**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

| (Mark One) | ** ** | ** **                                                                                                                                                    |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| x          |       | QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF                                                                                                |
|       |       | THE SECURITIES EXCHANGE ACT OF 1934                                                                                                                           |
|       |       | For the quarterly period  ended March 31, 2007                                                                                                           |
|       |       | 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**

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

(Exact name of registrantas specified in its charter)

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

 

**135 North Church Street**

**Spartanburg, SouthCarolina  29306**

(Address of principalexecutive offices) (Zip Code)

**864-342-5600**

(Registrant’s telephonenumber, including area code)

**None**

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes x    No o

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

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

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

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

| Class                                   |   | Outstanding as of  May 8, 2007 |
|-----------------------------------------|--------|-------------------------------------|
| Common Stock, par  value $.01 per share |   | 79,544,746 shares                   |

 

 

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

**Form 10-Q**

**Forthe three months ended March 31, 2007**

|                                                           | ** ** | ** **                                                                                                    | ** ** | **Page** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **FORWARD-LOOKING  STATEMENTS**                           |       | 3                                                                                                             |       |
| **PART I.    FINANCIAL  INFORMATION** |       |                                                                                                          |       |
| Item  1.                                                  |       | Financial  Statements                                                                                         |       | 4        |       |
|                                                      |       | Unaudited Consolidated Balance Sheets  December 31, 2006 and March 31, 2007                         |       | 4        |       |
|                                                      |       | Interim Unaudited Consolidated Statements of Income  Three Months Ended March 31, 2006 and 2007          |       | 5        |       |
|                                                      |       | Interim Unaudited Consolidated Statement of  Stockholders’ Equity Three Months Ended March 31, 2007 |       | 6        |       |
|                                                      |       | Interim Unaudited Consolidated Statements of Cash  Flows Three Months Ended March 31, 2006 and 2007      |       | 7        |       |
|                                                      |       | Notes to Interim Unaudited Consolidated Financial  Statements                                                 |       | 8        |       |
| Item 2.                                                   |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                   |       | 21       |       |
| Item 3.                                                   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                   |       | 39       |       |
| Item 4.                                                   |       | Controls and Procedures                                                                                       |       | 39       |       |
| **PART II.   OTHER  INFORMATION**          |       |                                                                                                          |       |
| Item  1.                                                  |       | Legal  Proceedings                                                                                            |       | 39       |       |
| Item  1A.                                                 |       | Risk Factors                                                                                                  |       | 39       |       |
| Item 2.                                                   |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                  |       | 40       |       |
| Item 6.                                                   |       | Exhibits                                                                                                      |       | 40       |       |
| **SIGNATURES**                                            | ** ** | 41                                                                                                            | ** ** |
| **INDEX TO  EXHIBITS**                                    |       | 42                                                                                                            |       |

 

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**FORWARD-LOOKINGSTATEMENTS**

The matters discussed in this Quarterly Report on Form 10-Qthat are forward-looking statements are based on current managementexpectations that involve substantial risks and uncertainties, which couldcause actual results to differ materially from the results expressed in, orimplied by, these forward-looking statements. These statements can beidentified by the fact that they do not relate strictly to historical orcurrent facts. They use words such as “expect,” “intend,” “plan,” “believe,” “project,”“anticipate,” “may,” “will,” “should,” “would,” “could,” “estimate,” “continue”and other words and terms of similar meaning in conjunction with a discussionof future operating or financial performance. You should read statements thatcontain these words carefully because they discuss our future expectations,contain projections of our future results of operations or of our financialposition or state other “forward-looking” information.

The factors listed in “Part I. Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2006, as well as any cautionary language in this Quarterly Report, provideexamples of risks, uncertainties and events that may cause our actual resultsto differ materially from the expectations we describe in our forward-lookingstatements. Although we believe that our expectations are based on reasonableassumptions, actual results may differ materially from those in theforward-looking statements as a result of various factors, including, but notlimited to, those described in “Part I. Item 1A. Risk Factors” in ourAnnual Report on Form 10-K for the year ended December 31,2006.

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

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**PART I.  FINANCIAL INFORMATION**

**ITEM 1. FINANCIALSTATEMENTS.**

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

| ** **                                                                                                                                                                                     | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| **Assets**                                                                                                                                                                                     | ** ** |                  | ** ** | ** **         |       | ** ** | ** ** |
| Current assets                                                                                                                                                                                 |       |                  |       |               |       |   |   |
| Cash and cash equivalents                                                                                                                                                                      |       |                  | $          | 67,245             |       |   | $ | 26,021 |   |
| Advances and fees receivable, net                                                                                                                                                              |       |                  | 237,725    |               |       | 186,962 |   |
| Deferred income taxes                                                                                                                                                                          |       |                  | 11,798     |               |       | 9,415 |   |
| Other current assets                                                                                                                                                                           |       |                  | 11,664     |               |       | 13,722 |   |
| Total current assets                                                                                                                                                                           |       |                  | 328,432    |               |       | 236,120 |   |
| Restricted cash                                                                                                                                                                                |       |                  | 5,446      |               |       | 5,465 |   |
| Property and  equipment, net                                                                                                                                                                   |       |                  | 63,198     |               |       | 61,013 |   |
| Goodwill                                                                                                                                                                                       |       |                  | 122,627    |               |       | 122,627 |   |
| Other assets                                                                                                                                                                                   |       |                  | 5,389      |               |       | 5,102 |   |
| Total assets                                                                                                                                                                                   |       |                  | $          | 525,092            |       |   | $ | 430,327 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                 | ** ** |                  | ** ** | ** **         |       | ** ** | ** ** |
| Current liabilities                                                                                                                                                                            |       |                  |       |               |       |   |   |
| Accounts payable                                                                                                                                                                               |       |                  | $          | 21,164             |       |   | $ | 16,799 |   |
| Accrued liabilities                                                                                                                                                                            |       |                  | 31,737     |               |       | 21,376 |   |
| Income taxes payable                                                                                                                                                                           |       |                  | 14,983     |               |       | 229 |   |
| Current portion of long-term debt                                                                                                                                                              |       |                  | 537        |               |       | 546 |   |
| Total current liabilities                                                                                                                                                                      |       |                  | 68,421     |               |       | 38,950 |   |
| Revolving credit  facility                                                                                                                                                                     |       |                  | 104,835    |               |       | 27,948 |   |
| Long-term debt                                                                                                                                                                                 |       |                  | 5,678      |               |       | 5,545 |   |
| Deferred income  taxes                                                                                                                                                                         |       |                  | 13,564     |               |       | 14,235 |   |
| Other liabilities                                                                                                                                                                              |       |                  | 157        |               |       | 192 |   |
| Total liabilities                                                                                                                                                                              |       |                  | 192,655    |               |       | 86,870 |   |
| Non-controlling interest in variable interest entity                                                                                                                                           |       |                  | 32,540     |               |       | 30,571 |   |
| Commitments and  contingencies (Note 7)                                                                                                                                                        |       |                  |       |               |       |   |   |
| Stockholders’ equity                                                                                                                                                                      |       |                  |       |               |       |   |   |
| Preferred stock, par value $.01 per share, 25,000  shares authorized; no shares issued and outstanding                                                                                         |       |                  | —     |               |       | — |   |
| Common stock, par value $.01 per share, 250,000  shares authorized; 96,821 shares issued and 79,534 and 79,543 outstanding as  of December 31, 2006 and March 31, 2007, respectively |       |                  | 968        |               |       | 968 |   |
| Paid in capital                                                                                                                                                                                |       |                  | 285,382    |               |       | 285,677 |   |
| Retained earnings                                                                                                                                                                              |       |                  | 118,258    |               |       | 130,631 |   |
| Common stock in  treasury (17,287 and 17,278 shares at cost at December 31, 2006 and  March 31, 2007, respectively)                                                                  |       |                  | (104,711   | )                  |       | (104,390 | ) |
| Total stockholders’ equity                                                                                                                                                                |       |                  | 299,897    |               |       | 312,886 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                               |       |                  | $          | 525,092            |       |   | $ | 430,327 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

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**AdvanceAmerica, Cash Advance Centers, Inc.Interim Unaudited Consolidated Statements of IncomeThree Months Ended March 31, 2006 and 2007(in thousands, except per share data)**

| ** **                                                     | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Revenues:**                                                  |       |     |       |     |       |
| Fees and interest  charged to customers                        |       | $        | 143,092    |     | $          | 168,083 |   |
| Marketing,  processing and servicing fees                      |       | 9,077    |       | —   |       |
| Total revenues                                                 |       | 152,169  |       | 168,083  |       |
| Provision for  doubtful accounts and agency bank losses        |       | (11,876  | )          | (15,815  | )          |
| Net revenues                                                   |       | 140,293  |       | 152,268  |       |
| **Center  Expenses:**                                          |       |     |       |     |       |
| Salaries and related payroll costs                             |       | 46,547   |       | 49,197   |       |
| Occupancy costs                                                |       | 21,048   |       | 23,533   |       |
| Center depreciation expense                                    |       | 3,953    |       | 4,269    |       |
| Advertising expense                                            |       | 3,319    |       | 5,309    |       |
| Other center expenses                                          |       | 15,290   |       | 14,158   |       |
| Total center expenses                                          |       | 90,157   |       | 96,466   |       |
| Center gross profit                                            |       | 50,136   |       | 55,802   |       |
| **Corporate  and Other Expenses (Income):**                    |       |     |       |     |       |
| General and  administrative expenses                           |       | 13,011   |       | 13,279   |       |
| Corporate  depreciation expense                                |       | 961      |       | 818      |       |
| Interest expense                                               |       | 907      |       | 2,313    |       |
| Interest income                                                |       | (176     | )          | (76      | )          |
| Loss on disposal  of property and equipment                    |       | 208      |       | 252      |       |
| Loss on  impairment of assets                                  |       | —   |       | 314      |       |
| Income before income taxes                                     |       | 35,225   |       | 38,902   |       |
| Income tax  expense                                            |       | 14,313   |       | 16,343   |       |
| Income before income of consolidated variable interest  entity |       | 20,912   |       | 22,559   |       |
| Income of  consolidated variable interest entity               |       | (485     | )          | (243     | )          |
| Net income                                                     |       | $        | 20,427     |     | $          | 22,316 |   |
| Net income per common share:                                   |       |     |       |     |       |
| Basic                                                          |       | $        | 0.25       |     | $          | 0.28 |   |
| Diluted                                                        |       | $        | 0.25       |     | $          | 0.28 |   |
| Dividends declared per common share                            |       | $        | 0.11       |     | $          | 0.125 |   |
| Weighted average number of shares outstanding:                 |       |     |       |     |       |
| Basic                                                          |       | 81,827   |       | 79,117   |       |
| Diluted                                                        |       | 81,827   |       | 79,167   |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

