Advance America, Cash Advance Centers (AEA) 10-Q 2006 Q3 Quarterly report

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 September 30, 2006
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 registrant as 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, South Carolina  29306

(Address of principal executive offices) (Zip Code)

864-342-5600

(Registrant’s telephone number, including area code)

None

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

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

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

Class	Outstanding as of November 8, 2006
Common Stock, par value $.01 per share	79,539,816 shares

ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.

Form 10-Q

For the three months and nine months ended September 30, 2006

		Page
FORWARD-LOOKING STATEMENTS		3
PART I. FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
	Unaudited Consolidated Balance Sheets December 31, 2005 and September 30, 2006	4
	Interim Unaudited Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2005 and 2006	5
	Interim Unaudited Consolidated Statement of Stockholders’ Equity Nine Months Ended September 30, 2006	6
	Interim Unaudited Consolidated Statements of Cash Flows Nine Months Ended September 30, 2005 and 2006	7
	Notes to Interim Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
PART II. OTHER INFORMATION		44
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.	Exhibits	56
SIGNATURES		57
INDEX TO EXHIBITS		58

2

FORWARD-LOOKING STATEMENTS

The matters discussed in this Quarterly Report on Form 10-Q that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties, which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current 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 discussion of future operating or financial performance. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information.

The factors listed in “Part II. Item 1A. Risk Factors,” as well as any cautionary language in this Quarterly Report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, those described in “Part II. Item 1A. Risk Factors.”

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

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PART I.  FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

Advance America, Cash Advance Centers, Inc.
Unaudited Consolidated Balance Sheets
December 31, 2005 and September 30, 2006
(in thousands, except per share data)

	December 31, 2005				September 30, 2006
Assets
Current assets
Cash and cash equivalents		$	27,259			$	50,219
Advances and fees receivable, net		193,468				222,428
Deferred income taxes		6,367				9,947
Other current assets		5,033				12,910
Total current assets		232,127				295,504
Restricted cash		10,034				10,908
Property and equipment, net		64,990				61,406
Goodwill		122,586				122,627
Other assets		6,651				5,754
Total assets		$	436,388			$	496,199
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	9,306			$	11,054
Accrued liabilities		29,895				26,822
Income taxes payable		11,349				3,994
Accrual for excess bank losses		1,373				—
Current portion of long-term debt		503				498
Total current liabilities		52,426				42,368
Revolving credit facility		37,933				96,838
Long-term debt		6,185				5,808
Deferred income taxes		15,706				14,993
Other liabilities		44				179
Total liabilities		112,294				160,186
Non-controlling interest in variable interest entity		21,069				39,169
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 82,219 and 80,061 outstanding as of December 31, 2005 and September 30, 2006, respectively		968				968
Paid in capital		282,840				284,727
Retained earnings		83,842				108,146
Common stock in treasury (14,602 and 16,760 shares at cost at December 31, 2005 and September 30, 2006, respectively)		(64,625		)		(96,997		)
Total stockholders’ equity		303,025				296,844
Total liabilities and stockholders’ equity		$	436,388			$	496,199

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

4

Advance America, Cash Advance Centers, Inc.
Interim Unaudited Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2005 and 2006
(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
Revenues:
Fees and interest charged to customers	$	153,161		$	178,521		$	373,010		$	474,224
Marketing, processing and servicing fees	19,476			31			88,327			12,418
Total revenues	172,637			178,552			461,337			486,642
Provision for doubtful accounts and agency bank losses	(36,340		)	(40,514		)	(76,998		)	(79,825		)
Net revenues	136,297			138,038			384,339			406,817
Center Expenses:
Salaries and related payroll costs	44,359			46,661			128,948			139,379
Occupancy costs	20,455			22,113			58,735			64,242
Center depreciation expense	3,841			4,081			10,973			12,034
Advertising expense	7,952			3,780			20,808			13,210
Other center expenses	13,991			12,955			39,040			40,880
Total center expenses	90,598			89,590			258,504			269,745
Center gross profit	45,699			48,448			125,835			137,072
Corporate and Other Expenses (Income):
General and administrative expenses	13,236			12,933			38,218			39,386
General and administrative expenses with related parties	58			45			222			369
Corporate depreciation expense	1,241			902			3,390			2,798
Interest expense	1,356			2,170			2,914			3,996
Interest income	(50		)	(120		)	(208		)	(419		)
Loss on disposal of property and equipment	325			334			448			825
Loss on impairment of assets	1,852			—			1,852			—
Income before income taxes	27,681			32,184			78,999			90,117
Income tax expense	11,352			13,322			32,187			36,559
Income before income of consolidated variable interest entity	16,329			18,862			46,812			53,558
Income of consolidated variable interest entity	(476		)	(894		)	(476		)	(2,267		)
Net income	$	15,853		$	17,968		$	46,336		$	51,291
Net income per common share:
Basic	$	0.19		$	0.22		$	0.55		$	0.63
Diluted	$	0.19		$	0.22		$	0.55		$	0.63
Dividends declared per common share	$	0.09		$	0.11		$	0.27		$	0.33
Weighted average number of shares outstanding:
Basic	83,220			80,821			83,528			81,489
Diluted	83,449			80,939			83,760			81,584

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

5

Advance America, Cash Advance Centers, Inc.
Interim Unaudited Consolidated Statement of Stockholders’ Equity
Nine Months Ended September 30, 2006
(in thousands, except per share data)

	Common Stock					Paid-In		Retained				Common Stock In Treasury
	Shares		Par Value			Capital		Earnings				Shares		Amount			Total
Balances, December 31, 2005		96,821		$	968	$	282,840		$	83,842		(14,602	)	$	(64,625	)	$	303,025
Net income		—		—		—			51,291			—		—			51,291
Dividends paid ($0.33 per share)		—		—		—			(26,815		)	—		—			(26,815		)
Dividends payable		—		—		—			(172		)	—		—			(172		)
Purchases of Treasury stock		—		—		—			—			(2,292	)	(32,384		)	(32,384		)
Issuance of restricted stock		—		—		—			—			133		—			—
Amortization of restricted stock		—		—		1,148			—			—		—			1,148
Forfeiture of restricted stock		—		—		—			—			(1	)	—			-
Stock option expense		—		—		710			—			—		—			710
Issuance of common stock to director in lieu of cash		—		—		29			—			2		12			41
Balances, September 30, 2006		96,821		$	968	$	284,727		$	108,146		(16,760	)	$	(96,997	)	$	296,844

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

6

Advance America, Cash Advance Centers, Inc.
Interim Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2006
(in thousands)

	2005			2006
Cash flows from operating activities
Net income	$	46,336		$	51,291
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition
Income of consolidated variable interest entity	476			2,267
Depreciation	14,363			14,832
Non-cash interest expense	735			740
Provisions for doubtful accounts and agency bank losses	76,998			79,825
Agency bank charge-offs, net of recoveries	(13,698		)	(2,803		)
Deferred income taxes	291			(4,293		)
Loss on disposal of property and equipment	448			825
Loss on impairment of assets	1,768			—
Amortization of restricted stock	809			1,148
Stock option expense	23			710
Common stock issued to director in lieu of cash	—			41
Changes in operating assets and liabilities
Fees receivable, net	(8,171		)	(10,951		)
Other current assets	5,940			(7,878		)
Other assets	—			165
Accounts payable	(4,911		)	(1,578		)
Accrued liabilities	(304		)	(4,301		)
Income taxes payable	959			(7,357		)
Net cash provided by operating activities	122,062			112,683
Cash flows from investing activities
Changes in advances receivable	(83,078		)	(96,404		)
Changes in restricted cash	(364		)	(874		)
Acquisition of business, net of cash acquired	(332		)	(41		)
Proceeds from sale of property and equipment	230			41
Purchases of property and equipment	(13,039		)	(10,951		)
Net cash used in investing activities	(96,583		)	(108,229		)
Cash flows from financing activities
Proceeds from revolving credit facility, net	4,156			58,905
Increase in non-controlling interest of variable interest entity	13,430			15,863
Common stock issuance costs	(169		)	—
Payments on mortgage payable	(249		)	(265		)
Payments on note payable	(110		)	(116		)
Payments of financing costs	(15		)	(8		)
Purchases of treasury stock	(11,418		)	(32,384		)
Payments of dividends	(22,552		)	(26,815		)
Changes in book overdrafts	(1,062		)	3,326
Net cash (used in) provided by financing activities	(17,989		)	18,506
Net increase in cash and cash equivalents	7,490			22,960
Cash and cash equivalents, beginning of period	18,224			27,259
Cash and cash equivalents, end of period	$	25,714		$	50,219
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	2,089		$	3,170
Income taxes	30,992			48,207
Supplemental schedule of non-cash investing and financing activity:
Property and equipment purchases included in accounts payable and accrued expenses	1,426			1,163
Restricted stock dividends payable	58			172
Issuance of restricted common stock	—			1,918
Reclassification of property and equipment to other assets held for sale (included in other current assets)	6,300			—
Net assets acquired through acquisition of business	229			—

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

7

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

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim unaudited consolidated financial statements of Advance America, Cash Advance Centers, Inc. (“AACACI”) and its wholly owned subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). They do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC. In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of the Company’s financial condition, have been included. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for future interim periods or the entire year ended December 31, 2006.

Description of Business

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

Revenue Recognition

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

Concentration of Risk

During the three and nine months ended September 30, 2005 and 2006, the Company operated in up to 37 states in the United States. For the three months ended September 30, 2005 and 2006, total revenues

8

within the Company’s five largest states (measured by total revenues) accounted for approximately 40% and 48%, respectively, of the Company’s total revenues. For the nine months ended September 30, 2005 and 2006, total revenues within the Company’s five largest states (measured by total revenues) accounted for approximately 41% and 47%, respectively, of the Company’s total revenues.

Income Taxes

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

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period excluding unvested restricted stock. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period, after adjusting for the dilutive effect of unvested restricted stock and stock options. Options to purchase 1,280,000 shares of common stock that were outstanding at September 30, 2006 were not included in the computation of diluted earnings per share since the effect of including these stock options would be anti-dilutive.

