
| Cash and cash equivalents,  beginning of period               |       | 28,251     |       | 16,017     |       | (12,234                       | )          | (43.3 | )% |
| Cash and cash equivalents,  end of period                     |       | $          | 22,040     |       | $          | 14,754                        |       | $ | (7,286 | ) | (33.1 | )% |

 

Our principal sources ofcash are from operations and from borrowings under our revolving creditfacility. See “Certain Contractual Cash Commitments—Long-Term Debt Obligations”in this section for a detailed description of our revolving credit facility. Weanticipate that our primary uses of cash will be to provide working capital,finance capital expenditures, meet debt service requirements, fund advances,finance center openings, fund acquisitions, and pay dividends on our commonstock.

 

We borrow under our$270.0 million revolving credit facility to fund our advances and to meetour other liquidity needs. Our day-to-day balances under our revolving creditfacility, as well as our cash balances, vary because of seasonal and day-to-dayrequirements resulting from making and collecting advances. For example, if amonth ends on a Friday (a typical payday), our borrowings and our cash balanceswill be high compared to a month that does not end on a Friday. This is becausea substantial portion of the advances will be repaid in cash on that day butsufficient time will not yet have passed for the cash to reduce the outstandingborrowings under our revolving credit facility. Our borrowings under ourrevolving credit facility will also increase as the demand for advancesincreases during our peak periods such as the back-to-school and holidayseasons. Conversely, our borrowings typically decrease during the tax refundseason when cash receipts from customers peak or the customer demand for newadvances decreases. Advances and fees receivable, net decreased approximately$0.9 million, or 0.5%, to $194.8 million at June 30, 2009compared to $195.7 million at June 30, 2008. Advances and fees receivable,net decreased approximately $25.3 million, or 11.5%, to$194.8 million at June 30, 2009 compared to $220.1 million at December 31,2008.  As of June 30, 2008 and 2009, thesenior leverage covenant restricted our availability under our credit facility toapproximately $45.9 million and $22.5 million, respectively.

 

In July 2008, we completed our stock repurchase program that ourBoard of Directors approved on May 4, 2005, and twice extended, once on August 16,2006 and again on February 13, 2008, for a total of $225.0 million inauthorized repurchases.

 

During the six months ended June 30, 2008 and 2009, we repurchased10,214,340 and 3,272 shares of our common stock, respectively, at a cost ofapproximately $79.9 million and $5,200, respectively.  For the six months ended June 30, 2008and 2009, these amounts include 3,272 shares of common stock that weresurrendered by employees to satisfy their tax obligations with respect to thevesting of shares of restricted stock awarded pursuant to our 2004 OmnibusStock Plan.

 

Although our revolving credit facility places restrictions on ourcapital expenditures and acquisitions, we believe that these restrictions donot currently prohibit us from pursuing our strategy or limit our current levelof operations. Cash that is restricted due to certain states’ regulatoryliquidity requirements is not included in cash and cash equivalents. Instead,the restricted cash is shown on our consolidated balance sheet as a non-currentasset under the line item “Restricted cash.” Historically, these restrictions have not had an impact on our abilityto meet our liquidity needs for operations. However, our ability to make dividends to our stockholders andrepurchases of our common stock has been, and in the future may be, restrictedunder our revolving credit facility.

 

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***Cash Flows from OperatingActivities***

 

Net cash provided byoperating activities decreased approximately 16.8% to $62.2 million for the sixmonths ended June 30, 2009 compared to the same period ended June 30,2008. The decrease in operating cash flow was attributable to a decrease inoperating assets and liabilities of $10.9 million and a decrease in net incomeof approximately $2.3 million.  This waspartially offset by an increase in non-cash expense items of $0.5 million.

 

***Cash Flows from InvestingActivities***

 

Net cash used in investingactivities decreased approximately 20.9% to $21.8 million for the sixmonths ended June 30, 2009 compared to the same period ended June 30,2008. The decrease was primarily related to a decrease in advances receivableof $4.2 million, a decrease in the purchases of property and equipment of $3.9million, and a decrease in acquisitions of $0.8 million. This was partiallyoffset by an increase in restricted cash of $3.4 million.