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

**Interim Unaudited Consolidated Statement ofStockholders’ Equity**

**Three Months Ended March 31, 2007**

**(inthousands, except per share data)**

| ** **                                              | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **  | ** ** | **Common Stock** | ** ** | ** **       | ** ** |
|---------------------------------------------------------|------------|------------------|------------|------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** **       | ** ** | **Par**    | ** ** | **Paid-In** | ** ** | **Retained**     | ** ** | **In Treasury**  | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Shares**       | ** ** | **Value**  | ** ** | **Capital** | ** ** | **Earnings**     | ** ** | **Shares ** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| **Balances,  December 31, 2006**                   |       | 96,821           |       | $          | 968        |        | $          | 285,382          |       | $                | 118,258    |   | (17,287 | ) | $ | (104,711 | ) | $ | 299,897 |   |
| Net income                                              |       | —           |       | —     |       | —      |       | 22,316           |       | —           |       | — |   | 22,316 |   |
| Dividends paid  ($0.125 per share)                      |       | —           |       | —     |       | —      |       | (9,894           | )          | —           |       | — |   | (9,894 | ) |
| Dividends payable                                       |       | —           |       | —     |       | —      |       | (49              | )          | —           |       | — |   | (49 | ) |
| Purchases of  treasury stock                            |       | —           |       | —     |       | —      |       | —           |       | (3               | )          | (41 | ) | (41 | ) |
| Issuance of  restricted stock                           |       | —           |       | —     |       | —      |       | —           |       | 10               |       | — |   | — |   |
| Vesting of  restricted stock issued from treasury stock |       | —           |       | —     |       | (353        | )          | —           |       | —           |       | 353 |   | — |   |
| Amortization of  restricted stock                       |       | —           |       | —     |       | 392         |       | —           |       | —           |       | — |   | 392 |   |
| Stock option  expense                                   |       | —           |       | —     |       | 243         |       | —           |       | —           |       | — |   | 243 |   |
| Issuance of  common stock to director in lieu of cash   |       | —           |       | —     |       | 13          |       | —           |       | 2           |       | 9 |   | 22 |   |
| **Balances, March 31, 2007**                       |       | 96,821           |       | $          | 968        |        | $          | 285,677          |       | $                | 130,631    |   | (17,278 | ) | $ | (104,390 | ) | $ | 312,886 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

6

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

**Interim Unaudited Consolidated Statements of CashFlows**

**Three Months Ended March 31, 2006 and 2007**

**(inthousands)**

| ** **                                                                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash flows from operating  activities**                                              |       |     |       |     |       |
| Net income                                                                                            |       | $        | 20,427     |     | $          | 22,316 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities, net of acquisition |       |     |       |     |       |
| Income of consolidated variable interest entity                                                       |       | 485      |       | 243      |       |
| Depreciation                                                                                          |       | 4,914    |       | 5,087    |       |
| Non-cash interest expense                                                                             |       | 246      |       | 247      |       |
| Provisions for doubtful accounts and agency bank  losses                                              |       | 11,876   |       | 15,815   |       |
| Agency bank charge-offs, net of recoveries                                                            |       | (863     | )          | —   |       |
| Deferred income taxes                                                                                 |       | 1,627    |       | 3,053    |       |
| Loss on disposal of property and equipment                                                            |       | 208      |       | 252      |       |
| Loss on impairment of assets                                                                          |       | —   |       | 314      |       |
| Amortization of restricted stock                                                                      |       | 363      |       | 392      |       |
| Stock option expense                                                                                  |       | 219      |       | 243      |       |
| Common stock issued to director in lieu of cash                                                       |       | —   |       | 22       |       |
| Changes  in operating assets and liabilities                                                          |       |     |       |     |       |
| Fees receivable, net                                                                                  |       | 713      |       | 625      |       |
| Other current assets                                                                                  |       | (7,135   | )          | (2,058   | )          |
| Other assets                                                                                          |       | 63       |       | 45       |       |
| Accounts payable                                                                                      |       | (1,365   | )          | (1,399   | )          |
| Accrued liabilities                                                                                   |       | (5,366   | )          | (10,870  | )          |
| Income taxes payable                                                                                  |       | (7,409   | )          | (14,754  | )          |
| Net cash provided by operating activities                                                             |       | 19,003   |       | 19,573   |       |
| **Cash  flows from investing activities**                                                             |       |     |       |     |       |
| Changes in advances receivable                                                                        |       | 29,512   |       | 34,323   |       |
| Changes in restricted cash                                                                            |       | (325     | )          | (19      | )          |
| Acquisition of business, net of cash acquired                                                         |       | (41      | )          | —   |       |
| Proceeds from sale of property and equipment                                                          |       | 26       |       | 33       |       |
| Purchases of property and equipment                                                                   |       | (1,892   | )          | (3,005   | )          |
| Net cash provided by investing activities                                                             |       | 27,280   |       | 31,332   |       |
| **Cash  flows from financing activities**                                                             |       |     |       |     |       |
| Payments on revolving credit facility, net                                                            |       | (37,933  | )          | (76,887  | )          |
| Decrease in non-controlling interest of variable  interest entity                                     |       | —   |       | (2,212   | )          |
| Payments on mortgage payable                                                                          |       | (87      | )          | (93      | )          |
| Payments on note payable                                                                              |       | (57      | )          | (30      | )          |
| Payments of financing costs                                                                           |       | —   |       | (6       | )          |
| Purchases of treasury stock                                                                           |       | —   |       | (41      | )          |
| Payments of dividends                                                                                 |       | (9,000   | )          | (9,894   | )          |
| Changes in book overdrafts                                                                            |       | 4,302    |       | (2,966   | )          |
| Net cash used in financing activities                                                                 |       | (42,775  | )          | (92,129  | )          |
| Net increase (decrease) in cash and cash equivalents                                                  |       | 3,508    |       | (41,224  | )          |
| Cash and cash equivalents, beginning of period                                                        |       | 27,259   |       | 67,245   |       |
| Cash and cash equivalents, end of period                                                              |       | $        | 30,767     |     | $          | 26,021 |   |
| Supplemental disclosures  of cash flow information:                                                   |       |     |       |     |       |
| Cash  paid during the period for:                                                                     |       |     |       |     |       |
| Interest                                                                                              |       | $        | 837        |     | $          | 2,446 |   |
| Income taxes                                                                                          |       | 20,095   |       | 28,044   |       |
| Supplemental schedule of  non-cash investing and financing activity:                                  |       |     |       |     |       |
| Property and equipment purchases included in accounts  payable and accrued expenses                   |       | 1,356    |       | 497      |       |
| Restricted stock dividends payable                                                                    |       | 58       |       | 49       |       |
| Issuance of  restricted common stock                                                                  |       | 1,918    |       | 148      |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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

**1.   Summary ofSignificant Accounting Policies**

**Basis ofPresentation**

The accompanying interimunaudited consolidated financial statements of Advance America, Cash AdvanceCenters, Inc. (“AACACI”) and its wholly owned subsidiaries (collectively,the “Company”) have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andthe rules and regulations of the U.S. Securities and Exchange Commission(the “SEC”). They do not include all information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements. Although management believes that the disclosures areadequate to prevent the information from being misleading, the interimunaudited consolidated financial statements should be read in conjunction withthe Company’s audited financial statements in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006 filed with the SEC. In the opinion ofthe Company’s management, all adjustments, consisting of normal recurringaccruals considered necessary for a fair statement of the Company’s financialcondition, have been included. The results of operations for the three monthsended March 31, 2007 are not necessarily indicative of the results thatmay be expected for future interim periods or the entire year ended December 31,2007.

**Description ofBusiness**

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

**Revenue Recognition**

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

**Concentration ofRisk**

For the three months endedMarch 31, 2006 and 2007, total revenues within the Company’s five largeststates (measured by total revenues) accounted for approximately 46% of theCompany’s total revenues in both periods.

8

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**Income Taxes**

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

**Earnings Per Share**

Basic earnings per share is computed by dividing netincome by the weighted average number of common shares outstanding for theperiod excluding unvested restricted stock. Diluted earnings per share iscomputed by dividing net income by the weighted average number of common sharesoutstanding for the period, after adjusting for the dilutive effect of unvestedrestricted stock and stock options. Unvested shares of restricted stock of524,822 at March 31, 2006 and options to purchase 1,280,000 and 1,290,000shares of common stock that were outstanding at March 31, 2006 and 2007,respectively, were not included in the computation of diluted earnings pershare since the effect of including them would be anti-dilutive.

Thefollowing table presents the reconciliation of the denominator used in thecalculation of basic and diluted earnings per share for the three months ended March 31,2006 and 2007 (in thousands):

| ** **                                                         | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Reconciliation of  denominator:                                    |       |     |       |     |       |
| Weighted average number of common shares  outstanding—basic   |       | 81,827   |       | 79,117   |       |
| Effect of dilutive unvested restricted stock                       |       | —   |       | 50       |       |
| Weighted average  number of common shares outstanding—diluted |       | 81,827   |       | 79,167   |       |

 

**Recently IssuedAccounting Pronouncement**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in a company’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. Effective January 1, 2007,the Company adopted FIN 48. As a result of the adoption of FIN 48,the Company recognized no adjustments in the liability for unrecognized incometax benefits. At the adoption date, the Company did not have any unrecognizedtax benefits and did not have any interest or penalties accrued. The Company issubject to U.S. income taxes as well as various other state and localjurisdictions. With few exceptions, the Company is no longer subject to U.S.federal, state and local income tax examinations by tax authorities for yearsbefore the tax year ended September 30, 2002.

**Revision to theConsolidated Statement of Cash Flows**

The Company has revisedthe consolidated statement of cash flows for the three months ended March 31,2006 to properly present the changes in fees receivable, net as an operatingactivity. The effect of the revision is to increase net cash provided byoperating activities by $0.7 million and to decrease net cash provided byinvesting activities by the same amount. The revision does not affect the netchange in cash and cash equivalents for the three months ended March 31,2006 and has no effect on the Company’s consolidated statements of income orthe related earnings per share amount for that period.

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**Reclassifications**

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

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

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

During the three months ended March 31, 2006, theCompany was compensated under MP&S Agreements with the lending banks forArkansas and Pennsylvania. Operations in Arkansas and Pennsylvania wereconverted to state-based legislation during June 2006. The Company nowonly operates pursuant to enabling state statutes under its standard businessmodel.

Although the Companymarketed, processed and serviced payday cash advances and installment loansmade by the lending banks, each lending bank was responsible for evaluatingeach of its customers’ applications and determining whether to approve thepayday cash advance or installment loan. The Company was not involved in thelending banks’ payday cash advance or installment loan approval process or thedetermination of their approval procedures or criteria. The payday cashadvances and installment loans were repayable solely to the lending banks andwere assets of the lending banks; accordingly, they were never included in theCompany’s balance sheet. The aggregate amount of the outstanding balances ofthe lending banks’ advances, installment loans and fees receivable serviced bythe Company was approximately $14.5 million at March 31, 2006. Therewere no such outstanding balances at March 31, 2007.