The following table presents the reconciliation of the denominator used in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2006 (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2005	2006	2005	2006
Reconciliation of denominator:
Weighted average number of common shares outstanding - basic	83,220	80,821	83,528	81,489
Effect of dilutive unvested restricted stock	229	118	232	95
Weighted average number of common shares outstanding - diluted	83,449	80,939	83,760	81,584

Recently Issued Accounting Pronouncements

In June 2006, the Financial 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 income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has not determined the impact, if any, that the adoption of FIN 48 in January 2007 will have on its financial condition or results of operations.

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In September 2006, the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”) which expresses the view of the SEC’s staff (the “Staff”) regarding the process of quantifying financial statement misstatements. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The Staff believes registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on its current year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. The Company does not expect the application of the guidance in SAB 108 in fiscal year 2006 to have a material impact on its financial condition or results of operations.

Revision to the Consolidated Statement of Cash Flows

The Company has revised the consolidated statement of cash flows for the nine months ended September 30, 2005 to properly present the changes in fees receivable, net as an operating activity. The effect of this revision is to decrease net cash provided by operating activities by $8.2 million and to decrease net cash used in investing activities by the same amount. The revision does not affect the net change in cash and cash equivalents for the nine months ended September 30, 2005 and has no effect on the Company’s consolidated statements of income or the related earnings per share amount for that period.

Reclassifications

Certain previously reported amounts have been reclassified to conform to the current presentation.

2. Marketing, Processing and Servicing Arrangements

In connection with the Company’s former agency business model, the Company entered into marketing, processing and servicing agreements (“MP&S Agreements”) with lending banks that offered payday cash advances and, beginning in July 2005, installment loans.

During the three and nine months ended September 30, 2005, the Company was compensated under MP&S Agreements with the lending banks for marketing, processing and servicing the payday cash advances made by the lending banks to their customers in Arkansas, Michigan, North Carolina, Pennsylvania and Texas. Operations in Michigan and Texas were converted to state-based legislation during June and July 2005, respectively, and operations in Pennsylvania and Arkansas were converted to state-based legislation during June 2006. During the three and nine months ended September 30, 2006, the Company was compensated under MP&S Agreements relating to only Pennsylvania and Arkansas. As of September 30, 2006, the Company only operates pursuant to enabling state statutes under its standard business model.

Although the Company marketed, processed and serviced payday cash advances and installment loans made by the lending banks, each lending bank was responsible for evaluating each of its customers’ applications and determining whether to approve the payday cash advance or installment loan. The Company was not involved in the lending banks’ payday cash advance or installment loan approval process or the determination of their approval procedures or criteria. The payday cash advances and installment loans were repayable solely to the lending banks and were assets of the lending banks; accordingly, they were never included in the Company’s balance sheet.

Prior to July 2005, under each MP&S Agreement, the applicable lending bank was contractually obligated for the losses on payday cash advances in an amount established as a percentage of the interest and/or fees charged by the banks to their customers. The Company’s marketing, processing and servicing fee increased by the lending bank’s contractual obligation for losses. If the amount of the lending bank’s

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uncollected payday cash advances and installment loans exceeded the lending bank’s contractual obligations, the Company was potentially obligated to pay the lending bank the outstanding amount of the advances and loans plus the lending bank’s fees and/or interest receivable on the advances, less the lending bank’s contractually obligated portion of the losses. Beginning in July 2005, the lending bank offering payday cash advances and installment loans in North Carolina and Arkansas became responsible for all losses associated with its payday cash advances and installment loans, while the lending bank offering payday cash advances and installment loans in Pennsylvania continued to be contractually obligated only for losses in an amount established as a percentage of the interest and/or fees charged by the lending bank to its customers. The outstanding balances of the lending banks’ advances, installment loans and fees receivable serviced by the Company were approximately $21.9 million at December 31, 2005. There were no such outstanding balances at September 30, 2006.

3. Advances and Fees Receivable, Net

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

	December 31,  2005				September 30, 2006
Advances receivable.		$	165,212			$	177,807
Fees and interest receivable		25,945				27,827
Returned items receivable		35,244				44,402
Loans and fees receivable of consolidated variable interest entity		24,905				43,103
Lending bank receivable		2,342				36
Other		3,350				2,554
Allowance for doubtful accounts		(45,585		)		(53,378		)
Unearned revenues		(17,945		)		(19,923		)
Advances and fees receivable, net		$	193,468			$	222,428

4. Allowance for Doubtful Accounts and Accrual for Excess Bank Losses

Changes in the allowance for doubtful accounts for the three and nine months ended September 30, 2005 and 2006 were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
Beginning balance	$	33,875		$	46,196		$	29,221		$	45,585
Provision for doubtful accounts	34,704			40,508			64,570			78,395
Charge-offs	(30,097		)	(38,748		)	(65,618		)	(93,110		)
Recoveries	3,329			5,422			13,638			22,508
Ending balance	$	41,811		$	53,378		$	41,811		$	53,378

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Changes in the accrual for excess bank losses for the three and nine months ended September 30, 2005 and 2006 were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
Beginning balance	$	5,337		$	1,014		$	3,219		$	1,373
Provision for agency bank losses	1,636			6			12,428			1,430
Charge-offs	(5,785		)	(1,236		)	(19,158		)	(4,752		)
Recoveries	761			216			5,460			1,949
Ending balance	$	1,949		$	—		$	1,949		$	—

The provision for agency bank losses consisted of those losses for which the lending banks were contractually obligated and an estimate by which actual losses differed from the lending banks’ contractual obligations.

The total changes in the allowance for doubtful accounts and the accrual for excess bank losses for the three and nine months ended September 30, 2005 and 2006 were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
Beginning balance	$	39,212		$	47,210		$	32,440		$	46,958
Provision for doubtful accounts and agency bank losses	36,340			40,514			76,998			79,825
Charge-offs	(35,882		)	(39,984		)	(84,776		)	(97,862		)
Recoveries	4,090			5,638			19,098			24,457
Ending balance	$	43,760		$	53,378		$	43,760		$	53,378

5. Accrued Liabilities

Accrued liabilities were as follows (in thousands):

	December 31, 2005			September 30, 2006
Employee compensation		$	8,819		$	8,226
Workers’ compensation.		4,120			4,874
Health and dental insurance		3,352			3,365
Lease smoothing.		2,357			2,770
Advertising.		271			734
Construction in progress		3,071			1,163
Branch closing costs		2,235			872
Accounting and tax		1,362			604
Property, sales and franchise taxes.		676			908
Legal.		583			897
Other		3,049			2,409
Total		$	29,895		$	26,822

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6.Income Taxes

Income tax expense for the three and nine months ended September 30, 2005 and 2006 consisted of the following (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005		2006
Current
Federal.	$	11,021		$	17,394		$	26,610	$	36,567
State.	2,189			1,170			5,286		4,979
	13,210			18,564			31,896		41,546
Deferred	(1,858		)	(5,242		)	291		(4,987		)
Total	$	11,352		$	13,322		$	32,187	$	36,559

A reconciliation of the statutory federal income tax rate and the Company’s effective income tax rate for the three and nine months ended September 30, 2005 and 2006 follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
Statutory income tax rate		35.0	%		35.0	%		35.0	%		35.0	%
State income taxes, net .		4.4			4.3			4.4			4.3
Other		1.6			2.1			1.3			1.3
Effective income tax rate		41.0	%		41.4	%		40.7	%		40.6	%

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

	December 31, 2005				September 30, 2006
Deferred tax assets
Accrued expenses		$	4,113			$	5,194
Bad debts		2,491				5,226
Net operating loss carryforwards		356				476
State credit carryforwards		275				1,292
Other		46				497
Valuation allowance		—				(306		)
Total deferred tax assets.		7,281				12,379
Deferred tax liabilities
Goodwill		(10,743		)		(12,893		)
Depreciation		(3,731		)		(1,825		)
Prepaid expenses .		(1,477		)		(2,038		)
Book versus tax basis difference for aircraft.		(669		)		(669		)
Total deferred tax liabilities		(16,620		)		(17,425		)
Net deferred tax liability		$	(9,339	)		$	(5,046	)

Prior to the Company’s initial public offering in December 2004, the Company and substantially all of its subsidiaries (the “Subchapter S Companies”) were taxed as an S corporation for federal and most state income tax purposes. On December 21, 2004, the Subchapter S Companies terminated their status as an S corporation and are now taxed as Subchapter C corporations. As a result of the termination of the Subchapter S Companies’ S corporation status, AACACI recorded a net deferred tax liability and corresponding income tax expense on the revocation date of $8.4 million.

Following the filing of the Company’s final S corporation tax returns, the Company recorded an additional $0.6 million of deferred tax liability that resulted in a $0.6 million increase in tax expense for the

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quarter ended September 30, 2006. This item increased the Company’s effective tax rate for the quarter by approximately 1.9%.

As of December 31, 2005 and September 30, 2006, the Company had net operating loss carryforwards for federal and state income tax purposes totaling approximately $0.8 million and $0.5 million, respectively, which will begin to expire in 2014. A valuation allowance of $0.3 million has been recorded because management believes it is more likely than not that the entire deferred tax asset related to state net operating loss carryforwards will not be realized. As of December 31, 2005 and September 30, 2006, the Company had credit carryforwards for federal and state income tax purposes totaling approximately $0.4 million and $2.0 million, respectively, which will begin to expire in 2010.

7.Commitments and Contingencies

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

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

The Company, the Company’s subsidiary, McKenzie Check Advance of Florida, LLC (“McKenzie”) and certain officers, directors and employees are defendants in a putative class-action lawsuit commenced by former customers, Wendy Betts and Donna Reuter, in Florida. This putative class action was filed by Ms. Betts and Ms. Reuter in February 2001 in the Circuit Court of Palm Beach County and alleges that McKenzie, by and through the actions of certain officers, directors and employees, engaged in unfair and deceptive trade practices and violated Florida’s criminal usury statute, the Florida Consumer Finance Act and the Florida Racketeer Influenced and Corrupt Organizations Act. The suit seeks unspecified damages, and McKenzie or the other defendants could be required to refund fees and/or interest collected, refund the principal amount of payday cash advances, pay multiple damages and pay other monetary penalties.