 

***Cash Flows from FinancingActivities***

 

Net cash used in financingactivities decreased approximately 21.8% to $41.8 million for the sixmonths ended June 30, 2009 compared to the same period ended June 30,2008. During the six months ended June 30, 2009, the Company had netrepayments under the revolving credit facility of approximately$31.6 million and paid $7.6 million in dividends.

 

**Capital Expenditures**

 

For the six months ended June 30,2008 and 2009, we spent $5.8 million and $1.9 million, respectively,on capital expenditures. Capital expenditures included expenditures for: (1) newcenters opened; (2) center remodels; and (3) computer equipmentreplacements 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 loans and certain related fees that are not collected from the customers.As of June 30, 2008 and 2009, the third-party lender’s outstandingadvances and interest receivable (which were not recorded on our balance sheet)totaled approximately $16.9 million and $17.5 million, respectively. Weare obligated to pay the third-party lender to the extent these amounts becomeuncollectible. Additionally, if these advances become uncollectible, we arealso required to pay the third-party lender all related NSF fees and late feeson 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 June 30, 2008 and 2009was approximately $3.6 million and $3.9 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 futurecontractual obligations and commitments as of June 30, 2009, includingperiodic interest payments, included the following (dollars in thousands):

 
| ** **                                      | ** ** | ** ** | ** ** | **Payment due  by December 31,** | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------------------------|------------|
| **Contractual  Cash Obligations**               | ** ** | **Total**  | ** ** | **2009**                              | ** ** | **2010 and  2011** | ** ** | **2012 and  2013** | ** ** | **2014 and  thereafter** | ** ** |
| Long-term debt  obligations:                    |       |       |       |                                  |       |   |   |   |   |   |   |
| Revolving credit facility                       |       | $          | 158,235    |                                  | $          | — |   | $ | — |   | $ | 158,235 |   | $ | — |   |
| Mortgage payable                                |       | 4,816      |       | 226                                   |       | 991 |   | 1,146 |   | 2,453 |   |
| Note payable                                    |       | 34         |       | 34                                    |       | — |   | — |   | — |   |
| United Kingdom overdraft  facility              |       | 68         |       | 68                                    |       | — |   | — |   | — |   |
| Interest payable on  long-term debt obligations |       | 1,557      |       | 173                                   |       | 603 |   | 447 |   | 334 |   |
| Operating lease  obligations (1)           |       | 142,796    |       | 32,297                                |       | 85,419 |   | 22,880 |   | 2,200 |   |
| Purchase obligations                            |       | 88         |       | 85                                    |       | 3 |   | — |   | — |   |
| Total                                           |       | $          | 307,594    |                                  | $          | 32,883 |   | $ | 87,016 |   | $ | 182,708 |   | $ | 4,987 |   |

 

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

 

***Long-Term Debt Obligations***

 

*Revolving Credit Facility.*  In March 2008, we entered into anamendment and restatement of our prior credit facility with a syndicate ofbanks. As amended and restated, our revolving credit facility now provides uswith a $270.0 million revolving line of credit, including the ability toissue up to $25.0 million in letters of credit. Our revolving creditfacility matures on March 24, 2013. We have the option to increase therevolving credit facility by an additional $95.0 million upon receipt ofsufficient commitments from lenders in the lending syndicate and other eligiblelenders as defined in the credit agreement. Any portion of our revolving creditfacility that is repaid may be borrowed again subject to any limitations basedon financial covenants. In July 2008, we amended our credit facility tomodify the consolidated net worth test to reduce the requirement by the cost ofrepurchases of common stock made after January 1, 2008.