**3.   Advancesand Fees Receivable, Net**

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

| ** **                                                          | ** ** | **December 31,**

**2006** | ** ** | **March 31,  2007** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Advances  receivable                                                |       |                            | $          | 195,011                  |       |   | $ | 155,838 |   |
| Fees and interest  receivable                                       |       |                            | 35,300     |                     |       | 28,417 |   |
| Returned items  receivable                                          |       |                            | 43,793     |                     |       | 36,594 |   |
| Loans and fees  receivable of consolidated variable interest entity |       |                            | 37,701     |                     |       | 27,157 |   |
| Other                                                               |       |                            | 2,975      |                     |       | 3,559 |   |
| Allowance for  doubtful accounts                                    |       |                            | (57,396    | )                        |       | (47,417 | ) |
| Unearned revenues                                                   |       |                            | (19,659    | )                        |       | (17,186 | ) |
| Advances and fees  receivable, net                                  |       |                            | $          | 237,725                  |       |   | $ | 186,962 |   |

 

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

Changesin the allowance for doubtful accounts for the three months ended March 31,2006 and 2007 were as follows (in thousands):

| ** **                       | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                |       |     | $          | 45,585   |       |   | $ | 57,396 |   |
| Provision for  doubtful accounts |       |     | 9,466      |     |       | 15,815 |   |
| Charge-offs                      |       |     | (30,631    | )        |       | (38,483 | ) |
| Recoveries                       |       |     | 11,138     |     |       | 12,689 |   |
| Ending balance                   |       |     | $          | 35,558   |       |   | $ | 47,417 |   |

 

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Changesin the accrual for excess bank losses for the three months ended March 31,2006 and 2007 were as follows (in thousands):

| ** **                        | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                 |       |     | $          | 1,373    |       |   | $ | — |   |
| Provision for  agency bank losses |       |     | 2,410      |     |       | — |   |
| Charge-offs                       |       |     | (2,164     | )        |       | — |   |
| Recoveries                        |       |     | 1,301      |     |       | — |   |
| Ending balance                    |       |     | $          | 2,920    |       |   | $ | — |   |

 

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

Thetotal changes in the allowance for doubtful accounts and the accrual for excessbank losses for the three months ended March 31, 2006 and 2007 were asfollows (in thousands):

| ** **                                              | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                                       |       |     | $          | 46,958   |       |   | $ | 57,396 |   |
| Provision for  doubtful accounts and agency bank losses |       |     | 11,876     |     |       | 15,815 |   |
| Charge-offs                                             |       |     | (32,795    | )        |       | (38,483 | ) |
| Recoveries                                              |       |     | 12,439     |     |       | 12,689 |   |
| Ending balance                                          |       |     | $          | 38,478   |       |   | $ | 47,417 |   |

 

**5.   AccruedLiabilities**

Accruedliabilities consisted of the following (in thousands):

| ** **                           | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Employee  compensation               |       |                        | $          | 12,038                   |       |   | $ | 7,029 |   |
| Workers’  compensation          |       |                        | 3,754      |                     |       | 3,704 |   |
| Health and dental  insurance         |       |                        | 3,495      |                     |       | 2,668 |   |
| Lease smoothing                      |       |                        | 2,924      |                     |       | 2,775 |   |
| Advertising                          |       |                        | 2,001      |                     |       | 212 |   |
| Construction in  progress            |       |                        | 1,563      |                     |       | 497 |   |
| Center closing  costs                |       |                        | 618        |                     |       | 530 |   |
| Accounting and tax                   |       |                        | 661        |                     |       | 410 |   |
| Property, sales  and franchise taxes |       |                        | 622        |                     |       | 563 |   |
| Legal                                |       |                        | 885        |                     |       | 929 |   |
| Other                                |       |                        | 3,176      |                     |       | 2,059 |   |
| Total                                |       |                        | $          | 31,737                   |       |   | $ | 21,376 |   |

 

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**6.   IncomeTaxes**

Incometax expense for the three months ended March 31, 2006 and 2007 consistedof the following (in thousands):

| ** ** | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Current    |       |     |       |     |       |   |   |
| Federal    |       |     | $          | 10,584   |       |   | $ | 11,115 |   |
| State      |       |     | 2,102      |     |       | 2,175 |   |
|       |       |     | 12,686     |     |       | 13,290 |   |
| Deferred   |       |     | 1,627      |     |       | 3,053 |   |
| Total      |       |     | $          | 14,313   |       |   | $ | 16,343 |   |

 

Areconciliation of the statutory federal income tax rate and the Company’seffective income tax rate for the three months ended March 31, 2006 and2007 follows:

| ** **                 | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Statutory income  tax rate |       |     | 35.0       | %        |       |   | 35.0 | % |   |
| State income  taxes, net   |       |     | 4.4        |     |       |   | 4.4 |   |   |
| Other                      |       |     | 1.2        |     |       |   | 2.6 |   |   |
| Effective income tax  rate |       |     | 40.6       | %        |       |   | 42.0 | % |   |

 

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

| ** **                                    | ** ** | **December 31,  2006** | ** ** | **March 31,  2007** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Deferred tax  assets                          |       |                        |       |                     |       |   |   |
| Accrued expenses                              |       |                        | $          | 4,764                    |       |   | $ | 4,756 |   |
| Bad debts                                     |       |                        | 7,684      |                     |       | 5,541 |   |
| Net operating loss carryforwards              |       |                        | 260        |                     |       | 260 |   |
| State credit carryforwards                    |       |                        | 1,012      |                     |       | 1,012 |   |
| Depreciation                                  |       |                        | 224        |                     |       | 126 |   |
| Other                                         |       |                        | 646        |                     |       | 800 |   |
| Valuation allowance                           |       |                        | (260       | )                        |       | (260 | ) |
| Total deferred tax assets                     |       |                        | 14,330     |                     |       | 12,235 |   |
| Deferred tax  liabilities                     |       |                        |       |                     |       |   |   |
| Goodwill                                      |       |                        | (13,609    | )                        |       | (14,326 | ) |
| Prepaid expenses                              |       |                        | (1,822     | )                        |       | (2,064 | ) |
| Book versus tax basis difference for aircraft |       |                        | (665       | )                        |       | (665 | ) |
| Total deferred tax liabilities                |       |                        | (16,096    | )                        |       | (17,055 | ) |
| Net deferred tax  liability                   |       |                        | $          | (1,766                   | )          |   | $ | (4,820 | ) |

 

As of December 31, 2006 and March 31, 2007,the Company had net operating loss carryforwards for state income tax purposestotaling approximately $0.3 million which will begin to expire in 2014. Avaluation allowance of approximately $0.3 million has been recordedbecause management believes it is more likely than not that the entire deferredtax asset related to state net operating loss carryforwards will not berealized. As of December 31, 2006 and March 31 2007, the Company hadcredit carryforwards for federal and state income tax purposes totalingapproximately $1.0 million, which will begin to expire in 2010.

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

**7.**   Commitmentsand Contingencies

The Company is involved in several active lawsuits,including lawsuits arising out of actions taken by state regulatoryauthorities, and is involved in various other legal proceedings with state andfederal regulators. 

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

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

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

The Company, the Company’s subsidiary, McKenzie CheckAdvance of Florida, LLC (“McKenzie”), and certain officers, directors andemployees are defendants in a putative class-action lawsuit commenced byformer customers, Wendy Betts and Donna Reuter, in Florida. This putative classaction was filed by Ms. Betts and Ms. Reuter in February 2001 inthe Circuit Court of Palm Beach County and alleges that McKenzie, by andthrough the actions of certain officers, directors and employees, engaged inunfair and deceptive trade practices and violated Florida’s criminal usurystatute, the Florida Consumer Finance Act and the Florida Racketeer Influencedand Corrupt Organizations Act. The suit seeks unspecified damages, and McKenzieor the other defendants could be required to refund fees and/or interestcollected, refund the principal amount of payday cash advances, pay multipledamages and pay other monetary penalties.

Defendants’ motion for summary judgment was originallygranted as to Ms. Betts’ claims but later reversed by a Florida appellatecourt. On appeal, the Florida Supreme Court issued an opinion in April 2006,holding that the deferred presentment transactions between Betts and theCompany were governed by Florida’s usury laws and not governed by the FloridaMoney Transmitters’ Code as the Company asserted. The case has been remanded tothe Circuit Court by the Fourth District Court of Appeals where discovery isnow ongoing. Although this ruling by the Florida Supreme Court was adverse tothe Company, it is too early in this proceeding to identify the amount ofpotential losses to the Company, if any, since the case is still in its earlystages and several material issues have yet to be addressed by the courts.

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

The Circuit Court recently permitted Tiffany Kelly tojoin as a plaintiff and the Company is seeking to compel arbitration of herclaims. Oral argument for class certification is currently scheduled for June 2007.

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

A second Florida lawsuit was filed in August 2004in the Circuit Court of Palm Beach County by former customers Gerald Betts and Ms. Reuteragainst the Company, the Company’s subsidiary, Advance America, Cash AdvanceCenters of Florida, Inc., and certain officers and directors. Theallegations are nearly identical to those alleged in the first Betts and Reuterlawsuit. The Company filed motions to dismiss, to stay the proceedings pendingdetermination of dispositive actions by the Florida Supreme Court in theoriginal Betts and Reuter case and to compel arbitration. Proceedings in thiscase were stayed pending the disposition of the appeals in the original Bettsand Reuter case. Now that those appeals have been resolved, the stay ofproceedings has been lifted and the Company will proceed with defending thissecond lawsuit. Discovery is now ongoing.

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

In September 2006, the Pennsylvania Department ofBanking filed a lawsuit in the Commonwealth Court of Pennsylvania alleging thatthe Company’s Delaware subsidiary is providing 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. ThePennsylvania Department of Banking has filed a Motion for Judgment on thePleadings for Declaratory Relief and Permanent Injunction, seeking: (1) adeclaration as a matter of law that the Company’s Delaware subsidiary isviolating Pennsylvania lending laws and (2) a permanent injunctionenjoining the Delaware subsidiary from issuing new lines of credit and fromcollecting on or enforcing currently outstanding lines of credit or other loanproducts in Pennsylvania. The Company filed a brief in opposition and a crossmotion for judgment on the pleadings. Oral arguments for both parties were heldin April 2007 and the Company is awaiting the Commonwealth Court’s ruling.

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

In January 2007, Raymond King and Sandra Coates,who were customers of BankWest, the lending bank for which the Companymarketed, processed and serviced payday cash advances in Pennsylvania, filed a putativeclass action lawsuit in the United States District Court, Eastern District ofPennsylvania alleging various causes of action, including that the Pennsylvaniasubsidiary made illegal payday loans in Pennsylvania in violation ofPennsylvania’s usury law, the Pennsylvania Consumer Discount Company Act, thePennsylvania Unfair Trade Practices and Consumer Protection Law, thePennsylvania Fair Credit Extension Uniformity Act and the Pennsylvania CreditServices Act. The complaint alleges that BankWest was not the “true lender” onthe advances that the Company marketed, processed and serviced for BankWest inPennsylvania and that the Company was the “lender in fact.” The complaint seekscompensatory damages, attorneys’ fees, punitive damages and the trebling of anycompensatory damages. The Company filed a Motion to Compel Arbitration in March 2007.

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

In August 2004, Tahisha King and James E. Strong,who were customers of BankWest, the lending bank for which the Companymarketed, processed and serviced payday cash advances in Georgia, filed aputative class action lawsuit in the State Court of Cobb County, Georgiaagainst the Company, William M. Webster IV, the Company’s Vice Chairman, andother unnamed officers, directors, owners and “stakeholders,” alleging variouscauses of action including that the Georgia subsidiary made illegal paydayloans in Georgia in violation of Georgia’s usury law, the Georgia IndustrialLoan Act and Georgia’s Racketeer Influenced and Corrupt Organizations Act. Thecomplaint alleges that BankWest was not the “true lender” on the advances thatthe Company marketed, processed and serviced for BankWest in Georgia and thatthe Company was the “de facto” lender. The complaint seeks compensatorydamages, attorneys’ fees, punitive damages and the trebling of any compensatorydamages. The Company and the other defendants denied the plaintiffs’ claims andasserted that all of the claims are subject to mandatory and binding individualarbitration pursuant to arbitration agreements signed by each plaintiff. In 

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April 2006, the StateCourt of Cobb County entered a consent order, which was jointly submitted bythe parties, whereby the parties agreed and consented to arbitration of allclaims raised by plaintiffs in this action and to stay all proceedings pendingthe outcome of arbitration on plaintiffs’ claims. The plaintiffs filed a demandfor arbitration seeking to arbitrate their claims in a class action orrepresentative status. In March 2007, the appointed arbitrator issued aninterim order holding that payday loans are not subject to Georgia law, thatfederal preemption applies and that the mere existence of a contractualprohibition on class actions does not violate Georgia public policy. However,the arbitrator did not believe there was sufficient evidence to determine ifthe arbitration agreements were procedurally or substantively unconscionableand ordered additional discovery on that issue. Both parties have filedpleadings seeking reconsideration of the interim order. The Company intends tocontinue to deny plaintiffs’ claims and resist plaintiffs’ efforts to conductclass arbitration.