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

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

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

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

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Pennsylvania Department of Banking vs. NCAS of Delaware, LLC

On September 27, 2006, the Pennsylvania Department of Banking filed a lawsuit in the Commonwealth Court of Pennsylvania alleging that the Company’s Delaware subsidiary is providing lines of credit to borrowers in Pennsylvania without a license and with interest and fees in excess of the amounts permitted by Pennsylvania law. The lawsuit seeks a declaratory judgment that the monthly participation fee charged on the line of credit violates Pennsylvania law and a permanent injunction stopping the Company from charging Pennsylvania consumers a monthly participation fee for the line of credit. The Company recently filed its answer to the complaint.

Raymond King vs. Advance America, Cash Advance Centers of Pennsylvania, Inc.

On April 13, 2006, Raymond King, who was a customer of the lending bank in Pennsylvania, filed a declaratory judgment action in the Court of Common Pleas in Philadelphia County against the Company’s Pennsylvania subsidiary. The plaintiff is seeking to void his Consumer Loan Agreements with the lending bank and obtain a declaration that the arbitration clause that prohibits a class action lawsuit is unenforceable and that he may file a class action for alleged violation of various Pennsylvania statutes. The Company has filed its answer and a Motion of Dismissal for lack of subject matter jurisdiction and failure to join the lending bank as an indispensable party. The Court denied the Company’s preliminary objections. The Company is appealing this order to the Superior Court of Pennsylvania.

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

On August 6, 2004, Tahisha King and James E. Strong, who were customers of BankWest, the lending bank for which the Company marketed, processed and serviced payday cash advances in Georgia, filed a putative class action lawsuit in the State Court of Cobb County, Georgia against the Company, William M. Webster IV, the Company’s Vice Chairman, and other unnamed officers, directors, owners and “stakeholders,” alleging various causes of action including that the Georgia subsidiary made illegal payday loans in Georgia in violation of Georgia’s usury law, the Georgia Industrial Loan Act and Georgia’s Racketeer Influenced and Corrupt Organizations Act. The complaint alleges that BankWest was not the “true lender” on the advances that were marketed, processed and serviced for BankWest in Georgia and the Company was the “de facto” lender. The complaint seeks compensatory damages, attorneys’ fees, punitive damages and the trebling of any compensatory damages. The Company and the other defendants denied the plaintiffs’ claims and asserted that all of the claims are subject to mandatory and binding individual arbitration pursuant to arbitration agreements signed by each plaintiff. In April 2006, the State Court of Cobb County entered a consent order, which was jointly submitted by the parties, whereby the parties agreed and consented to arbitration of all claims raised by plaintiffs in this action and to stay all proceedings pending the outcome of arbitration on plaintiffs’ claims. The plaintiffs filed a demand for arbitration seeking to arbitrate their claims in a class action or representative status. An arbitrator was appointed, initial briefs were filed, and oral arguments were held regarding the enforceability of the arbitration provision and the class action waiver contained in the bank’s consumer loan agreement. The Company intends to continue to deny plaintiffs’ claims and resist plaintiffs’ efforts to conduct class arbitration.

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

The Company’s Georgia subsidiary is involved in another case in Georgia that, although not a class action lawsuit, contains essentially the same allegations as the King and Strong case. On March 10, 2003, Angela Glasscock, a customer of BankWest, filed an adversary proceeding in the U.S. Bankruptcy Court for the Southern District of Georgia alleging that the Georgia subsidiary was making payday cash advances in Georgia in violation of the Georgia Industrial Loan Act. BankWest intervened into the case and subsequently both the subsidiary and BankWest filed a motion for summary judgment which was granted in September 2005. In its holding, the court ruled that BankWest was the “true lender.” Plaintiffs have appealed this ruling to the United States District Court where it is now pending. Although the amount in

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controversy in the case is only $350, the underlying claims of Ms. Glasscock, if validated by the appellate court, could serve as a basis for future claims against the Company.

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

On July 27, 2004, John Kucan, Welsie Torrence and Terry Coates, each of whom was a customer of Republic Bank & Trust Company (“Republic”), the lending bank for whom the Company marketed, processed and serviced payday cash advances in North Carolina, filed a putative class action lawsuit in the General Court of Justice for the Superior Court Division for New Hanover County, North Carolina against the Company and Mr. Webster, alleging, among other things, that the relationship between the Company’s North Carolina subsidiary and Republic was a “rent a charter” relationship and therefore Republic was not the “true lender” on the payday cash advances it offered. The lawsuit also claims that the payday cash advances were made, administered and collected in violation of numerous North Carolina consumer protection laws. The lawsuit seeks an injunction barring the subsidiary from continuing to do business in North Carolina, the return of the principal amount of the payday cash advances made to the plaintiff class since August 2001, the return of any interest or fees associated with those advances, treble damages, attorneys’ fees and other unspecified costs. On December 30, 2005, the court issued an Order granting defendants’ motion for arbitration, staying the proceedings and denying class certification. The plaintiffs have appealed this Order to the North Carolina Court of Appeals. The plaintiffs in this case and two other North Carolina cases currently before the Court of Appeals filed a petition, which the Company has opposed, for discretionary review and consolidation of the cases. The petition is pending.

North Carolina Commissioner of Banks Order

In August 2004, the North Carolina Attorney General’s Office in conjunction with the Commissioner of Banks for North Carolina issued a subpoena to the Company to produce documents, respond to written questions and have a corporate representative appear for a deposition regarding the relationship between the Company’s North Carolina subsidiary and the lending bank in North Carolina, Republic, to determine whether operations in North Carolina were in compliance with North Carolina law. In February 2005, the Commissioner of Banks initiated a contested case against the Company’s North Carolina subsidiary for alleged violations of the North Carolina Consumer Finance Act. In December 2005, at the conclusion of the contested case, the Commissioner of Banks ordered that the Company’s North Carolina subsidiary immediately cease and desist operating. In accordance with the Commissioner of Banks’ Order, the Company’s North Carolina subsidiary ceased all business operations on December 22, 2005. The full North Carolina State Banking Commission has since affirmed the Commissioner of Banks’ Order and the Company filed an appeal with the North Carolina Superior Court. The appeal was dismissed and the Company is currently appealing the dismissal.

New Mexico Proposed Rules and Regulations Governing the Extension of Credit For Small Loans

On February 10, 2006, the Company joined four other payday lenders in a lawsuit against the New Mexico Attorney General requesting immediate injunctive relief from the enforcement of the Attorney General’s Proposed Rules and Regulations Governing the Extension of Credit for Small Loans, which would have severely limited the payday loan industry in New Mexico. The parties mutually agreed to stay any further proceedings pending the adoption of new proposed regulations published by the Financial Institutions Division 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 preliminary injunction enjoining the enforcement of the FID proposed regulations. As a result of the Court’s order, the Company has not made any changes in its New Mexico operations and is monitoring the litigation to determine what, if any, changes may be required to its New Mexico operations in the future.

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Department of Labor Investigations

The United States Department of Labor has periodically initiated investigations of the Company’s practices regarding the payment of overtime wages to certain employees. The Department of Labor recently concluded some of these investigations and the Company is cooperating with the ongoing investigations, any of which could result in the payment of back wages, civil monetary penalties and other enforcement action.

Other Matters

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

The amount of losses and/or the probability of an unfavorable outcome, if any, cannot be reasonably estimated. Accordingly, no accrual has been recorded for any of the above matters as of September 30, 2006.

8.      Capital Stock and Stock-Based Compensation Plans

On May 4, 2005, the Company announced that its Board of Directors had approved a program authorizing the repurchase by the Company of up to $50.0 million of its currently outstanding common stock. On August 16, 2006, the Company announced that its Board of Directors had approved an extension of the Company’s stock repurchase program authorizing the Company to repurchase up to $100.0 million of its outstanding common stock on and after this date. During the three and nine months ended September 30, 2005, the Company repurchased, pursuant to its stock repurchase program, 520,958 and 888,158 shares of its common stock, respectively, at a cost of approximately $7.0 million and $11.4 million, respectively. During the three and nine months ended September 30, 2006, the Company repurchased, pursuant to its stock repurchase programs, 2,292,000 shares of its common stock at a cost of approximately $32.4 million.

In 2004, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (“SFAS 123(R)”). Accordingly, the Company measures the cost of its stock-based employee compensation at fair value and recognizes such cost in the financial statements over the requisite service period.

The Company’s 2004 Omnibus Stock Plan provides for the granting of restricted stock, stock options and other stock awards to certain directors, officers and other key employees of the Company.

During the nine months ended September 30, 2006, the Company issued to certain executives 133,334 shares of restricted stock under the 2004 Omnibus Stock Plan. These restricted shares vest in equal annual installments over three, five or eight years beginning on the first anniversary of the grant date.

During the nine months ended September 30, 2006, the Company granted to certain executives stock options to purchase 80,000 shares of the Company’s common stock at an exercise price of $14.70 per share. These options vest in three equal annual installments beginning on the first anniversary of the grant date and are within the Company’s 2004 Omnibus Stock Plan.

The weighted-average fair value of the options granted during the nine months ended September 30, 2006 was $4.85 per option. The fair value was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions: dividend yield of 3.6%, weighted average risk-free interest rate of 4.63%, expected volatility of 47% and a weighted average expected life of 4.41 years. These options expire ten years from the date of grant.

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The grant date fair value of all shares of restricted stock was based on the market value of the Company’s common stock on the dates of grant. These amounts are being amortized and expensed ratably over each award’s respective vesting period. All stock options were granted with an exercise price equal to the market value of the Company’s common stock on the dates of grant. The weighted-average fair values of all stock options are being expensed ratably over each award’s respective vesting period.

A summary of the Company’s authorized and available shares, activity and the weighted average stock option exercise prices under its stock-based compensation plans follows:

								Weighted
		Outstanding						Average
		Restricted			Stock	Available		Exercise
	Authorized	Stock			Options	For Grant		Price
Outstanding at December 31, 2005	5,200,000		457,043		1,200,000	3,542,957			$	12.47
Authorized	—		—		—	—			—
Granted	—		133,334		80,000	(213,334	)		$	14.70
Exercised	—		—		—	—			—
Canceled	—		(1,333	)	—	1,333			—
Outstanding at September 30, 2006	5,200,000		589,044		1,280,000	3,330,956			$	12.61

Exercise prices for stock options outstanding at September 30, 2006 ranged from $12.11 to $14.70. As of September 30, 2006, there were 50,000 options exercisable at a weighted average exercise price of $13.83 per share.