 

As of June 30, 2009, we had $158.2 million outstanding on therevolving portion of our credit facility and approximately $1.4 million ofunutilized letters of credit outstanding, leaving approximately$110.4 million available for future borrowings under this credit facility,subject to additional limitations based on certain financial covenants. As of June 30,2008 and 2009, the senior leverage covenant restricted that availability toapproximately $45.9 million and $22.5 million, respectively.

 

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 June 30,2009, the applicable margin for the prime-based rate was 1.75% and theapplicable margin for the LIBOR-based rate was 2.75%.

 

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

 

Our obligations under the revolving credit facility are guaranteed byeach of our domestic subsidiaries. Our borrowings under the revolving creditfacility are collateralized by substantially all of our assets and the assetsof our subsidiaries. In addition, our borrowings under the revolving creditfacility are secured by a pledge of all of the capital stock, or similar equityinterests, of our domestic subsidiaries and 65% of the voting capital stock, orsimilar equity interests, of our foreign subsidiaries. Our revolving creditfacility contains various financial covenants that require, among other things,the maintenance of minimum net worth, maximum leverage and senior leverage,minimum fixed charge coverage and maximum charge-off ratios. The maximumleverage allowed under the revolving credit facility is three and one halftimes trailing twelve month EBITDA, as defined in the credit agreement. Themaximum senior leverage allowed under the revolving credit facility is twotimes trailing twelve month EBITDA as defined in the credit agreement. Ourtrailing twelve month EBITDA, as defined in the credit agreement, as of June30, 2009 was approximately $93.5 million. The charge-off ratio, as defined inthe revolving credit facility, limits the average of actual charge-offsincurred during each fiscal month to a maximum of 4.50% of the average amountof adjusted transaction receivables outstanding at the end of each fiscal monthending during the prior twelve consecutive months.  At June 30, 2009, our charge off ratiowas 3.99% and was calculated based on average monthly charge-offs of $11.3million and average transaction receivables of $282.5 million, and we hadcharge-offs of $28.7 million during the three months ended June 30, 2009. Wecould have charged off an additional $15.2 million for the three months endedJune 30, 2009 within the limits of this covenant. The revolving credit facilitycontains customary covenants, including covenants that restrict our ability to,among other things (i) incur liens, (ii) incur certain indebtedness(including guarantees or other contingent obligations), (iii) engage inmergers 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

 

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judgmentdefaults in excess of $1.0 million in the aggregate, (viii) customaryERISA defaults, (ix) actual or asserted invalidity of any materialprovision of the loan documentation or impairment of a material portion of thecollateral, and (x) a change of control. A breach of a covenant or anevent of default could cause all amounts outstanding under the revolving creditfacility to become immediately due and payable. We were in compliance with allfinancial covenants at June 30, 2009. See “Liquidity and Capital Resources”in this section for a description of how we utilize the revolving creditfacility to meet our liquidity needs.

 

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

 

*United Kingdom Overdraft Facility.* In October 2008,our United Kingdom operations entered into an overdraft facility. The maximumavailable borrowings under the facility are GBP 400,000, which is equivalent toapproximately $661,000 at June 30, 2009. The interest rate on anyborrowings under this facility is the Bank of England base rate plus 1.75%. Thefacility is repayable upon demand by the lender. We had outstanding borrowingsof approximately $68,000 on this facility at June 30, 2009.

 

*Mortgage Payable.*  Our corporate headquarters building andrelated land are subject to a mortgage loan, the principal amount of which was approximately$5.0 million and $4.8 million at December 31, 2008 and June 30,2009, 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 $4.7 million and $4.6 million at December 31,2008 and June 30, 2009, 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. See “Item 1. Financial Statements—Notes toInterim Unaudited Consolidated Financial Statements—Note 9. Related PartyTransactions.”

 

***Purchase Obligations***

 

We enter into agreementswith vendors to purchase furniture, fixtures, and other items used to open newcenters. These purchase commitments typically extend for a period of two tothree months after the opening of a new center. As of June 30, 2009, ourpurchase obligations totaled approximately $0.1 million.