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

The Company’s Georgia subsidiary is involved inanother case in Georgia that, although not a class action lawsuit, containsessentially the same allegations as the King and Strong case. In March 2003,Angela Glasscock, a customer of BankWest, filed an adversary proceeding in theU.S. Bankruptcy Court for the Southern District of Georgia alleging that theGeorgia subsidiary was making payday cash advances in Georgia in violation ofthe 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 its holding, the courtruled that BankWest was the “true lender.” In April 2007, the UnitedStates District Court overturned the U.S. Bankruptcy Court’s grant of summaryjudgment to the Company. Although the amount in controversy in the case is only$350, the underlying claims of Ms. Glasscock, if validated by theappellate court, could serve as a basis for future claims against the Company.

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

In July 2004, John Kucan, Welsie Torrence andTerry Coates, each of whom was a customer of Republic Bank & TrustCompany (“Republic”), the lending bank for whom the Company marketed, processedand serviced payday cash advances in North Carolina, filed a putative classaction lawsuit in the General Court of Justice for the Superior Court Divisionfor New Hanover County, North Carolina against the Company and Mr. Webster,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” on the payday cash advances itoffered. The lawsuit also claims that the payday cash advances were made,administered and collected in violation of numerous North Carolina consumerprotection laws. The lawsuit seeks an injunction barring the subsidiary fromcontinuing to do business in North Carolina, the return of the principal amountof the payday cash advances made to the plaintiff class since August 2001,the return of any interest or fees associated with those advances, trebledamages, attorneys’ fees and other unspecified costs. In December 2005,the court issued an Order granting defendants’ motion for arbitration, stayingthe proceedings and denying class certification. The plaintiffs have appealedthis Order to the North Carolina Court of Appeals. The plaintiffs in this caseand two other North Carolina cases currently before the Court of Appeals fileda petition, which the Company has opposed, for discretionary review andconsolidation of the cases. The Court of Appeals heard oral argument on theconsolidated cases in January 2007. The Company is awaiting a ruling fromthe Court of Appeals.

*North Carolina Commissioner of Banks Order*

In August 2004, the North Carolina AttorneyGeneral’s Office, in conjunction with the Commissioner of Banks for NorthCarolina, issued a subpoena to the Company to produce documents, respond towritten questions and have a corporate representative appear for a depositionregarding the relationship between the Company’s North Carolina subsidiary andthe lending bank in North Carolina, Republic, to determine 

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whether the Company’soperations in North Carolina were in compliance with North Carolina law. In February 2005,the Commissioner of Banks initiated a contested case against the Company’sNorth Carolina subsidiary for alleged violations of the North Carolina ConsumerFinance Act. In December 2005, at the conclusion of the contested case,the Commissioner of Banks ordered that the Company’s North Carolina subsidiaryimmediately cease and desist operating. In accordance with the Commissioner ofBanks’ Order, the Company’s North Carolina subsidiary ceased all business operationson December 22, 2005. The full North Carolina State Banking Commission hassince affirmed the Commissioner of Banks’ Order and the Company filed an appealwith the North Carolina Superior Court. The appeal was dismissed and theCompany has appealed the dismissal to the North Carolina Court of Appeals. Theparties have submitted briefs to the North Carolina Court of Appeals and theCompany is waiting for the court to respond to the Company’s request for oralargument.

*New Mexico Proposed Rules and RegulationsGoverning the Extension of Credit For Small Loans*

In February 2006, the Company joined four otherpayday lenders in a lawsuit against the New Mexico Attorney General requestingimmediate injunctive relief from the enforcement of the Attorney General’sProposed Rules and Regulations Governing the Extension of Credit for SmallLoans, which would have severely limited the payday loan industry in NewMexico. The parties mutually agreed to stay any further proceedings pending theadoption of new proposed regulations published by the Financial InstitutionsDivision of the New Mexico Regulation and Licensing Department (“FID”) in June 2006.In August 2006, in a lawsuit filed by several other payday loan companies,the second judicial district court of New Mexico issued a preliminaryinjunction enjoining the enforcement of the FID proposed regulations. As aresult of the Court’s order, the Company has not made any changes in its NewMexico operations. As a result of recently enacted legislation, the Companyanticipates this lawsuit will be dismissed.

*Other Matters*

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

The amount of losses and/or the probability of anunfavorable outcome, if any, cannot be reasonably estimated for the above legalproceedings. Accordingly, no accrual has been recorded for any of the abovematters as of March 31, 2007.

*Department of Labor Investigations*

During the first quarterof 2007, the Company resolved all investigations by the United StatesDepartment of Labor of the Company’s practices regarding the payment ofovertime wages.

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

On May 4, 2005, the Company announced that itsBoard of Directors had approved a program authorizing the repurchase by theCompany of up to $50.0 million of its outstanding common stock. On August 16,2006, the Company announced that its Board of Directors had approved anextension of the Company’s stock repurchase program authorizing the Company torepurchase up to $100.0 million of its outstanding common stock on andafter this date. The Company did not repurchase any shares pursuant to itsstock repurchase program during the three months ended March 31, 2006 or March 31,2007. However, during the three months ended March 31, 2007, 2,826 sharesof common stock were surrendered by employees to satisfy their tax obligationswith respect to the vesting of shares of restricted stock awarded pursuant tothe Company’s 2004 Omnibus Stock Plan.

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In 2004, the Companyadopted Statement of Financial Accounting Standards No. 123 (Revised),Share-Based Payment (“SFAS 123(R)”). Accordingly, the Company measures thecost of its stock-based employee compensation at fair value on the grant dateand recognizes such cost in the financial statements on a straight-line basisover the requisite service period of the awards, which is generally the vestingperiod.

The Company’s 2004 Omnibus Stock Plan provides for thegranting of restricted stock, stock options and other stock awards to certaindirectors, officers and other key employees of the Company. Additionally,during 2005, the Company granted stock options and shares of restricted stockto its President and Chief Executive Officer under a Nonqualified Stock OptionAgreement and a Restricted Stock Agreement, respectively. Both of theseagreements are separate from the Company’s 2004 Omnibus Stock Plan.

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

The grant date fair value of all shares of restrictedstock was based on the market value of the Company’s common stock on the datesof grant. These amounts are being expensed ratably over each award’s respectivevesting period.

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

·       *Expected term*—The expected term represents the period duringwhich the Company’s stock options are expected to be outstanding. The Companybased its determination of the expected term by giving consideration to thecontractual terms of the stock options awards, vesting schedules, expectationsof future employee behavior and published academic research regarding exercisebehavior.

·       *Expected volatility*—The expected volatility represents theamount by which the price of the underlying shares has fluctuated or isexpected to fluctuate during the expected term. As of the stock option grantdates, the Company was still a relatively new public company with limitedhistorical data regarding the volatility of the price of its publicly-tradedshares and has no other publicly-traded financial instruments from which toderive implied volatility. As such, the Company based its estimated volatilityon the historical stock price volatility of other public companies in itsindustry, which the Company believes is representative of its expected futurevolatility over the expected term of its options.

·       *Expected dividends*—The Company used its expected dividendyield as of each stock option grant date as its expected dividends over theexpected term of the options.

·       *Risk-free rate*—The Company used risk-free interest rates forperiods within the expected terms of the options based on the U.S. Treasuryyield curve in effect at each option grant date.

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Toestimate each stock option’s weighted-average fair value on the grant dates,the following weighted-average assumptions were used in the Black-Scholesoption pricing model for all stock options granted during the three monthsended March 31, 2006 and 2007:

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

 

The weighted-average grant-date fair values of optionsgranted during the three months ended March 31, 2006 and 2007 were $4.85per option and $4.51 per option, respectively, and are being expensed ratablyover each award’s respective vesting period.

Thefollowing table provides certain information with respect to stock optionsoutstanding and exercisable at March 31, 2007 under the Company’sstock-based compensation plans:

| ** **                                           | ** ** | **Outstanding** | ** **     | **Exercisable** | ** ** |
|------------------------------------------------------|------------|-----------------|----------------|-----------------|------------|
| Number of stock  options                             |       | 1,290,000       |           | 195,417         |       |
| Range of exercise  prices                            |       | $               | 12.11 - $14.70 |            | $          | 12.11 - $14.70 |   |
| Weighted-average  exercise price                     |       | $12.61          |           | $12.90          |       |
| Aggregate  intrinsic value (in thousands)            |       | $3,583          |           | $486            |       |
| Weighted-average  remaining contractual term (years) |       | 8.6             |           | 8.6             |       |
|                                                      |            |                 |                |                 |            |  |  |

 

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

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

 

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

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

 

No restricted shares vested during the three monthsended March 31, 2006. The total grant date fair value of restricted sharesvested during the three months ended March 31, 2007 was approximately $0.1 millionand the total market value of these shares on the dates vested wasapproximately $0.1 million.

Asummary of the stock-based compensation cost included in general andadministrative expenses in the accompanying consolidated statements of incomefor the three months ended March 31, 2006 and 2007 follows (in thousands):

| ** **                              | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Restricted stock                        |       | $        | 363        |     | $          | 392 |   |
| Stock options                           |       | 219      |       | 243      |       |
| Total stock-based  compensation expense |       | $        | 582        |     | $          | 635 |   |

 

As of March 31,2007, the total compensation cost not yet recognized related to nonvested stockawards under the Company’s plans is approximately $9.9 million. Theweighted average period over which this expense is expected to be recognized isapproximately 5.5 years.

**9.**   Transactionswith Variable Interest Entity

The Company conducts business in Texas through awholly owned subsidiary registered as a Credit Services Organization (“CSO”)under Texas law. In connection with operating as a CSO, the Company is a partyto a credit services organization agreement (“CSO Agreement”) with anunaffiliated third-party lender. The CSO Agreement governs the terms by whichthe Company refers customers in Texas to that lender, on a non-exclusive basis,for a possible extension of credit, processes loan applications and commits toreimburse the lender for any loans or related fees that are not collected fromsuch customers.

**The Company has determined that thelender is a variable interest entity (“VIE”) under Financial**Accounting Standards Board Financial Interpretation No. 46(Revised) (“FIN 46(R)”). The Company has neither an equity interest norvoting rights in the lender and has no input into the management of the lender.However, the Company has determined that it is the primary beneficiary of the VIEbecause the Company has committed to reimburse the lender for the full amountof the loans and all related fees that are not paid by the customers for allloans that are processed under the CSO Agreement. As a result, the Company hasconsolidated the lender into the Company’s financial statements.