A summary of the Company’s restricted stock activity and the weighted average grant-date fair values follows:

	Shares		Weighted Average Fair Value
Nonvested at December 31, 2005	391,488			$	12.69
Granted	133,334			14.38
Vested	—			—
Forfeited	(1,333	)		15.00
Nonvested at September 30, 2006	523,489			$	13.12

A summary of the stock-based compensation cost included in general and administrative expenses in the accompanying consolidated statements of income for the three and nine months ended September 30, 2005 and 2006 follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
Stock-based compensation expense:
Restricted stock		$	236		$	389		$	809		$	1,148
Stock options		23			243			23			710
Total stock-based compensation expense		$	259		$	632		$	832		$	1,858

As of September 30, 2006, the total compensation cost not yet recognized related to nonvested stock awards under the Company’s plans is approximately $11.0 million. The weighted average period over which this expense is expected to be recognized is approximately 5.9 years.

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9. Transactions with Variable Interest Entity

Beginning in July 2005, the Company ceased conducting business under the agency business model in Texas, and began conducting business through a wholly owned subsidiary registered as a Credit Services Organization (“CSO”) under Texas law. In connection with operating as a CSO, the Company entered into a credit services organization agreement (“CSO Agreement”) with an unaffiliated third-party lender. The CSO Agreement governs the terms by which the Company refers customers in Texas to that lender, on a non-exclusive basis, for a possible extension of credit, processes loan applications and commits to reimburse the lender for any loans or related fees that are not collected from such customers.

The Company has determined that the lender is a variable interest entity (“VIE”) under FIN 46(R). The Company has neither an equity interest nor voting 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 VIE because the Company has committed to reimburse the lender for the full amount of the loans and all related fees that are not paid by the customers for all loans that are processed under the CSO Agreement. As a result, the Company has consolidated the lender into the Company’s financial statements.

The impact of the consolidation of this VIE on the Company’s September 30, 2005 and 2006 consolidated balance sheets was to increase the following balance sheet accounts as follows (in thousands):

	September 30,
	2005		2006
Cash and cash equivalents	$	2,931	$	9,701
Advances and fees receivable, net	10,990		29,516
Accrued liabilities	15		48
Non-controlling interest in variable interest entity	13,906		39,169

The impact of the consolidation of this VIE on the Company’s consolidated statements of income for the three and nine months ended September 30, 2005 and 2006 was to increase the following income statement accounts as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
Net revenues		$	556		$	1,443		$	556		$	3,357
Other center expenses		80			294			80			835
Interest expense		—			255			—			255
Income of consolidated variable interest entity		476			894			476			2,267

10. Subsequent Events

On October 15, 2006, the Company voluntarily ceased offering its services to active, full-time military personnel by no longer qualifying customers for advances based on income from military service. The Company believes that, historically, military personnel have represented less than one percent of the Company’s total customers.

On October 25, 2006, the Company announced that its Board of Directors declared a cash dividend of $0.11 per share of common stock, payable on December 8, 2006 to shareholders of record on November 27, 2006.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes in “Item 1. Financial Statements.” This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements. Please see “Part II. Item 1A. Risk Factors” and “Forward-Looking Statements” for discussions of the uncertainties, risks and assumptions associated with these statements.

Overview

Headquartered in Spartanburg, South Carolina, we are the largest provider of payday cash advance services in the United States as measured 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 September 30, 2006, we operated 2,745 centers in 36 states.

Historically, we have conducted our business in most states under the authority of a variety of enabling state statutes including payday advance, deferred presentment, check-cashing, small loan, credit service organization and other state laws (which we refer to as the standard business model). In certain states we previously conducted business as marketing, processing and servicing agent for FDIC supervised, state-chartered banks that made payday cash advances and installment loans to their customers pursuant to the authority of the laws of the states in which they were located and federal interstate banking laws, regulations and guidelines (which we refer to as the agency business model). We refer to the banks for which we acted as agent under the agency business model as lending banks.

We provide advances and charge fees and/or interest as specified by the laws of the states where we operate under the standard business model. In the states where we previously operated under the agency business model, the lending banks provided advances and installment loans and charged fees and/or interest as specified by the laws of the states in which they were located and consistent with the regulatory authority of the FDIC and federal banking law. The permitted size of an advance varies by state and ranges from $50 to $1,000. The permitted fees and/or interest on an advance also vary by state and range from 10% to 22% of the amount of the advance. Additional fees that we may collect include fees for returned checks and late fees. The returned check fee varies by state and ranges up to $30. We charge a customer this fee if a deposited check is returned due to non-sufficient funds (“NSF”) in the customer’s account or other reasons. In four states, we are also permitted to charge a late fee.

Despite numerous differences under the various enabling regulations, the application and approval process, underwriting criteria, delivery method, repayment and collection practices, customer and market characteristics and underlying economics are substantially similar under the standard and agency business models.

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The following table summarizes the most significant differences between the standard business model and the agency business model, including the applicable separation 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 or 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.

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

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Approval Process

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

To obtain an advance, a customer typically:

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

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

·writes a personal check to cover the amount of the advance plus charges for applicable fees and/or interest; and

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

The process for installment loans was substantially similar, except that the agreement with the customer usually contemplated bi-weekly payments over a three- or four-month period.

Under the standard business model, we determine whether to approve an advance to our customers (except in Texas, where the third-party lender makes this determination). We do not undertake any evaluation of the creditworthiness of our customers in determining whether to approve customers for advances, other than requiring proof of identification, bank account and income source, as described above. We also consider the customer’s income in determining the amount of the advance. Under the agency business model, the lending banks determined whether to approve an advance or installment loan utilizing third-party credit scores to evaluate and approve the customer’s application.

Repayment and Collection Process

If a customer does not return to repay the amount due, the center manager has the discretion to either (1) commence past-due collection efforts, which typically may proceed for up to 14 days in most states, or (2) deposit the customer’s personal check. If the center manager has decided to commence past-due collection efforts in place of depositing the customer’s personal check, center employees typically contact the customer by telephone or in person to obtain a payment or a promise to pay and attempt to exchange the customer’s check for a cashier’s check, if funds are available.

If at the end of this past-due collection period, the center has been unable to collect the amount due, the customer’s check is then deposited. For the year ended December 31, 2005, approximately 5.5% of total customer checks were deposited. Additional collection efforts are not required if the customer’s deposited check clears. For the year ended December 31, 2005, approximately 21% of deposited customer checks cleared (i.e., were not returned NSF). If the customer’s check does not clear and is returned because of non-sufficient funds in the customer’s account or because of a closed account or a stop-payment order, additional collection efforts begin. These additional collection efforts are carried out by center employees and typically include contacting the customer by telephone or in person to obtain payment or a promise to pay, sending a series of collection letters to the customer and attempting to exchange the customer’s check for a cashier’s check, if funds become available.

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Revenues and Expenses

We have historically derived our revenues from (1) fees and/or interest paid to 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 former agency business model. Our total revenues for the three and nine months ended September 30, 2005 and 2006 consisted of (dollars in millions):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005			2006
	Dollars		%	Dollars		%	Dollars		%	Dollars		%
Fees and interest charged to customers	$	153.1	88.7	$	178.5	100.0	$	373.0	80.9	$	474.2	97.4
Marketing, processing and servicing fees	19.5		11.3	—		—	88.3		19.1	12.4		2.6
Total revenues	$	172.6	100.0	$	178.5	100.0	$	461.3	100.0	$	486.6	100.0

As of September 30, 2006, we were operating under our standard business model in all of our 2,745 centers.

Our expenses relate primarily to the operation of our centers. These expenses include salaries and related payroll costs, occupancy expense related to our leased centers, center depreciation expense, advertising expense and other center expenses that consist principally of costs related to center closings, communications, delivery, supplies, travel, bank charges, various compliance and collection costs and costs associated with theft.

Former Agency Business Model

During the three and nine months ended September 30, 2005, we were marketing, processing and servicing payday cash advances made by lending banks to their customers in Arkansas, Michigan, North Carolina, Pennsylvania and Texas. In March 2005, the FDIC issued revised guidance (the “Revised Guidance”) to FDIC supervised institutions that offered payday cash advances, including the lending banks for which we then acted as marketing, processing and servicing agent. The Revised Guidance materially constrained payday lending under the agency business model and, despite the introduction of installment loans by the lending banks, significantly reduced our marketing, processing and servicing fees. In response to the Revised Guidance, in June and July 2005, we modified our MP&S Agreements in Arkansas, North Carolina and Pennsylvania and started operating in Texas and Michigan under existing state-based legislation. In response to an order from the North Carolina Commissioner of Banks, we closed all our centers in North Carolina in December 2005.

In February 2006, the FDIC instructed the lending banks, including those for which we still marketed, processed and serviced payday cash advances and installment loans in Pennsylvania and Arkansas, to discontinue offering payday cash advances and installment loans if they could not adequately address the FDIC’s continued concerns. In response, the lending banks in Pennsylvania and Arkansas stopped originating payday cash advances and installment loans and our marketing, processing and servicing fees declined during the second and third quarters of 2006. During June 2006, we began operating in Pennsylvania and Arkansas pursuant to existing state-based legislation under the standard business model. As a result, we now operate under the standard business model in all of our centers. We recently agreed to provide the FDIC 30-days prior written notice before entering into an agreement with a state non-member bank to market, process or service any payday loan products.

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Conversion of Operations in Michigan and Texas.   Effective June 26, 2005, we terminated our MP&S Agreement with the lending bank for Michigan. Under the prior MP&S agreement, the lending bank recorded advances and fees receivable on its balance sheet and was contractually obligated for uncollectible accounts in amounts determined as a percentage of fees and interest charged by the lending bank to its customers. Therefore, our balance sheet included, as an accrual for excess bank losses, the amount by which estimated losses exceeded the lending bank’s contractual obligation. In connection with terminating this MP&S Agreement, we purchased payday cash advance accounts receivable for approximately $7.7 million. As a result, the lending bank no longer had any obligations for losses with respect to those accounts.