 

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**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, are forward-lookingstatements. The words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,”“may,” “will,” “should,” “would,” “could,” “estimate,” “continue” and similarexpressions are intended to identify forward-looking statements.

 

We have based these forward-looking statements on management’s currentviews and expectations.  Although webelieve that the current views and expectations reflected in theseforward-looking statements are reasonable, those views and expectations, andthe related statements, are inherently subject to risks, uncertainties andother factors, many of which are not under our control and may not even bepredictable.  These risks, uncertaintiesand other factors could cause 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 factorsinclude, 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;

 

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

 

·                  our ability to findadditional growth opportunities and to identify and successfully implement newproduct and service offerings;

 

·                  the possible impairment ofgoodwill;

 

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

 

·                  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;

 

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·                  the availability of adequatefinancing;

 

·                  our ability to continue tomeet the listing standards of the New York Stock Exchange;

 

·                  the effect of extended repaymentplans on our revenues, loss experience, provision for doubtful accounts andresults 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 “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2008 and under “Part II. Item 1A. RiskFactors” of this Quarterly Report on Form 10-Q.

 

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.

 

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

 

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

 

***Interest Rate Risk***

 

We are exposed to interestrate risk on our revolving credit facility. Our variable interest expense issensitive to changes in the general level of interest rates. We may from timeto time enter into interest rate swaps, collars or similar instruments with theobjective of reducing our volatility in borrowing costs. We do not usederivative financial instruments for speculative or trading purposes. We had noderivative financial instruments outstanding as of December 31, 2008 or June 30,2009. The weighted average interest rate on our $189.8 million of variableinterest debt as of December 31, 2008 was approximately 4.17%. Theweighted average interest rate on our $158.2 million of variable interestdebt as of June 30, 2009 was approximately 3.19%.

 

We had total interestexpense of $2.5 million and $1.6 million for the three months ended June 30,2008 and 2009, respectively. We had total interest expense of $5.2 millionand $3.3 million for the six months ended June 30, 2008 and 2009,respectively. The estimated increase in interest expense from a hypothetical200 basis-point increase in applicable variable interest rates would have beenapproximately $0.8 million and $0.7 million for the three months ended June 30,2008 and 2009, respectively. The estimated increase in interest expense from ahypothetical 200 basis-point increase in applicable variable interest rateswould have been approximately $1.4 million and $1.5 million for thesix months ended June 30, 2008 and 2009, respectively.

 

***Foreign Currency ExchangeRate 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 such financialinstruments outstanding as of December 31, 2008 or June 30, 2009.

 

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 $2.6 million and$1.7 million as of December 31, 2008 and June 30, 2009, respectively.These cumulative translation adjustments are included in accumulated othercomprehensive loss 

 

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asa separate component of stockholders’ equity. Due to the immateriality of ourcurrent operations in the United Kingdom and Canada, a change in foreigncurrency exchange rates is not expected to have a significant impact on ourconsolidated financial position, results of operations or cash flows.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we have evaluated the effectiveness of the designand operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, and ourinternal control over financial reporting, as of the end of the period coveredby this Report. Based upon that evaluation, our Chief Executive Officer andChief Financial Officer concluded that those disclosure controls and proceduresare effective. There were no changes in our internal control over financialreporting during the quarter ended June 30, 2009, that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

See “Part I. Item 1. Financial Statements—Notes to InterimUnaudited Consolidated Financial Statements—Note 6. Commitments and Contingencies,”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 31,2008, 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 risk and uncertainties previouslydisclosed.