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Theimpact of the consolidation of this VIE on the Company’s March 31, 2006and 2007 consolidated balance sheets was to increase (decrease) the followingbalance sheet accounts as follows (in thousands):

| ** **                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash and cash  equivalents                            |       | $        | 6,086      |     | $          | 2,653 |   |
| Advances and fees  receivable, net                    |       | 15,509   |       | 27,063   |       |
| Accounts payable                                      |       | —   |       | 4,016    |       |
| Accrued  liabilities                                  |       | 70       |       | (5,040   | )          |
| Income taxes  payable                                 |       | —   |       | 169      |       |
| Non-controlling interest  in variable interest entity |       | 21,525   |       | 30,571   |       |
|                                                       |            |          |            |          |            |  |  |

 

Theimpact of the consolidation of this VIE on the Company’s consolidatedstatements of income for the three months ended March 31, 2006 and 2007was to increase the following income statement accounts as follows (inthousands):

| ** **                                       | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Net revenues                                     |       | $        | 696        |     | $          | 1,361 |   |
| Other center  expenses                           |       | 211      |       | 226      |       |
| Interest expense                                 |       | —   |       | 723      |       |
| Income tax  expense                              |       | —   |       | 169      |       |
| Income of consolidated  variable interest entity |       | 485      |       | 243      |       |
|                                                  |            |          |            |          |            |  |  |

 

**10.**   RelatedParty Transactions

Included in center expenses for the three months endedMarch 31, 2006 and 2007 are expenses for center leases with relatedparties of approximately $18,000 and $10,000, respectively. Included in generaland administrative expenses are expenses with related parties relatingprimarily to aircraft operating expenses and operating leases for office andwarehouse space of approximately $163,000 for the three months ended March 31,2006 and a net credit of approximately $1,000 for the three months ended March 31,2007.

In addition, under atime-share arrangement, the Company’s Chairman and Vice Chairman have used theCompany’s aircraft for private purposes in exchange for the Company’s use of anidentical aircraft owned by the Company’s Chairman and Vice Chairman. Includedin accrued liabilities at March 31, 2007 is a $28,000 liability related tothis arrangement.

**11.**   SubsequentEvents

On May 2, 2007, theCompany announced that its Board of Directors declared a cash dividend of$0.125 per share of common stock, payable on June 8, 2007 to shareholdersof record on May 29, 2007.

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

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our consolidated financial statements andthe related notes in “Item 1. Financial Statements.” This discussioncontains forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated by theseforward-looking statements. Please see “Part I. Item 1A. Risk Factors”in our Annual Report on Form 10-K for the year ended December 31,2006 and “Forward-Looking Statements” for discussions of the uncertainties,risks and assumptions associated with these statements.*

**Overview**

Headquartered in Spartanburg, South Carolina, we arethe largest provider of payday cash advance services in the United States asmeasured by the number of centers operated. Our centers provide short-term,unsecured cash advances that are typically due on the customers’ next payday.As of March 31, 2007, we operated 2,871 centers in 37 states.

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

We provide advances and charge fees and/or interest asspecified by the laws of the states where we operate under the standardbusiness model. In the states where we previously operated under the agencybusiness model, the lending banks provided advances and installment loans andcharged fees and/or interest as specified by the laws of the states in whichthey were located and consistent with the regulatory authority of the FDIC andfederal banking law. The permitted size of an advance varies by state andranges from $50 to $1,000. The permitted fees and/or interest on an advancealso vary by state and range from 10% to 22% of the amount of a payday cashadvance. Fees and interest for the line of credit product consist of a monthlyservice fee for the line of credit plus interest on the average outstandingbalance. Fees and interest for installment loans are larger relative to thesize of the advance because of the longer term of this product.

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

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

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Thefollowing table summarizes the most significant differences between thestandard business model and the agency business model, including the applicableseparation of obligations, fees and risks:

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

 

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

***Approval Process***

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

To obtain anadvance, a customer typically:

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

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

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

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

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

***Repayment andCollection Process***

If a customer does not return to repay the amount due,the center manager has the discretion to either (1) commence past-duecollection efforts, which typically may proceed for up to 14 days in moststates, or (2) deposit the customer’s personal check. If the centermanager has decided to commence past-due collection efforts in place ofdepositing the customer’s personal check, center employees typically contactthe customer by telephone or in person to obtain a payment or a promise to payand attempt to exchange the customer’s check for a cashier’s check, if fundsare available. We also may permit a customer to enter into an extended paymentplan if the customer is unable to meet his or her current repayment obligation.

If at the end of thispast-due collection period, the center has been unable to collect the amountdue, the customer’s check is then deposited. For the year ended December 31,2006, approximately 5.7% of total customer checks were deposited. Additionalcollection efforts are not required if the customer’s deposited check clears.For the year ended December 31, 2006, approximately 22% of depositedcustomer checks cleared (i.e., were not returned NSF). If the customer’s checkdoes not clear and is returned because of non-sufficient funds in 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 attempting to exchangethe customer’s check for a cashier’s check, if funds become 

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available.We also send out a series of collection letters, which are automaticallytriggered based on a set of pre-determined criteria.

***Selected OperatingData***

Thefollowing table presents key operating data for our business:

| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                           | ** ** | **March 31,**               | ** ** |
| ** **                                                                                           | ** ** | **2006**                         | ** ** | **2007** | ** ** |
| Number of centers  open at end of period                                                             |       | 2,640                            |       | 2,871 |   |
| Number of  customers served—all credit products (thousands)                                     |       | 792                              |       | 829 |   |
| Number of payday  cash advances originated (thousands)                                               |       | 2,565                            |       | 2,704 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)                           |       | $                                | 899,432    |   | $ | 968,076 |   |
| Average amount of  payday cash advance originated                                                    |       | $                                | 351        |   | $ | 358 |   |
| Average charge to  customers for providing and processing a payday cash advance                      |       | $                                | 56         |   | $ | 56 |   |
| Average duration  of a payday cash advance (days)                                                    |       | 16.0                             |       | 16.4 |   |
| Average number of  lines of credit outstanding during the period (thousands)                         |       | —                           |       | 24 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) |       | —                           |       | $ | 10,202 |   |
| Average principal  amount on lines of credit outstanding during the period                           |       | —                           |       | $ | 423 |   |
| Number of installment  loans originated (thousands)                                                  |       | 17                               |       | 6 |   |
| Aggregate  principal amount of installment loans originated (thousands)                              |       | $                                | 8,677      |   | $ | 2,345 |   |
| Average amount of  installment loan originated                                                       |       | $                                | 519        |   | $ | 415 |   |
| Average charge to  customers for providing and processing an installment loan(1)                     |       | $                                | 358        |   | — |   |

----

(1)          Forthe three months ended March 31, 2006, the installment loan activityreflects only loans originated by us as an agent for the lending banks inPennsylvania and Arkansas. Those loans contained no discounts for earlyrepayment, resulting in a readily determinable average fee. Since October 2006,we have only originated installment loans directly to customers. These loanshave five-month terms with early repayment provisions. As a result, we have notbeen directly originating installment loans for a long enough period todetermine the average charge.

***Revenues andExpenses***

Wehave historically derived our revenues from (1) fees and/or interest paidto us directly by our customers under the standard business model and (2) marketing,processing and servicing fees paid to us by the lending banks under the formeragency business model. Our total revenuesfor the three months ended March 31, 2006 and 2007 consisted of (dollarsin millions):

| ** **                                | ** ** | **2006**    | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|
| ** **                                | ** ** | **Dollars** | ** ** | **%**    | ** ** | **Dollars** | ** ** | **%** | ** ** |
| Fees and interest  charged to customers   |       | $           | 143.1      |     | 94.0       |   | $ | 168.1 |   | 100.0 |   |
| Marketing,  processing and servicing fees |       | 9.1         |       | 6.0      |       | — |   | — |   |
| Total revenues                            |       | $           | 152.2      |     | 100.0      |   | $ | 168.1 |   | 100.0 |   |

 

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.

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***Conversion ofOperations in Michigan***

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

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

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

As a result of the lending bank for Pennsylvaniaceasing to originate advances and loans, our revenues and center gross profitsfrom Pennsylvania significantly decreased during the second quarter of 2006.Through August 28, 2006, we continued to service all of this lending bank’sadvances and installment loans that were outstanding as of March 27, 2006.****In June 2006, we began offering the Advance AmericaChoice-Line of Credit (“Choice-Line”) in Pennsylvania. The Choice-Line productallows customers access to up to $500 in credit for a monthly participation feeplus interest on outstanding loan balances.

Thefollowing is a summary of financial information for our operations inPennsylvania for the three months ended March 31, 2006 and 2007 (inthousands):

| ** **             | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Net revenues           |       | $        | 6,900      |     | $          | 8,858 |   |
| Total center  expenses |       | 4,012    |       | 3,832    |       |
| Center gross profit    |       | $        | 2,888      |     | $          | 5,026 |   |

 

As a result of the lending bank for Arkansas ceasingto originate advances and loans, our revenues and center gross profits inArkansas also deteriorated significantly during the second quarter of 2006. Wecontinued, through September 8, 2006, to service all of this lendingbank’s installment loans and payday cash advances that were outstanding as of April8, 2006 and June 24, 2006, respectively. In June 2006, we began operatingin Arkansas under existing state-based legislation and directly providingcheck-cashing services to customers in Arkansas.

Thefollowing is a summary of financial information for our operations in Arkansasfor the three months ended March 31, 2006 and 2007 (in thousands):

| ** **             | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Net revenues           |       | $        | 1,348      |     | $          | 1,117 |   |
| Total center  expenses |       | 998      |       | 948      |       |
| Center gross profit    |       | $        | 350        |     | $          | 169 |   |

 

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***Centers***

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

| **State**      | ** ** | ** ** | ** ** | **December 31,**

**2006** | ** ** | **March 31,**

**2007** | ** ** |
|----------------|------------|------------|------------|---------------------------------|------------|------------------------------|------------|
| Alabama        |       |       | 140        |                            |       |                         | 141        |   |   |
| Arizona        |       |       | 60         |                            |       |                         | 58         |   |   |
| Arkansas       |       |       | 30         |                            |       |                         | 30         |   |   |
| California     |       |       | 302        |                            |       |                         | 302        |   |   |
| Colorado       |       |       | 67         |                            |       |                         | 68         |   |   |
| Delaware       |       |       | 14         |                            |       |                         | 14         |   |   |
| Florida        |       |       | 248        |                            |       |                         | 251        |   |   |
| Idaho          |       |       | 15         |                            |       |                         | 14         |   |   |
| Illinois       |       |       | 72         |                            |       |                         | 72         |   |   |
| Indiana        |       |       | 123        |                            |       |                         | 123        |   |   |
| Iowa           |       |       | 37         |                            |       |                         | 37         |   |   |
| Kansas         |       |       | 56         |                            |       |                         | 56         |   |   |
| Kentucky       |       |       | 43         |                            |       |                         | 42         |   |   |
| Louisiana      |       |       | 76         |                            |       |                         | 77         |   |   |
| Michigan       |       |       | 137        |                            |       |                         | 139        |   |   |
| Mississippi    |       |       | 53         |                            |       |                         | 53         |   |   |
| Missouri       |       |       | 84         |                            |       |                         | 83         |   |   |
| Montana        |       |       | 8          |                            |       |                         | 8          |   |   |
| Nebraska       |       |       | 24         |                            |       |                         | 24         |   |   |
| Nevada         |       |       | 11         |                            |       |                         | 13         |   |   |
| New Hampshire  |       |       | 20         |                            |       |                         | 21         |   |   |
| New Mexico     |       |       | 12         |                            |       |                         | 12         |   |   |
| North Dakota   |       |       | 8          |                            |       |                         | 8          |   |   |
| Ohio           |       |       | 231        |                            |       |                         | 235        |   |   |
| Oklahoma       |       |       | 67         |                            |       |                         | 66         |   |   |
| Oregon         |       |       | 53         |                            |       |                         | 48         |   |   |
| Pennsylvania   |       |       | 99         |                            |       |                         | 99         |   |   |
| Rhode Island   |       |       | 15         |                            |       |                         | 16         |   |   |
| South Carolina |       |       | 129        |                            |       |                         | 130        |   |   |
| South Dakota   |       |       | 12         |                            |       |                         | 12         |   |   |
| Tennessee      |       |       | 65         |                            |       |                         | 65         |   |   |
| Texas          |       |       | 231        |                            |       |                         | 238        |   |   |
| Utah           |       |       | —     |                            |       |                         | 1          |   |   |
| Virginia       |       |       | 142        |                            |       |                         | 143        |   |   |
| Washington     |       |       | 110        |                            |       |                         | 109        |   |   |
| Wisconsin      |       |       | 52         |                            |       |                         | 54         |   |   |
| Wyoming        |       |       | 7          |                            |       |                         | 9          |   |   |
| Total          |       |       | 2,853      |                            |       |                         | 2,871      |   |   |

 

***New centers***

We opened 42 and 39 newcenters during the three months ended March 31, 2006 and 2007,respectively.