After terminating our prior MP&S Agreement for Michigan, we began offering check-cashing and deferred-presentment services directly to customers in Michigan. The profitability of our check-cashing and deferred-presentment business and average fees, check amounts and duration for which we held checks was similar to what we historically experienced under the standard business model. Because of the recent adoption of a new affirmative payday lending law in Michigan, we began offering payday cash advances in Michigan in June 2006. 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, than our historical experience under the standard business model.

In the beginning of July 2005, we terminated our prior MP&S Agreement with the lending bank for Texas and began conducting business in that state through a wholly owned subsidiary that has registered as a Credit Services Organization (“CSO”) under Texas law. As a CSO, we offer a fee-based credit services package to assist customers in trying to improve their credit and in obtaining an extension of consumer credit through a third-party lender. A credit services organization agreement (“CSO Agreement”) that we entered into with an unaffiliated third-party lender governs the terms by which we refer customers in Texas to that lender, on a non-exclusive basis, for a possible extension of credit, process loan applications and commit to reimburse the lender for any loans or related fees that are not collected from such customers.

Under our former MP&S Agreement with the lending bank in Texas, the lending bank was contractually obligated for uncollectible payday cash advance accounts in amounts determined as a percentage of fees and interest charged by the lending bank to its customers, which historically had been sufficient to cover all losses incurred. Under the CSO Agreement, we are contractually obligated for all losses incurred by the lender with respect to loans it makes to customers referred by us.

Conversion of Operations in Pennsylvania and Arkansas.   In response to instructions from the FDIC, the lending bank for Pennsylvania ceased its payday cash advance and installment loan originations as of the close of business on March 27, 2006. As a result, our revenues and center gross profits from Pennsylvania significantly decreased during the second quarter. Through August 28, 2006, we continued to service all of this lending bank’s payday cash advances and installment loans that were outstanding as of March 27, 2006. In June 2006, we began offering the Advance America Choice-Line of Credit (“Choice-Line”) in Pennsylvania. The Choice-Line product allows customers access to up to $500 in credit for a monthly participation fee plus interest on outstanding loan balances. We expect the profitability and cash flows of operating under state-based legislation to be similar to historic levels. Therefore, we do not believe that the changes in our Pennsylvania operations will result in any impairment of goodwill.

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The following is a summary of financial information for our operations in Pennsylvania for the three and nine months ended September 30, 2005 and 2006 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2006		2005		2006
Net revenues	$	8,924	$	7,735	$	28,247	$	16,405
Total center expenses	4,145		3,680		12,187		10,993
Center gross profit	$	4,779	$	4,055	$	16,060	$	5,412

In addition, the lending bank for Arkansas discontinued offering installment loans on April 8, 2006 and discontinued offering payday cash advances on June 24, 2006. As a result, our revenues and center gross profits in Arkansas also deteriorated significantly during the second quarter. We continued, through September 8, 2006, to service all of this lending bank’s payday cash advances and installment loans that were outstanding as of these dates. In June 2006, we began operating in Arkansas under existing state-based legislation and directly providing check-cashing services to customers in Arkansas. We expect the profitability and cash flows of operating under state-based legislation to be similar to historic levels. Therefore, we do not believe that the changes in our Arkansas operations will result in any impairment of goodwill.

The following is a summary of financial information for our operations in Arkansas for the three and nine months ended September 30, 2005 and 2006 (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2005			2006		2005		2006
Net revenues	$	1,273		$	1,040	$	4,587	$	3,271
Total center expenses	1,327			954		3,223		2,859
Center gross profit/(loss)	$	(54	)	$	86	$	1,364	$	412

Closings

In August 2004, the North Carolina Attorney General’s office, in conjunction with the Commissioner of Banks for North Carolina, commanded an investigation of the agency business model operations of our centers in North Carolina. In September 2005, the lending bank for which we marketed, processed and serviced payday cash advances and installment loans in our North Carolina centers suspended its payday cash advance and installment loan originations. On December 22, 2005, the North Carolina Commissioner of Banks issued an order directing us to cease operation of our centers in the state. As a result, we ceased all of our business activities and closed our centers in North Carolina.

The following is a summary of financial information for our operations in North Carolina for the three and nine months ended September 30, 2005 and 2006 (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005		2006
Net revenues	$	4,060		$	—		$	17,428	$	(35	)
Total center expenses	4,465			3			12,269		967
Center gross profit/(loss)	$	(405	)	$	(3	)	$	5,159	$	(1,002	)

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Centers

The following table lists the number of centers by state at December 31, 2005 and September 30, 2006:

State	December 31, 2005		September 30, 2006
Alabama		140		141
Arizona		53		57
Arkansas		30		30
California		298		300
Colorado		62		64
Delaware		13		13
Florida		211		233
Idaho		13		14
Illinois		60		69
Indiana		116		118
Iowa		35		36
Kansas		42		52
Kentucky		39		43
Louisiana		75		75
Michigan		111		128
Mississippi		53		51
Missouri		70		80
Montana		9		9
Nebraska		25		23
Nevada		10		10
New Hampshire		16		18
New Mexico		12		12
North Dakota		7		8
Ohio		210		218
Oklahoma		67		65
Oregon		56		56
Pennsylvania		101		99
Rhode Island .		3		11
South Carolina		112		125
South Dakota		11		12
Tennessee		62		63
Texas		207		216
Virginia		120		134
Washington		105		109
Wisconsin		45		47
Wyoming		5		6
Total		2,604		2,745

New centers.   We opened 82 and 91 new centers during the three months ended September 30, 2005 and 2006, respectively. We opened 208 and 179 new centers during the nine months ended September 30, 2005 and 2006, respectively.

Closed centers.   We closed 93 (including 86 in Georgia) and 16 centers during the three months ended September 30, 2005 and 2006, respectively. We closed 107 (including 86 in Georgia) and 38 centers during the nine months ended September 30, 2005 and 2006, respectively. The expenses related to closing

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centers typically include the undepreciated costs of fixtures and signage that cannot be moved and reused at another center, moving costs, severance payments and any lease cancellation costs. We recorded expenses related to center closures, including loss on impairment of assets, of approximately $2.0 million and $0.3 million in the three months ended September 30, 2005 and 2006, respectively. We recorded expenses related to center closures, including loss on impairment of assets, of approximately $2.3 million and $1.2 million in the nine months ended September 30, 2005 and 2006, respectively.

Critical Accounting Policies and Use of Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of our results of operations and financial condition in the preparation of our financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). We evaluate these estimates on an ongoing basis and we base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our financial statements:

Provision for Doubtful Accounts and Agency Bank Losses, Allowance for Doubtful Accounts and Accrual for
Excess Bank Losses

We believe the most significant estimates made in the preparation of our accompanying consolidated financial statements relate to the determination of an allowance for doubtful accounts for estimated probable losses under the standard business model (and the amount we historically accrued for probable excess bank losses for our share of the losses on payday cash advances and installment loans we marketed, processed and serviced for the lending banks under the former agency business model).

The allowance for doubtful accounts and accrual for excess bank losses are primarily based upon models that analyze specific portfolio statistics and also reflect, to a lesser extent, management’s judgment regarding overall accuracy. The analytical models take into account several factors including the number of transactions customers complete and charge-off and recovery rates. Additional factors such as changes in state 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 also evaluated to determine whether the results from the analytical models should be revised. For those states where we operate under the standard business model, we record this estimate of probable losses on receivables as a reduction of advances and receivables, net on our balance sheet.

For those states where we previously operated as a marketing, processing and servicing agent for a lending bank under the former agency business model, the estimate of probable losses was reduced by the lending bank’s contractual obligation for such losses, as described above, to arrive at an estimate of excess loan losses. We recorded this as an accrual for excess bank losses, a current liability on our balance sheet.

We have charged the portion of advances, installment loans and fees deemed to be uncollectible against the allowance for doubtful accounts or the accrual for excess bank losses, as appropriate, and credited any subsequent recoveries to the allowance for doubtful accounts or the accrual for excess bank losses, as appropriate.

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Under the standard business model, unpaid advances and the related fees and/or interest are generally charged off if a customer does not make a payment of at least 15% of his or her outstanding balance within 60 days of the date the check was returned by the customer’s bank for non-sufficient funds or other reasons. Under the agency business model, unpaid payday cash advances and the related fees and/or interest generally were charged off 60 days from the due date. Under the agency business model, unpaid installment loans and the related fees and/or interest generally were charged off 60 days from the deposit date if the check is returned by the customer’s bank for non-sufficient funds or other reasons. Under either model, unpaid advances of customers who file for bankruptcy are charged off upon receipt of the bankruptcy notice. Although management uses the best information available to make evaluations, future adjustments to the allowance for doubtful accounts may be necessary if conditions differ substantially from our assumptions used in assessing their adequacy.

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

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

In addition to the seasonal fluctuations, the receivable balances can fluctuate throughout a week, generally being at their highest levels on a Wednesday or Thursday and at their lowest levels on a Friday. In general, receivable balances decrease approximately 4% to 7% from a typical Thursday to a typical Friday. The third quarter of 2005 began on a Friday (a relative low point in weekly receivable balances) and ended on a Friday (a relative low point in weekly receivable balances). The third quarter of 2006 began on a Saturday (a relative low point in weekly receivable balances) and ended on a Saturday (a relative low point in weekly receivable balances).

To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, our loss experience could differ significantly, resulting in either higher or lower future provisions for doubtful accounts. As of September 30, 2006, if average default rates were 5% higher or lower, the allowance for doubtful accounts would change by approximately $2.6 million.

Intangible Assets

As a result of our acquisition of the National Cash Advance group of affiliated companies in October 1999, we recorded approximately $143.0 million of goodwill. Due to the significance of goodwill and the reduction of net income that would occur if goodwill were impaired, we assess the impairment of our long-lived and intangible assets annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include significant underperformance relative to historical or projected future cash flows, significant changes in the manner of use of the acquired assets or the strategy of the overall business and significant negative industry trends. To identify potential impairment, we compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit does not exceed its carrying amount, we measure the amount of impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The amount of any impairment would lower our net income.