 

***Current and future litigation,regulatory proceedings, and other legal proceedings against us and our officersand directors could have a material adverse effect on our business, prospects,results of operations, and financial condition.***

 

Our business is subject to lawsuits, regulatory proceedings, and otherlegal proceedings, including government investigations, that generate adversepublicity, cause us to incur substantial expenditures, and could significantlyimpair our business and/or force us to cease doing business in one or morestates. See “Item 1. Legal Proceedings.” Our officers and directors areoften also named in these lawsuits or subject to these matters.  Our amended and restated certificate ofincorporation, our bylaws, and indemnification agreements provide that ourofficers and directors are entitled to have us indemnify them for damages andadvance expenses incurred in defending against these lawsuits and proceedings,including in connection with their responding to a pending investigation, anddefending against any related enforcement proceedings, by the U.S. Securitiesand Exchange Commission into alleged improper trading by third parties in oursecurities.  Accordingly, we may alsoincur significant expenditures in connection with matters involving our currentor former officers and directors.  Any ofthese lawsuits, regulatory proceedings, or other legal matters could have amaterial adverse effect on our business, prospects, results of operations, andfinancial condition.

 

We, and our officers and directors, are likely to be subject to furtherlitigation and proceedings in the future. The consequences of an adverse rulingin any current or future litigation or proceeding could cause us to have torefund fees and/or interest collected, refund the principal amount of advances,pay treble or other multiple damages, pay monetary penalties and/or modify orterminate our operations in particular states. We also may be subject toadverse publicity as a result of litigation and investigations. Defense of anylawsuits or proceedings, even if successful, and responding to investigationsrequires substantial time and attention on the part of our senior officers andother management personnel that otherwise would be spent on other aspects ofour business and requires the expenditure of significant amounts for legal feesand other related costs. Settlement of lawsuits also may result in significantpayments and modifications to our operations. Futher, actions against ourofficers and directors may impair our ability to obtain, renew, or maintainvarious licenses that are necessary for us to conduct business.  Any of these events could have a materialadverse effect on our business, prospects, results of operations and financialcondition.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

The following tablesummarizes the votes at the Annual Meeting of our stockholders held on May 21,2009:

 
| **Matter**                                                                                                                              | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|-------------|------------|--------------|------------|
| Election of Directors:                                                                                                                  |       |       |       |        |       |         |       |        |       |         |       |
| William M. Webster IV                                                                                                                   |       | 42,622,159 |       | —      |       | 15,688,337   |       | —      |       | —       |       |
| Stephen K. Benjamin                                                                                                                     |       | 42,610,181 |       | —      |       | 15,700,315   |       | —      |       | —       |       |
| Robert H. Chapman III                                                                                                                   |       | 43,776,628 |       | —      |       | 14,533,868   |       | —      |       | —       |       |
| Tony S. Colletti                                                                                                                        |       | 42,225,606 |       | —      |       | 16,084,890   |       | —      |       | —       |       |
| Kenneth E. Compton                                                                                                                      |       | 47,170,129 |       | —      |       | 11,140,367   |       | —      |       | —       |       |
| Thomas E. Hannah                                                                                                                        |       | 42,439,775 |       | —      |       | 15,870,721   |       | —      |       | —       |       |
| Donovan A. Langford III                                                                                                                 |       | 55,690,661 |       | —      |       | 2,619,835    |       | —      |       | —       |       |
| W. Olin Nisbet                                                                                                                          |       | 47,877,668 |       | —      |       | 10,432,828   |       | —      |       | —       |       |
| J. Patrick O’Shaughnessy                                                                                                           |       | 42,484,660 |       | —      |       | 15,825,836   |       | —      |       | —       |       |
| Ratification of the  appointment of PricewaterhouseCoopers LLP As Independent Registered  Accounting Firm for the Company for 2009 |       | 57,631,147 |       | 671,275     |       | —       |       | 8,074       |       | —       |       |

 

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**ITEM 6.  EXHIBITS.**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                  |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                 | ADVANCE AMERICA, CASH ADVANCE CENTERS, INC. |
|----------------------|--------------------------------------------------|
|                 |                                             |
|                 |                                             |
| August 10, 2009 | By:                                              | /s/ J. PATRICK O’SHAUGHNESSY |
|                 |                                             | J. Patrick O’Shaughnessy |
|                 |                                             | *Executive Vice President and Chief Financial  Officer* |
|                 |                                             | *(Duly authorized officer and principal financial  officer)* |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                  |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31(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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