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***Closed centers***

We closed 6 and 21 centersduring the three months ended March 31, 2006 and 2007, respectively. Theexpenses related to closing centers typically include the undepreciated costsof fixtures and signage that cannot be moved and reused at another center,moving costs, severance payments and any lease cancellation costs. We recordedexpenses related to center closures, including loss on impairment of assets, ofapproximately $0.6 million and $0.7 million in the three months endedMarch 31, 2006 and 2007, respectively.

**Critical AccountingPolicies and Use of Estimates**

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

We believe that the following critical accountingpolicies affect the more significant estimates and assumptions used in thepreparation of our financial statements:

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

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

The allowance for doubtful accounts is (and accrualfor excess bank losses was) primarily based upon models that analyze specificportfolio statistics and also reflect, to a lesser extent, management’sjudgment regarding overall accuracy. The analytical models take into accountseveral factors including the number of transactions customers complete andcharge-off and recovery rates. Additional factors such as changes instate laws, center closings, length of time centers have been open in a state,relative mix of new centers within a state and other relevant factors are alsoevaluated to determine whether the results from the analytical models should berevised.

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

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

Under the standard business model, unpaid advances andthe related fees and/or interest are generally charged off 60 days after thedate the check was returned by the customer’s bank for non-sufficient funds orother reasons, unless the customer has paid at least 15% of the total of his orher loan plus the original fee. Under the agency business model, unpaid paydaycash advances and the related fees and/or interest generally were charged off60 days from the due date and unpaid installment loans and the related fees and/orinterest generally were charged off 60 days from the deposit date if the checkwas returned by the 

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customer’s bank fornon-sufficient funds or other reasons. Under either model, unpaid advances ofcustomers who file for bankruptcy are charged off upon receipt of thebankruptcy notice. Although management uses the best information available tomake evaluations, future adjustments to the allowance for doubtful accounts maybe necessary if conditions differ substantially from our assumptions used inassessing their adequacy.

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

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

In addition to the seasonal fluctuations, thereceivable balances can fluctuate throughout a week, generally being at theirhighest levels on a Wednesday or Thursday and at their lowest levels on aFriday. In general, receivable balances decrease approximately 4% to 7% from atypical Thursday to a typical Friday. The first quarter of 2006 began on aSunday (a relative low point in weekly receivable balances) and ended on aFriday (a relative low point in weekly receivable balances). The first quarterof 2007 began on a Monday (a relative low point in weekly receivable balances)and ended on a Saturday (a relative low point in weekly receivable balances).

To the extent historicalcredit experience is not indicative of future performance or other assumptionsused by management do not prevail, our loss experience could differsignificantly, resulting in either higher or lower future provisions fordoubtful accounts. As of March 31, 2007, if average default rates were 5%higher or lower, the allowance for doubtful accounts would change byapproximately $2.4 million.

***Intangible Assets***

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

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

Accrued liabilities in ourDecember 31, 2006 and March 31, 2007 financial statements includeaccruals of approximately $3.5 million and $2.7 million,respectively, for the self-insured portion of our health and dentalinsurance and approximately $3.8 million and $3.7 million,respectively, for workers’ compensation. We recognize our obligationsassociated with those benefits in the period the claim is incurred. The costsof both reported claims and claims incurred but not reported, up to specifieddeductible limits, are estimated based on historical data, current enrollment,employee statistics and other information. We review estimates and periodicallyupdate our estimates and the resulting reserves and any necessary adjustmentsare reflected in earnings currently. For the quarter ended March 31, 2007,we revised our estimated claims lag for our health and dental insurance, whichresulted in reductions of salaries and related payroll costs and general andadministrative expenses for the quarter of approximately $0.9 million 

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and $0.1 million,respectively. To the extent historical claims are not indicative of futureclaims, there are changes in enrollment or employee history, workers’compensation loss development factors change or other assumptions used bymanagement do not prevail, our expense and related accrued liabilities couldincrease or decrease.

***Consolidation ofVariable Interest Entity***

In connection with our CSOoperations in Texas, we entered into an agreement with an unaffiliatedthird-party lender. We have determined that the third-party lender is avariable interest entity (“VIE”) under Financial Accounting Standards BoardInterpretation No. 46 (Revised) (“FIN 46(R)”). We have neither anequity interest nor voting rights in the lender and have no input into themanagement of the lender. However, we determined that we are the primarybeneficiary of the VIE because we have committed to reimburse the lender forthe full amounts of the loans and all related fees that are not paid by thecustomers. As a result, we have consolidated the lender as of March 31,2006 and 2007. See “Item 1. Financial Statements—Notes to Interim UnauditedConsolidated Financial Statements—Note 9. Transactions with VariableInterest Entity” for the impact of adopting FIN 46(R) on our resultsof operations and financial condition.

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

In 2004, we adoptedStatement of Financial Accounting Standards No. 123 (Revised), Share-BasedPayment (“SFAS 123(R)”). Accordingly, we measure the cost of ourstock-based employee compensation at the grant date based on fair value andrecognize such cost in the financial statements over each award’s requisiteservice period. As of March 31, 2007, the total compensation cost not yetrecognized related to nonvested stock awards under our stock-based employeecompensation plans is approximately $9.9 million. The weighted averageperiod over which this expense is expected to be recognized is approximately5.5 years. See “Item 1. Financial Statements—Notes to Interim UnauditedFinancial Statements—Note 8. Capital Stock and Stock-Based Compensation Plans”for a description of our restricted stock and stock option awards and theassumptions used to calculate the fair value of such awards including theexpected volatility assumed in valuing our stock option grants.

***Recently IssuedAccounting Pronouncement***

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Financial InterpretationNo. 48, Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109 (“FIN 48”). FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in a company’s financialstatements in accordance with FASB Statement No. 109, Accounting forIncome Taxes. FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. It also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition.Effective January 1, 2007, we adopted FIN 48. As a result of theadoption of FIN 48, we recognized no adjustments in the liability forunrecognized income tax benefits. At the adoption date, we did not have anyunrecognized tax benefits and did not have any interest or penalties accrued.We are subject to U.S. income taxes as well as various other state and localjurisdictions. With few exceptions, we are no longer subject to U.S. federal,state and local income tax examinations by tax authorities for years before thetax year ended September 30, 2002.

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**Results ofOperations**

***Three Months Ended March 31,2006 Compared to Three Months Ended March 31, 2007***

Thefollowing tables set forth our results of operations for the three months endedMarch 31, 2006 compared to the three months ended March 31, 2007:

| ** **                                                     | ** ** | **Three  Months Ended March 31,**                                         | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
| ** **                                                     | ** ** | **2006**                                                                       | ** ** | **2007** | ** ** | **Favorable/(Unfavorable)** | ** ** |
| ** **                                                     | ** ** | **Dollars**                                                                    | ** ** | **% Net **

**Revenues** | ** ** | **Dollars** | ** ** | **% Net **

**Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands, except center information)** | ** ** |
| **Revenues:**                                                  |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fees and interest  charged to customers                        |       | $                                                                              | 143,092    |   |   | 102.0 | % |   | $ | 168,083 |   |   | 110.4 | % |   | $ | 24,991 |   | 17.5 | % |
| Marketing, processing  and servicing fees                      |       | 9,077                                                                          |       |   | 6.5 | % |   | — |   |   | — |   |   | (9,077 | ) | (100.0 | )% |
| Total revenues                                                 |       | 152,169                                                                        |       |   | 108.5 | % |   | 168,083 |   |   | 110.4 | % |   | 15,914 |   | 10.5 | % |
| Provision for doubtful  accounts and agency bank losses        |       | (11,876                                                                        | )          |   | (8.5 | )% |   | (15,815 | ) |   | (10.4 | )% |   | (3,939 | ) | (33.2 | )% |
| Net revenues                                                   |       | 140,293                                                                        |       |   | 100.0 | % |   | 152,268 |   |   | 100.0 | % |   | 11,975 |   | 8.5 | % |
| **Center Expenses:**                                           |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related  payroll costs                            |       | 46,547                                                                         |       |   | 33.2 | % |   | 49,197 |   |   | 32.3 | % |   | (2,650 | ) | (5.7 | )% |
| Occupancy costs                                                |       | 21,048                                                                         |       |   | 15.0 | % |   | 23,533 |   |   | 15.5 | % |   | (2,485 | ) | (11.8 | )% |
| Center depreciation  expense                                   |       | 3,953                                                                          |       |   | 2.8 | % |   | 4,269 |   |   | 2.8 | % |   | (316 | ) | (8.0 | )% |
| Advertising expense                                            |       | 3,319                                                                          |       |   | 2.4 | % |   | 5,309 |   |   | 3.5 | % |   | (1,990 | ) | (60.0 | )% |
| Other center expenses                                          |       | 15,290                                                                         |       |   | 10.9 | % |   | 14,158 |   |   | 9.3 | % |   | 1,132 |   | 7.4 | % |
| Total center expenses                                          |       | 90,157                                                                         |       |   | 64.3 | % |   | 96,466 |   |   | 63.4 | % |   | (6,309 | ) | (7.0 | )% |
| Center gross profit                                            |       | 50,136                                                                         |       |   | 35.7 | % |   | 55,802 |   |   | 36.6 | % |   | 5,666 |   | 11.3 | % |
| **Corporate and Other Expenses (Income):**                     |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative expenses                           |       | 13,011                                                                         |       |   | 9.3 | % |   | 13,279 |   |   | 8.7 | % |   | (268 | ) | (2.1 | )% |
| Corporate depreciation  expense                                |       | 961                                                                            |       |   | 0.7 | % |   | 818 |   |   | 0.5 | % |   | 143 |   | 14.9 | % |
| Interest expense                                               |       | 907                                                                            |       |   | 0.6 | % |   | 2,313 |   |   | 1.5 | % |   | (1,406 | ) | (155.0 | )% |
| Interest income                                                |       | (176                                                                           | )          |   | (0.1 | )% |   | (76 | ) |   | — |   |   | (100 | ) | (56.8 | )% |
| Loss on disposal of  property and equipment                    |       | 208                                                                            |       |   | 0.1 | % |   | 252 |   |   | 0.2 | % |   | (44 | ) | (21.2 | )% |
| Loss on impairment of  assets                                  |       | —                                                                         |       |   | — |   |   | 314 |   |   | 0.2 | % |   | (314 | ) | (100.0 | )% |
| Total corporate and  other expenses                            |       | 14,911                                                                         |       |   | 10.6 | % |   | 16,900 |   |   | 11.1 | % |   | (1,989 | ) | (13.3 | )% |
| Income before income  taxes                                    |       | 35,225                                                                         |       |   | 25.1 | % |   | 38,902 |   |   | 25.5 | % |   | 3,677 |   | 10.4 | % |
| Income tax expense                                             |       | 14,313                                                                         |       |   | 10.2 | % |   | 16,343 |   |   | 10.7 | % |   | (2,030 | ) | (14.2 | )% |
| Income before income of  consolidated variable interest entity |       | 20,912                                                                         |       |   | 14.9 | % |   | 22,559 |   |   | 14.8 | % |   | 1,647 |   | 7.9 | % |
| Income of consolidated  variable interest entity               |       | (485                                                                           | )          |   | (0.3 | )% |   | (243 | ) |   | (0.1 | )% |   | 242 |   | 49.9 | % |
| Net income                                                     |       | $                                                                              | 20,427     |   |   | 14.6 | % |   | $ | 22,316 |   |   | 14.7 | % |   | $ | 1,889 |   | 9.2 | % |