Accrued Healthcare and Workers’ Compensation Expenses

Accrued liabilities in our December 31, 2005 and September 30, 2006 financial statements include accruals of approximately $3.4 and $3.4 million, respectively, for the self-insured portion of our health and dental insurance and approximately $4.1 million and $4.9 million, respectively, for workers’ compensation. We recognize our obligations associated with those benefits in the period the claim is incurred. The costs

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of both reported claims and claims incurred but not reported, up to specified deductible limits, are estimated based on historical data, current enrollment, employee statistics and other information. We review and periodically update our estimates and the resulting reserves and any necessary adjustments are reflected in earnings currently. To the extent historical claims are not indicative of future claims, there are changes in enrollment or employee history, workers’ compensation loss development factors change or other assumptions used by management do not prevail, our expense and related accrued liabilities could increase or decrease.

Consolidation of Variable Interest Entity

In connection with our CSO operations in Texas, we entered into an agreement with an unaffiliated third-party lender. We have determined that the third-party lender is a variable interest entity (“VIE”) under Financial Accounting Standards Board Interpretation No. 46 (Revised) (“FIN 46(R)”). We have neither an equity interest nor voting rights in the lender and have no input into the management of the lender. However, we determined that we are the primary beneficiary of the VIE because we have committed to reimburse the lender for the full amounts of the loans and all related fees that are not paid by the customers with respect to all loans that are processed under the CSO Agreement between us and the lender. As a result, we have consolidated the lender as of September 30, 2006. See “Item 1. Financial Statements—Notes to Interim Unaudited Consolidated Financial Statements—Note 9. Transactions with Variable Interest Entity” for the impact of adopting FIN 46(R) on our results of operations and financial condition.

Accounting for Stock-Based Employee Compensation

In 2004, we adopted Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (“SFAS 123(R)”). Accordingly, we measure the cost of our stock-based employee compensation at the grant date based on fair value and recognize such cost in the financial statements over each award’s requisite service period. As of September 30, 2006, the total compensation cost not yet recognized related to nonvested stock awards under our stock-based employee compensation plans is approximately $11.0 million. The weighted average period over which this expense is expected to be recognized is approximately 5.9 years. See “Item 1. Financial Statements—Notes to Interim Unaudited Financial Statements—Note 8. Capital Stock and Stock-Based Compensation Plans” for a description of our restricted stock and stock option awards and the assumptions used to calculate the fair value of such awards including the expected volatility assumed in valuing our stock option grants.

Recently Issued Accounting Pronouncements

In June 2006, the Financial 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 income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not determined the impact, if any, that the adoption of FIN 48 in January 2007 will have on our financial condition or results of operations.

In September 2006, the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”) which expresses the view of the SEC’s staff (the “Staff”) regarding the process of quantifying financial statement misstatements. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The Staff believes

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registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on its current year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. We do not expect the application of the guidance in SAB 108 in fiscal year 2006 to have a material impact on our financial condition or results of operations.

Results of Operations

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2006

The following tables set forth our results of operations for the three months ended September 30, 2005 compared to the three months ended September 30, 2006 (dollars in thousands, except Center Information):

	Three Months Ended September 30,
	2005						2006						Variance
	Dollars			% Net Revenues			Dollars			% Net Revenues			Dollars			%
Revenues:
Fees and interest charged to customers	$	153,161			112.4	%	$	178,521			129.3	%	$	25,360		16.6	%
Marketing, processing and servicing fees	19,476				14.3	%	31				—		(19,445		)	(99.8	)%
Total revenues	172,637				126.7	%	178,552				129.3	%	5,915			3.4	%
Provision for doubtful accounts and agency bank losses	(36,340		)		(26.7	)%	(40,514		)		(29.3	)%	(4,174		)	(11.5	)%
Net revenues	136,297				100.0	%	138,038				100.0	%	1,741			1.3	%
Center Expenses:
Salaries and related payroll costs	44,359				32.6	%	46,661				33.8	%	2,302			5.2	%
Occupancy costs	20,455				15.0	%	22,113				16.0	%	1,658			8.1	%
Center depreciation expense	3,841				2.8	%	4,081				3.0	%	240			6.2	%
Advertising expense	7,952				5.8	%	3,780				2.7	%	(4,172		)	(52.5	)%
Other center expenses	13,991				10.3	%	12,955				9.4	%	(1,036		)	(7.4	)%
Total center expenses	90,598				66.5	%	89,590				64.9	%	(1,008		)	(1.1	)%
Center gross profit	45,699				33.5	%	48,448				35.1	%	2,749			6.0	%
Corporate and Other Expenses (Income):
General and administrative expenses .	13,294				9.7	%	12,978				9.4	%	(316		)	(2.4	)%
Corporate depreciation expense	1,241				0.9	%	902				0.7	%	(339		)	(27.3	)%
Interest expense	1,356				1.0	%	2,170				1.6	%	814			60.0	%
Interest income	(50		)		—		(120		)		(0.1	)%	(70		)	(140.0	)%
Loss on disposal of property and equipment	325				0.2	%	334				0.2	%	9			2.8	%
Loss on impairment of assets	1,852				1.4	%	—				—		(1,852		)	(100.0	)%
Total corporate and other expenses	18,018				13.2	%	16,264				11.8	%	(1,754		)	(9.7	)%
Income before income taxes	27,681				20.3	%	32,184				23.3	%	4,503			16.3	%
Income tax expense	11,352				8.3	%	13,322				9.7	%	1,970			17.4	%
Income before income of consolidated variable interest entity	16,329				12.0	%	18,862				13.6	%	2,533			15.5	%
Income of consolidated variable interest entity	(476		)		(0.4	)%	(894		)		(0.6	)%	(418		)	(87.8	)%
Net income	$	15,853			11.6	%	$	17,968			13.0	%	$	2,115		13.3	%

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	Three Months Ended
	September 30,
	2005			2006
Center Information:
Number of centers open at beginning of period	2,520			2,670
Opened	82		��	91
Acquired	3			—
Closed (excluding Georgia)	(7		)	(16		)
Number of centers open at end of period	2,598			2,745
Weighted average number of centers open during the period	2,565			2,710
Number of payday cash advances provided and processed (in thousands)	3,072			3,119
Amount of average payday cash advance provided and processed	$	340		$	355
Number of installment loans provided and processed (in thousands)	45			—
Amount of average installment loan provided and processed	$	494		—
Number of lines of credit outstanding at end of period (in thousands)	—			22
Aggregate principal amount of lines of credit outstanding at end of period (in thousands)	—			$	10,208
Average number of lines of credit outstanding during the period (in thousands)	—			18
Average amount of aggregate principal on lines of credit outstanding during the period (in thousands)	—			$	8,326

	Three Months Ended September 30,
	2005						2006							Variance
	Dollars			% Net Revenues			Dollars				% Net Revenues			Dollars				%
Per Center (based on weighted average number of centers open during the period):
Center net revenues		$	53.1		100.0	%		$	50.9			100.0	%		$	(2.2	)	(4.1	)%
Center expenses:
Salaries and related payroll costs		17.3			32.6	%		17.2				33.8	%		(0.1		)	(0.6	)%
Occupancy costs		8.0			15.0	%		8.2				16.0	%		0.2			2.5	%
Center depreciation expense		1.5			2.8	%		1.5		��		3.0	%		—			—
Advertising expense		3.1			5.8	%		1.3				2.7	%		(1.8		)	(58.1	)%
Other center expenses		5.4			10.3	%		4.8				9.4	%		(0.6		)	(11.1	)%
Total center expenses		35.3			66.5	%		33.0				64.9	%		(2.3		)	(6.5	)%
Center gross profit		$	17.8		33.5	%		$	17.9			35.1	%		$	0.1		0.6	%

Revenue Analysis

Total revenues increased approximately $5.9 million during the three months ended September 30, 2006 compared to the same period in 2005. The increase was primarily due to the opening of new centers and revenue growth in existing centers. Total revenues for the 2,331 centers opened prior to July 1, 2005 and still open as of September 30, 2006 increased $7.5 million from $161.6 million for the three months ended September 30, 2005 to $169.1 million for the same period in 2006. Centers opened prior to July 1, 2005 were at least three months and fifteen months old at the end of the three-month periods ended September 30, 2005 and 2006, respectively. Total revenues for the 414 centers opened after July 1, 2005 and still open as of September 30, 2006 increased $8.8 million from $0.3 million for the three months ended September 30, 2005 to $9.1 million for the same period in 2006. Total revenues for the remaining 275 centers that closed represented a decrease of approximately $10.4 million for the three months ended

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September 30, 2006 compared to the same period in 2005. This decrease is primarily due to the suspension and subsequent closure of operations in North Carolina during the fourth quarter of 2005.

In addition to the closed centers mentioned in the preceding paragraph, the increase in total revenues during the three months ended September 30, 2006 was partially offset by:

·the implementation of the FDIC Revised Guidance in Pennsylvania and Arkansas beginning during the third quarter of 2005 and the lending banks’ suspension of originations in the first half of 2006. Total revenues for the third quarter of 2006 in Pennsylvania and Arkansas were approximately $2.7 million less than the third quarter of 2005. This decrease in revenues was partially offset by the conversion of our operations in Pennsylvania and Arkansas to state-based legislation in June 2006; and

·the implementation of material changes in enabling legislation in Illinois and Indiana. Total revenues for the third quarter of 2006 in Illinois and Indiana were approximately $5.1 million less than the third quarter of 2005.

As a percentage of total revenues, the provision for doubtful accounts and agency bank losses increased to 22.7% for the three months ended September 30, 2006 from 21.0% for the same period in 2005. The increase in the provision during the third quarter of 2006 is due primarily to increased loss rates. This increase was partially offset by the sale of certain customer accounts receivable to a collection agency, which generated proceeds of approximately $1.0 million which was recorded as a reduction in the 2006 provision.

Center Expense Analysis

Salaries and related payroll costs.   The increase in salaries and related payroll costs for the three months ended September 30, 2006 was due primarily to the new centers opened in 2005 and 2006. We averaged approximately 2.15 and 2.20 full-time equivalent field employees, including district directors, per center during the three months ended September 30, 2005 and 2006, respectively.

Occupancy costs and center depreciation expense.   The increases in occupancy costs and center depreciation expense for the three months ended September 30, 2006 were due primarily to the new centers opened in 2005 and 2006.

Advertising expense.   Advertising expense decreased for the three months ended September 30, 2006 compared to the same period in 2005 due primarily to a change in marketing strategy. During the third quarter of 2006, we launched a new advertising campaign which we expect to evolve in the future with new center merchandising materials, direct mail and television and radio commercials. Advertising expense in the third quarter 2006 also reflects the improved efficiencies in marketing to our traditional customer base. Going forward, we expect increased marketing expenditures tied to the introduction of new products and a more aggressive overall marketing strategy.

Other center expenses.   Other center expenses decreased for the three months ended September 30, 2006 compared to the same period in 2005 due primarily to lower office supplies and center closing costs in 2006.

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Corporate and Other Expense (Income) Analysis

General and administrative expenses.   The decrease in general and administrative expenses for the three months ended September 30, 2006 was due primarily to:

·a decrease in airplane operating expenses of approximately $0.6 million;

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

·approximately $0.2 million related to consultant costs for new product development; and

·an increase in stock-based compensation expense of approximately $0.4 million.

Loss on impairment of assets.   Loss on impairment of assets in 2005 represents a writedown of approximately $1.5 million to market value of an aircraft subsequently sold in 2005 as well as a writedown of approximately $0.4 million of the undepreciated costs of certain fixed assets in centers identified for closure.

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Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2006

The following tables set forth our results of operations for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2006 (dollars in thousands, except Center Information):

	Nine Months Ended September 30,
	2005						2006						Variance
	Dollars			% Net Revenues			Dollars			% Net Revenues			Dollars			%
Revenues:
Fees and interest charged to customers	$	373,010			97.0	%	$	474,224			116.6	%	$	101,214		27.1	%
Marketing, processing and servicing fees	88,327				23.0	%	12,418				3.0	%	(75,909		)	(85.9	)%
Total revenues	461,337				120.0	%	486,642				119.6	%	25,305			5.5	%
Provision for doubtful accounts and agency bank losses	(76,998		)		(20.0	)%	(79,825		)		(19.6	)%	(2,827		)	(3.7	)%
Net revenues	384,339				100.0	%	406,817				100.0	%	22,478			5.8	%
Center Expenses:
Salaries and related payroll costs	128,948				33.5	%	139,379				34.3	%	10,431			8.1	%
Occupancy costs	58,735				15.3	%	64,242				15.8	%	5,507			9.4	%
Center depreciation expense	10,973				2.9	%	12,034				3.0	%	1,061			9.7	%
Advertising expense	20,808				5.4	%	13,210				3.2	%	(7,598		)	(36.5	)%
Other center expenses	39,040				10.2	%	40,880				10.0	%	1,840			4.7	%
Total center expenses	258,504				67.3	%	269,745				66.3	%	11,241			4.3	%
Center gross profit	125,835				32.7	%	137,072				33.7	%	11,237			8.9	%
Corporate and Other Expenses (Income):
General and administrative expenses .	38,440				10.0	%	39,755				9.7	%	1,315			3.4	%
Corporate depreciation expense	3,390				0.9	%	2,798				0.7	%	(592		)	(17.5	)%
Interest expense	2,914				0.7	%	3,996				1.0	%	1,082			37.1	%
Interest income	(208		)		(0.1	)%	(419		)		(0.1	)%	(211		)	(101.4	)%
Loss on disposal of property and equipment	448				0.1	%	825				0.2	%	377			84.2	%
Loss on impairment of assets	1,852				0.5	%	—				—		(1,852		)	(100.0	)%
Total corporate and other expenses	46,836				12.1	%	46,955				11.5	%	119			0.3	%
Income before income taxes	78,999				20.6	%	90,117				22.2	%	11,118			14.1	%
Income tax expense	32,187				8.4	%	36,559				9.0	%	4,372			13.6	%
Income before income of consolidated variable interest entity	46,812				12.2	%	53,558				13.2	%	6,746			14.4	%
Income of consolidated variable interest entity	(476		)		(0.1	)%	(2,267		)		(0.6	)%	(1,791		)	(376.3	)%
Net income	$	46,336			12.1	%	$	51,291			12.6	%	$	4,955		10.7	%

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	Nine Months Ended
	September 30,
	2005			2006
Center Information:
Number of centers open at beginning of period	2,408			2,604
Opened	208			179
Acquired	3			—
Closed (excluding Georgia)	(21		)	(38		)
Number of centers open at end of period	2,598			2,745
Weighted average number of centers open during the period	2,461			2,643
Number of payday cash advances provided and processed (in thousands)	8,674			8,524
Amount of average payday cash advance provided and processed	$	336		$	352
Number of installment loans provided and processed (in thousands)	45			—
Amount of average installment loan provided and processed	$	494		—
Number of lines of credit outstanding at end of period (in thousands).	—			22
Aggregate principal amount of lines of credit outstanding at end of period (in thousands)	—			$	10,208
Average number of lines of credit outstanding during the period (in thousands)	—			16
Average amount of aggregate principal on lines of credit outstanding during the period (in thousands)	—			$	7,549

	Nine Months Ended September 30,
	2005					2006					Variance
	Dollars		% Net Revenues			Dollars		% Net Revenues			Dollars				%
Per Center (based on weighted average number of centers open during the period):
Center net revenues	$	156.2		100.0	%	$	153.9		100.0	%		$	(2.3	)	(1.5	)%
Center expenses:
Salaries and related payroll costs	52.4			33.5	%	52.7			34.3	%		0.3			0.6	%
Occupancy costs	23.9			15.3	%	24.3			15.8	%		0.4			1.7	%
Center depreciation expense	4.5			2.9	%	4.5			3.0	%		-			-
Advertising expense	8.4			5.4	%	5.0			3.2	%		(3.4		)	(40.5	)%
Other center expenses	15.9			10.2	%	15.5			10.0	%		(0.4		)	(2.5	)%
Total center expenses	105.1			67.3	%	102.0			66.3	%		(3.1		)	(2.9	)%
Center gross profit	$	51.1		32.7	%	$	51.9		33.7	%		$	0.8		1.6	%

Revenue Analysis

Total revenues increased approximately $25.3 million during the nine months ended September 30, 2006 compared to the same period in 2005. The increase was primarily due to the opening of new centers and revenue growth in existing centers. Total revenues for the 2,207 centers opened prior to January 1, 2005 and still open as of September 30, 2006 increased $27.2 million from $426.9 million for the nine months ended September 30, 2005 to $454.1 million for the same period in 2006. Centers opened prior to January 1, 2005 were at least nine months and twenty-one months old at the end of the nine-month periods ended September 30, 2005 and 2006, respectively. Total revenues for the 538 centers opened after January 1, 2005 and still open as of September 30, 2006 increased $27.8 million from $2.8 million for the nine months ended September 30, 2005 to $30.6 million for the same period in 2006. Total revenues for the remaining 289 centers that closed represented a decrease of approximately $29.7 million for the nine months ended September 30, 2006 compared to the same period in 2005. This decrease is primarily due to the suspension and subsequent closure of operations in North Carolina during the fourth quarter of 2005.

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In addition to the closed centers mentioned in the preceding paragraph, the increase in total revenues during the nine months ended September 30, 2006 was partially offset by:

·the implementation of the FDIC Revised Guidance in Pennsylvania and Arkansas beginning during the third quarter of 2005 and the lending banks’ suspension of originations in the first half of 2006. Total revenues for the first nine months of 2006 in Pennsylvania and Arkansas were approximately $16.6 million less than the same period in 2005;

·the implementation of material changes in enabling legislation in Illinois and Indiana. Total revenues for the first nine months of 2006 in Illinois and Indiana were approximately $12.9 million less than the same period in 2005; and

·the continued impact of Hurricanes Katrina and Rita in Louisiana and Mississippi. Total revenues for the first nine months of 2006 in Louisiana and Mississippi were approximately $4.0 million less than the same period in 2005.

As a percentage of total revenues, the provision for doubtful accounts and agency bank losses decreased to 16.4% for the nine months ended September 30, 2006 from 16.7% for the same period in 2005. The decrease in the provision is due in part to the inclusion in the 2005 provision of an approximate $4.2 million net expense related to the contractual changes in Arkansas, Michigan, North Carolina and Texas. In addition, during the second and third quarters of 2006, we sold certain customer accounts receivable to a collection agency, which generated proceeds of approximately $2.2 million which was recorded as a reduction in the 2006 provision. This decrease was partially offset by increased loss rates.

Center Expense Analysis

Salaries and related payroll costs.   The increase in salaries and related payroll costs for the nine months ended September 30, 2006 was due primarily to the new centers opened in 2005 and 2006. We averaged approximately 2.14 and 2.18 full-time equivalent field employees, including district directors, per center during the nine months ended September 30, 2005 and 2006, respectively.

Occupancy costs, center depreciation expense and other center expenses.   The increases in occupancy costs, center depreciation expense and other center expenses in the nine months ended September 30, 2006 were due primarily to the new centers opened in 2005 and 2006.

Advertising expense.   Advertising expense decreased for the nine months ended September 30, 2006 compared to the same period in 2005 due primarily to a decision to conduct less advertising activities during 2006.

Corporate and Other Expense (Income) Analysis

General and administrative expenses.   The increase in general and administrative expenses for the nine months ended September 30, 2006 was due primarily to:

·approximately $2.0 million of additional expense related to personnel, consulting and other costs associated with new product development;

·an increase in stock-based compensation expense of approximately $1.0 million;

·an increase of approximately $0.4 million related to additional headcount in our real estate and construction departments;

·higher expenses of approximately $0.3 million for consultants and trade association dues in our public and government relations department; offset by

·a decrease in airplane operating expenses of approximately $1.7 million; and

·a decrease in legal fees of approximately $0.8 million.