 

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| ** **                                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| **Center Information:**                                                                              |       |                                             |       |   |   |
| Number of centers  open at beginning of period                                                       |       | 2,604                                            |       | 2,853 |   |
| Opened                                                                                               |       | 42                                               |       | 39 |   |
| Closed                                                                                               |       | (6                                               | )          | (21 | ) |
| Number of centers  open at end of period                                                             |       | 2,640                                            |       | 2,871 |   |
| Weighted average  number of centers open during the period                                           |       | 2,617                                            |       | 2,862 |   |
| Number of  customers served—all credit products (thousands)                                     |       | 792                                              |       | 829 |   |
| Number of payday  cash advances originated (thousands)                                               |       | 2,565                                            |       | 2,704 |   |
| Aggregate  principal amount of payday cash advances originated (thousands)                           |       | $                                                | 899,432    |   | $ | 968,076 |   |
| Average amount of  payday cash advance originated                                                    |       | $                                                | 351        |   | $ | 358 |   |
| Average charge to  customers for providing and processing a payday cash advance                      |       | $                                                | 56         |   | $ | 56 |   |
| Average duration  of a payday cash advance (days)                                                    |       | 16.0                                             |       | 16.4 |   |
| Average number of  lines of credit outstanding during the period (thousands)                         |       | —                                           |       | 24 |   |
| Average amount of  aggregate principal on lines of credit outstanding during the period  (thousands) |       | —                                           |       | $ | 10,202 |   |
| Average principal  amount on lines of credit outstanding during the period                           |       | —                                           |       | $ | 423 |   |
| Number of  installment loans originated (thousands)                                                  |       | 17                                               |       | 6 |   |
| Aggregate  principal amount of installment loans originated (thousands)                              |       | $                                                | 8,677      |   | $ | 2,345 |   |
| Average amount of  installment loan originated                                                       |       | $                                                | 519        |   | $ | 415 |   |
| Average charge to  customers for providing and processing an installment loan(1)                     |       | $                                                | 358        |   | — |   |

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(1)          Forthe three months ended March 31, 2006, the installment loan activityreflects only loans originated by us as an agent for the lending banks inPennsylvania and Arkansas. Those loans contained no discounts for earlyrepayment, resulting in a readily determinable average fee. Since October 2006,we have only originated installment loans directly to customers. These loanshave five-month terms with early repayment provisions. As a result, we have notbeen directly originating installment loans for a long enough period todetermine the average charge.

| ** **                                                                            | ** ** | **Three  Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                            | ** ** | ** **                             | ** ** | ** ** | ** ** | **Variance** | ** ** |
| ** **                                                                            | ** ** | **2006**                               | ** ** | **2007** | ** ** | **Favorable/(Unfavorable)** | ** ** |
| ** **                                                                            | ** ** | **Dollars**                            | ** ** | **% Net**

**Revenues** | ** ** | **Dollars** | ** ** | **% Net**

**Revenues** | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**   | ** ** |
| **Per  Center (based on weighted average number of centers open during the period):** |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Center net  revenues                                                                  |       |                                   | $          | 53.6 |   |   |   | 100.0 | % |   |   | $ | 53.2 |   |   |   | 100.0 | % |   |   | $ | (0.4 | ) |   | (0.7 | )% |
| Center expenses:                                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and related payroll costs                                                    |       |                                   | 17.8       |   |   |   | 33.2 | % |   |   | 17.2 |   |   |   | 32.3 | % |   |   | 0.6 |   |   | 3.4 | % |
| Occupancy costs                                                                       |       |                                   | 8.0        |   |   |   | 15.0 | % |   |   | 8.2 |   |   |   | 15.5 | % |   |   | (0.2 | ) |   | (2.5 | )% |
| Center depreciation expense                                                           |       |                                   | 1.5        |   |   |   | 2.8 | % |   |   | 1.5 |   |   |   | 2.8 | % |   |   | — |   |   | — |   |
| Advertising expense                                                                   |       |                                   | 1.3        |   |   |   | 2.4 | % |   |   | 1.9 |   |   |   | 3.5 | % |   |   | (0.6 | ) |   | (46.2 | )% |
| Other center expenses                                                                 |       |                                   | 5.8        |   |   |   | 10.9 | % |   |   | 4.9 |   |   |   | 9.3 | % |   |   | 0.9 |   |   | 15.5 | % |
| Total center expenses                                                                 |       |                                   | 34.4       |   |   |   | 64.3 | % |   |   | 33.7 |   |   |   | 63.4 | % |   |   | 0.7 |   |   | 2.0 | % |
| Center gross profit                                                                   |       |                                   | $          | 19.2 |   |   |   | 35.7 | % |   |   | $ | 19.5 |   |   |   | 36.6 | % |   |   | $ | 0.3 |   |   | 1.6 | % |

 

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***Revenue Analysis***

Total revenues increased approximately $15.9 millionduring the three months ended March 31, 2007 compared to the same periodin 2006. The increase was primarily due tothe opening of new centers and revenue growth in existing centers. Totalrevenues for the 2,530 centers opened prior to January 1, 2006 and stillopen as of March 31, 2007 increased $11.4 million from $150.2 million forthe three months ended March 31, 2006 to $161.6 million for the sameperiod in 2007. Centers opened prior to January 1, 2006 were at leastthree months and fifteen months old at the end of the three-month periods endedMarch 31, 2006 and 2007, respectively. Total revenues for the 341 centersopened after January 1, 2006 and still open as of March 31, 2007 increased$6.0 million from $0.1 million for the three months ended March 31, 2006to $6.1 million for the same period in 2007. Total revenues for the remaining74 centers that closed represented a decrease of approximately $1.5 million forthe three months ended March 31, 2007 compared to the same period in 2006.

As a percentage of total revenues, the provision fordoubtful accounts and agency bank losses increased to 9.4% for the three monthsended March 31, 2007 from 7.8% for the same period in 2006. The increasein the provision during the first quarter of 2007 is due primarily to increasedloss rates.

***Center ExpenseAnalysis***

*Salariesand related payroll costs.**  *The increase in salaries and related payroll costsfor the three months ended March 31, 2007 was due primarily to the newcenters opened in 2006 and 2007. We averaged approximately 2.14 and 2.16full-time equivalent field employees, including district directors, per centerduring the three months ended March 31, 2006 and 2007, respectively. Forthe quarter ended March 31, 2007, we revised our estimated claims lag forour health and dental insurance, which resulted in a reduction of salaries andrelated payroll costs for the quarter of approximately $0.9 million.

*Occupancycosts and center depreciation expense.**  *The increases in occupancy costsand center depreciation expense for the three months ended March 31, 2007were due primarily to the new centers opened in 2006 and 2007.

*Advertisingexpense.**  *Advertisingexpense increased for the three months ended March 31, 2007 compared tothe same period in 2006 due primarily to a change in marketing strategy. Duringthe third quarter of 2006, we launched a new advertising campaign with newcenter merchandising materials, direct mail and television and radio commercials.Going forward, we expect increased marketing expenditures tied to theintroduction of new products and a more aggressive overall marketing strategy.

*Other center expenses.**  *Other center expenses decreased forthe three months ended March 31, 2007 compared to the same period in 2006due primarily to lower office supplies, postage and center closing costs in2007.

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

*General and administrativeexpenses.**  *Theincrease in general and administrative expenses for the three months ended March 31,2007 was due primarily to:

·       increasesin our human resources department expenses of approximately $0.5 millionrelated to additional department headcount, consulting, recruiting and employeerelocation costs;

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

·       adecrease in payroll expense of approximately $0.8 million for the SouthCarolina Job Development Credit related to employees in our corporateheadquarters (of which approximately $0.7 million represents a catchup creditfor the years 2003—2006).

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

**Liquidity andCapital Resources**

Thefollowing table presents a summary of cash flows for the three months ended March 31,2006 and 2007 (dollars in thousands):

| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                            | ** ** | **2006**   | ** ** | **2007**   | ** ** | **Dollars**  | ** ** | **%** | ** ** |
| Cash flows provided by  (used in):                    |       |       |       |       |       |         |       |   |   |
| Operating activities                                  |       | $          | 19,003     |       | $          | 19,573       |       | $ | 570 |   | 3.0 | % |
| Investing activities                                  |       | 27,280     |       | 31,332     |       | 4,052        |       | 14.9 | % |
| Financing activities                                  |       | (42,775    | )          | (92,129    | )          | (49,354      | )          | (115.4 | )% |
| Net increase  (decrease) in cash and cash equivalents |       | 3,508      |       | (41,224    | )          | (44,732      | )          | (1,275.1 | )% |
| Cash and cash  equivalents, beginning of period       |       | 27,259     |       | 67,245     |       | 39,986       |       | 146.7 | % |
| Cash and cash equivalents,  end of period             |       | $          | 30,767     |       | $          | 26,021       |       | $ | (4,746 | ) | (15.4 | )% |

 

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

We borrow under our $265.0 million revolvingcredit facility to fund our advances and our other liquidity needs. Ourday-to-day balances under our revolving credit facility, as well as our cashbalances, vary because of seasonal and day-to-day requirements resulting frommaking and collecting advances. For example, if a month ends on a Friday (atypical payday), our borrowings and our cash balances will be high compared toa month that does not end on a Friday. This is because a substantial portion ofthe advances will be repaid in cash on that day but sufficient time will notyet have passed for the cash to reduce the outstanding borrowings under ourrevolving credit facility. Our borrowings under our revolving credit facilitywill also increase as the demand for advances increases during our peak periodssuch as the back-to-school and holiday seasons. Conversely, our borrowingstypically decrease during the tax refund season when cash receipts fromcustomers peak or the customer demand for new advances decreases. Advances andfees receivable, net increased approximately $33.2 million, or 21.6% to $187.0million at March 31, 2007 compared to $153.8 million at March 31,2006 due primarily to an increase in the number of centers and the conversionof Pennsylvania and Arkansas to state-based legislation where we fund the advances.Advances and fees receivable, net decreased approximately $50.7 million, or21.4% to $187.0 million at March 31, 2007 compared to $237.7 million at December 31,2006 due primarily to tax refund season.

On May 4, 2005, we announced that our Board of Directorshad approved a program authorizing the repurchase of up to $50.0 million of ouroutstanding common stock. Additionally, on August 16, 2006, we announcedthat our Board of Directors had approved an extension of our stock repurchaseprogram authorizing us to repurchase up to $100.0 million of our outstandingcommon stock on and after this date. Our Board of Directors determined that thecontinuation and increase of the stock repurchase program serves the bestinterest of us and our stockholders by returning capital to our stockholders.

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

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During the three months ended March 31, 2006, wedid not repurchase any shares of our outstanding common stock. During the threemonths ended March 31, 2007, 2,826 shares of our common stock weresurrendered by employees to satisfy their tax obligations with respect to thevesting of restricted stock awarded pursuant to our 2004 Omnibus Stock Plan.Based on the average of the high and low stock price on the day of surrender, thoseshares had an aggregate value of approximately $41.0 thousand.

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

***Cash Flows fromOperating Activities***

The increase in net cashprovided by operating activities for the three months ended March 31, 2007compared to the same period in 2006 was due primarily to an increase innon-cash adjustments of $6.6 million and an increase in net income of $1.9million, offset by a net decrease in changes in operating assets andliabilities of $7.9 million.

***Cash Flows fromInvesting Activities***

The increase in net cashprovided by investing activities for the three months ended March 31, 2007compared to the same period in 2006 was primarily due to a $4.8 millionincrease in the change in cash invested in advances and fees receivable,partially offset by a $1.1 million increase in purchases of property andequipment.

***Cash Flows from FinancingActivities***

The increase in net cashused in financing activities for the three months ended March 31, 2007compared to the same period in 2006 was primarily due to a $39.0 millionincrease in payments on our revolving credit facility, a $7.3 milliondecrease in the change in book overdrafts and a $0.9 million increase individend payments.

**CapitalExpenditures**

For the three months endedMarch 31, 2006 and 2007, we spent $1.9 million and $3.0 million,respectively, on capital expenditures. Capital expenditures includedexpenditures for (1) new centers opened, (2) center remodels and (3) computerequipment replacements in our centers and at our corporate headquarters.

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

During the first quarter of 2006, we operated as anagent for lending banks in Arkansas and Pennsylvania pursuant to MP&SAgreements. Each lending bank was responsible for evaluating each of itscustomers’ applications and determining whether the payday cash advance orinstallment loan was approved. The lending banks utilized an automatedthird-party credit scoring system to evaluate and approve each customerapplication. We were not involved in the lending banks’ approval process or indetermining their approval procedures or criteria and, in the normal course ofbusiness, we generally did not fund or acquire any payday cash advances orinstallment loans from the lending banks. The payday cash advances andinstallment loans were repayable solely to the lending banks and were assets ofthe lending banks. Consequently, the lending banks’ payday cash advances andinstallment loans have never been included in our balance sheet within ouradvances and fees receivable, net.

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

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

As a result of theconversion of our Pennsylvania and Arkansas operations to our standard businessmodel in June 2006, the accrual for excess bank losses and gross profitderived from the agency business model has declined to zero. The accrual forexcess bank losses that was reported in our balance sheet was $2.9 million asof March 31, 2006. We had no accrual for excess bank losses as of December 31,2006 and March 31, 2007. Approximately 2.1% of our total center grossprofit, in the three months ended March 31, 2006 was derived from theagency business model.

**Certain ContractualCash Commitments**

Ourprincipal future contractual obligations and commitments as of March 31,2007, including periodic interest payments, included the following (dollars inthousands):

| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Payment due by**

**December 31,** | ** ** | ** **              | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------|------------|-------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** ** | ** ** | **Total**  | ** ** | **2007**                                            | ** ** | **2008 and  2009** | ** ** | **2010 and  2011** | ** ** | **2012 and  thereafter** | ** ** |
| Long-term debt  obligations:               |       |       |       |       |       |                                                |       |                    |       |   |   |   |   |
| Revolving credit facility                  |       | $          | 27,948     |       | $          | —                                              |       | $                       | 27,948     |   | $ | — |   |   | $ | — |   |   |
| Mortgage payable                           |       | 8,166      |       | 598        |       | 1,593                                               |       | 1,593                   |       |   | 4,382 |   |   |
| Note payable                               |       | 381        |       | 139        |       | 242                                                 |       | —                  |       |   | — |   |   |
| Operating lease  obligations  (1)          |       | 143,331    |       | 46,525     |       | 77,374                                              |       | 18,019                  |       |   | 1,413 |   |   |
| Purchase  obligations                      |       | 1,576      |       | 1,576      |       | —                                              |       | —                  |       |   | — |   |   |
| Total                                      |       | $          | 181,402    |       | $          | 48,838                                              |       | $                       | 107,157    |   | $ | 19,612 |   |   | $ | 5,795 |   |   |
|                                            |            |            |            |            |            |                                                     |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

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

***Long-Term DebtObligations***

*RevolvingCredit Facility.*   On July 16, 2004, weentered into an amendment and restatement of our prior credit facility with asyndicate of banks. As amended and restated, our revolving credit facilityprovides us with a $265.0 million revolving line of credit, which amountincludes the ability to issue up to $20.0 million in letters of credit.Our revolving credit facility matures on July 16, 2009. We have the optionto (i) increase our revolving credit facility by an additional$10.0 million and (ii) extend its maturity date to July 16,2010, in each case upon our satisfaction of certain covenants and conditions.Any portion of our revolving credit facility that is repaid may be borrowedagain. In May 2005, we amended our revolving credit facility to allow therepurchase of up to $50.0 million of our outstanding common stock. In June 2005,we further amended our revolving credit facility to permit us to operate as aCSO in Texas. In August 2006, we amended our revolving credit facility toallow the repurchase of up to $100.0 million of our outstanding common stock onand after the date of that amendment. In January 2007, we further amendedour credit facility to permit foreign subsidiaries.

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As of March 31, 2007, we had $27.9 millionoutstanding on the revolving portion of our credit facility and $2.6 million ofletters of credit outstanding, leaving approximately $234.5 millionavailable for future borrowings under our credit facility.

In general, our borrowings under our revolving creditfacility bear interest, at our option, at either a base rate plus an applicablemargin or a LIBOR-based rate plus an applicable margin. The base rateequals the greater of (i) the prime rate announced by Bank of America, theadministrative agent under the revolving credit facility, and (ii) the sumof the federal funds rate plus 0.50%. The applicable margin is determined eachquarter by a pricing grid based on our senior leverage ratio of ourconsolidated senior debt to consolidated EBITDA. The base rate applicablemargin ranges from 0.75% to 1.50% based upon our senior leverage ratio. TheLIBOR-based applicable margin ranges from 2.50% to 3.25% based upon oursenior leverage ratio. As of March 31, 2007, the applicable margin for theprime-based rate was 0.75% and the applicable margin for the LIBOR-basedrate was 2.50%.

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

Our obligations under the revolving credit facilityare guaranteed by each of our domestic subsidiaries. Our borrowings under therevolving credit facility are secured by substantially all of our assets andthe assets of our subsidiaries. In addition, our borrowings under the revolvingcredit facility are secured by a pledge of all of the capital stock, or similarequity interests, of our domestic subsidiaries. Our revolving credit facilitycontains various financial covenants that require, among other things, themaintenance of a minimum net worth and leverage and fixed charge coverageratios. The revolving credit facility contains customary covenants and eventsof default, including covenants that restrict our ability to encumber assets, tocreate indebtedness and to declare and pay dividends. The revolving creditfacility also includes cross default provisions where an event of default withrespect to any other indebtedness in excess of $1.0 million in theaggregate could cause all amounts outstanding under the revolving creditfacility to become due and payable. We were in compliance with all financialcovenants at March 31, 2007.

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

*Mortgage Payable.**  *Our corporate headquarters buildingand related land are subject to a mortgage, the principal amount of which wasapproximately $5.8 million and $5.7 million at December 31, 2006 and March 31, 2007, respectively. Themortgage is payable to an insurance company and is collateralized by ourcorporate headquarters building and related land. The mortgage is payable in180 monthly installments of approximately $66,400, including principal andinterest, and bears interest at a fixed rate of 7.30% over its term. Themortgage matures on June 10, 2017. The carrying amount of our corporateheadquarters (land, 

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land improvementsand building) was approximately $5.2 million and $5.1 million at December 31,2006 and March 31, 2007,respectively.

***Operating LeaseObligations***

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

***PurchaseObligations***

We enter into agreementswith vendors to purchase furniture, fixtures and other items used to open newcenters. These purchase commitments typically extend for a period of two tothree months after the opening of a new center. As of March 31, 2007, ourpurchase obligations totaled approximately $1.6 million.

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

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

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

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

**Impact ofInflation**

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

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**FORWARD-LOOKINGSTATEMENTS**

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

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

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

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

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

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

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

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

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

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

·       theftand employee errors; and

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

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

You are cautioned not torely unduly on any forward-looking statements. These risks and uncertaintiesare discussed in more detail elsewhere in this Quarterly Report and in ourAnnual Report on Form 10-K for the year ended December 31, 2006under “Part I. Item 1A. Risk Factors.”

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

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

***Interest Rate Risk***

We are exposed to interest rate risk on our revolvingcredit facility. Our variable interest expense is sensitive to changes in thegeneral level of interest rates. We may from time to time enter into interestrate swaps, collars or similar instruments with the objective of reducing ourvolatility in borrowing costs. We do not use derivative financial instrumentsfor speculative or trading purposes. We had no derivative financial instrumentsoutstanding as of December 31, 2006 or March 31, 2007. The weightedaverage interest rate on our $104.8 million of variable interest debt asof December 31, 2006 was approximately 8.15%. The weighted averageinterest rate on our $27.9 million of variable interest debt as of March 31,2007 was approximately 8.67%.

We had total interestexpense of $0.9 million and $2.3 million for the three months ended March 31,2006 and 2007, respectively. The estimated change in interest expense from ahypothetical 200 basis-point change in applicable variable interest rateswould have been approximately $55.0 thousand and $0.2 million for the threemonths ended March 31, 2006 and 2007, respectively.

**ITEM 4.   CONTROLSAND 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, andour internal control over financial reporting, as of the end of the periodcovered by this Report. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that those disclosure controls andprocedures are effective. There were no changes in our internal control overfinancial reporting during the quarter ended March 31 2007, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II.  OTHER INFORMATION**

**ITEM 1.   LEGALPROCEEDINGS.**

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

**ITEM 1A.   RISKFACTORS.**

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

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

Thefollowing table sets forth information about our stock repurchases for thethree months ended March 31, 2007:

| **Period (1)**                  | ** ** | ** ** | ** ** | **Total  Number of  Shares  Purchased (2)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs (2)** | ** ** | **Approximate Dollar  Value of Shares That  May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1 to  January 31   |       |       | —     |                                                  |       |                                         | —     |                                                                                                                                      |       |                                                                                                                                               | —     |   |   |   | $ | 80,437,292 |   |   |
| February 1  to February 28 |       |       | 2,157      |                                                  |       |                                         | $          | 14.66                                                                                                                                     |       |                                                                                                                                               |       | 2,157 |   |   |   | $ | 80,405,659 |   |   |
| March 1 to  March 31       |       |       | 669        |                                                  |       |                                         | $          | 14.90                                                                                                                                     |       |                                                                                                                                               |       | 669 |   |   |   | $ | 80,395,691 |   |   |
| Total                                |       |       | 2,826      |                                                  |       |                                         | $          | 14.72                                                                                                                                     |       |                                                                                                                                               |       | 2,826 |   |   |   | $ | 80,395,691 |   |   |

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(1)          Based on trade date.

(2)          Includes2,826 shares that were surrendered by employees to satisfy their taxobligations with respect to the vesting of shares of restricted stock awardedpursuant to our 2004 Omnibus Stock Plan.

**ITEM6.   EXHIBITS.**

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

 

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**SIGNATURES**

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

|                  | ** ** | **ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.** |
|------------------|------------|-------------------------------------------------|
| ** **       | ** ** | ** **                                      |
| May 9, 2007 |       | By:                                             |   | /s/ JOHN I. HILL |
|             |       |                                            |   | John I. Hill |
| * *         |       |                                            |   | *Executive  Vice President and Chief   Financial Officer* |
| * *         |       |                                            |   | *(Duly  authorized officer and principal financial officer)* |

 

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**INDEXTO EXHIBITS**

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

 

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