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Liquidity and Capital Resources

The following table presents a summary of cash flows for the nine months ended September 30, 2005 and 2006 (dollars in thousands):

							Variance
	2005			2006			Dollars			%
Cash flows provided by (used in):
Operating activities	$	122,062		$	112,683		$	(9,379	)	(7.7	)%
Investing activities	(96,583		)	(108,229		)	(11,646		)	(12.1	)%
Financing activities	(17,989		)	18,506			36,495			202.9	%
Net increase in cash and cash equivalents	7,490			22,960			15,470			206.5	%
Cash and cash equivalents, beginning of period	18,224			27,259			9,035			49.6	%
Cash and cash equivalents, end of period	$	25,714		$	50,219		$	24,505		95.3	%

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

We borrow under our $265.0 million revolving credit facility to fund our advances and our other liquidity needs. Our day-to-day balances under our revolving credit facility, as well as our cash balances, vary because of seasonal and day-to-day requirements resulting from making and collecting advances. For example, if a month ends on a Friday (a typical payday), our borrowings and our cash balances will be high compared to a month that does not end on a Friday. This is because a substantial portion of the advances will be repaid in cash on that day but sufficient time will not yet have passed for the cash to reduce the outstanding borrowings under our revolving credit facility. Our borrowings under our revolving credit facility will also increase as the demand for advances increases during our peak periods such as the back-to-school and holiday seasons. Conversely, our borrowings typically decrease during the tax refund season when cash receipts from customers peak or the customer demand for new advances decreases. Advances and fees receivable, net increased approximately $40.6 million, or 22.3% and $28.9 million or 15.0%, respectively, to $222.4 million at September 30, 2006 compared to $181.8 million at September 30, 2005 and $193.5 million at December 31, 2005 due primarily to an increase in the number of centers and to the conversion of our operations in Pennsylvania and Arkansas to state-based legislation under the agency business model pursuant to which we fund the advances.

On May 4, 2005, we announced that our Board of Directors had approved a program authorizing the repurchase of up to $50.0 million of our outstanding common stock. Additionally, on August 16, 2006, we announced that our Board of Directors had approved an extension of our stock repurchase program authorizing us to repurchase up to $100.0 million of our outstanding common stock on and after this date. Our Board of Directors determined that the continuation and increase of the stock repurchase program serves the best interest of us and our stockholders by returning capital to our stockholders, by providing an attractive investment opportunity for our funds and by reducing the dilutive impact of employee stock incentive programs and potential acquisitions.

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

During the three and nine months ended September 30, 2006, we repurchased 2,292,000 shares of our common stock at a cost of approximately $32.4 million.

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Although our revolving credit facility places restrictions on our capital expenditures and acquisitions, we believe that these restrictions do not prohibit us from pursuing our growth strategy as currently planned. Cash that is restricted due to certain states’ regulatory liquidity requirements is not included in cash and cash equivalents. Instead, the restricted cash is shown on our consolidated balance sheet as a non-current asset under the line item “Restricted cash.”

Cash Flows from Operating Activities

The decrease in net cash provided by operating activities for the nine months ended September 30, 2006 compared to the same period in 2005 was due primarily to a net decrease in changes in operating assets and liabilities of $25.4 million, partially offset by a net increase in non-cash adjustments of $11.1 million and an increase in net income. The $25.4 million net decrease in changes in operating assets and liabilities is due primarily to a decrease in the change in income taxes payable of $8.3 million and a decrease in the change in other current assets of $13.8 million (due primarily to the timing of insurance and center rent payments as well as the refund in 2005 of funds deposited with the IRS relating to the period we were an S Corporation).

Cash Flows from Investing Activities

The increase in net cash used in investing activities for the nine months ended September 30, 2006 compared to the same period in 2005 was primarily due to a $13.3 million increase in the change in cash invested in advances receivable, partially offset by a $2.1 million decrease in purchases of property and equipment.

Cash Flows from Financing Activities

The increase in net cash from financing activities for the nine months ended September 30, 2006 compared to the same period in 2005 was primarily due to a $54.7 million increase in borrowings under our revolving credit facility, a $4.4 million increase in the change in book overdrafts, partially offset by a $21.0 million increase in repurchases of our common stock.

Capital Expenditures

For the nine months ended September 30, 2005 and 2006, we spent $13.0 million and $11.0 million, respectively, on capital expenditures. Capital expenditures included expenditures for (1) new centers opened, (2) center remodels and (3) computer equipment replacements in our centers and at our corporate headquarters.

Off-Balance Sheet Arrangements with the Lending Banks

We previously operated as an agent for lending banks in Arkansas, Michigan, North Carolina, Pennsylvania and Texas pursuant to MP&S Agreements. Each lending bank was responsible for evaluating each of its customers’ applications and determining whether the payday cash advance or installment loan was approved. The lending banks utilized an automated third-party credit scoring system to evaluate and approve each customer application. We were not involved in the lending banks’ approval process, we were not involved in determining the approval procedures or criteria of the lending banks and, in the normal course of business, we generally did not fund or acquire any payday cash advances or installment loans from the lending banks. The payday cash advances and installment loans were repayable solely to the lending banks and were assets of the lending banks. Consequently, the lending banks’ payday cash advances and installment loans have never been included in our payday cash advance and installment loan portfolios nor have they been reflected on our balance sheet within our advances and fees receivable, net.

Under the MP&S Agreements, the lending banks were contractually obligated for all or a specified percentage of the losses on their payday cash advances. Therefore, our marketing, processing and servicing

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fee increased by the lending banks’ contractual obligation for losses. If actual payday cash advance losses by a lending bank exceeded the percentage specified in its MP&S Agreement with us, we were potentially obligated to pay the lending bank the outstanding amount of the advances and loans plus the lending bank’s fees and/or interest receivable on the advances, less the lending bank’s contractually obligated portion of the losses.

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

As a result of the FDIC Revised Guidance, and the conversion of our Texas and Michigan operations to our standard business model in July 2005, the discontinuation of our North Carolina operations in September 2005, and the conversion of our Pennsylvania and Arkansas operations to our standard business model in June 2006, the accrual for excess bank losses and gross profit derived from the agency business model has declined. The accrual for excess bank losses that was reported in our balance sheet was $1.4 million as of December 31, 2005. We had no accrual for excess bank losses as of September 30, 2006. Approximately 15.4% of our total center gross profit in the three months ended September 30, 2005 was derived from the agency business model. Approximately 22.5% and 0.6% of our total center gross profit, in the nine months ended September 30, 2005 and 2006, respectively, was derived from the agency business model.

Certain Contractual Cash Commitments

Our principal future contractual obligations and commitments as of September 30, 2006, including periodic interest payments, included the following (dollars in thousands):

			Payment due by December 31,
Contractual Cash Obligations	Total		2006		2007 and 2008		2009 and 2010		2011 and thereafter
Long-term debt obligations:
Revolving credit facility	$	96,838	$	—	$	—	$	96,838		$	—
Mortgage payable.	8,564		199		1,594		1,594			5,177
Note payable	415		35		276		104			—
Operating lease obligations (1)	139,426		16,245		91,759		27,378			4,044
Purchase obligations	2,148		1,912		236		-			—
Total.	$	247,391	$	18,391	$	93,865	$	125,914		$	9,221

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

Long-Term Debt Obligations

Revolving Credit Facility.   On July 16, 2004, we entered into an amendment and restatement of our prior credit facility with a syndicate of banks. As amended and restated, our revolving credit facility provides us with a $265.0 million revolving line of credit, which amount includes 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 option to (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 borrowed again. In May 2005, we amended our revolving credit facility to allow the repurchase 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 a CSO in Texas. In August 2006, we amended our revolving credit facility to allow the repurchase of up to $100.0 million of our outstanding common stock on and after the date of this amendment.

39

As of September 30, 2006, we had $96.8 million outstanding on the revolving portion of our credit facility and approximately $3.9 million of letters of credit outstanding, leaving approximately $164.3 million available for future borrowings under our credit facility.

In general, our borrowings under our revolving credit facility bear interest, at our option, at either a base rate plus an applicable margin or a LIBOR-based rate plus an applicable margin. The base rate equals the greater of (i) the prime rate announced by Bank of America, the administrative agent under the revolving credit facility, and (ii) the sum of the federal funds rate plus 0.50%. The applicable margin is determined each quarter by a pricing grid based on our senior leverage ratio of our consolidated senior debt to consolidated EBITDA. The base rate applicable margin ranges from 0.75% to 1.50% based upon our senior leverage ratio. The LIBOR-based applicable margin ranges from 2.50% to 3.25% based upon our senior leverage ratio. As of September 30, 2006, the applicable margin for the prime-based rate was 0.75% and the applicable margin for the LIBOR-based rate was 2.50%.

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

Our obligations under the revolving credit facility are guaranteed by each of our subsidiaries. Our borrowings under the revolving credit facility are secured by substantially all of our assets and the assets of our subsidiaries. In addition, our borrowings under the revolving credit facility are secured by a pledge of all of the capital stock, or similar equity interests, of our subsidiaries. Our revolving credit facility contains various financial covenants that require, among other things, the maintenance of a minimum net worth and leverage and fixed charge coverage ratios. The revolving credit facility contains customary covenants and events of default, including covenants that restrict our ability to encumber assets, to create indebtedness and to declare and pay dividends. The revolving credit facility also includes cross default provisions where an event of default with respect to any other indebtedness in excess of $1.0 million in the aggregate could cause all amounts outstanding under the revolving credit facility to become due and payable. We were in compliance with all covenants at September 30, 2006.

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

Mortgage Payable.   Our corporate headquarters building and related land are subject to a mortgage, the principal amount of which was approximately $6.2 million and $5.9 million at December 31, 2005 and September 30, 2006, respectively. The mortgage is payable to an insurance company and is collateralized by our corporate headquarters building and related land. The mortgage is payable in 180 monthly installments of approximately $66,400, including principal and interest, and bears interest at a fixed rate of 7.30% over its term. The mortgage matures on June 10, 2017. The carrying amount of our corporate headquarters (land, land improvements and building) was approximately $5.4 million and $5.2 million at December 31, 2005 and September 30, 2006, respectively.

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Operating Lease Obligations

We lease all but three of our centers from third-party lessors under operating leases. These leases typically have initial terms of three to five years and may contain provisions for renewal options, additional rental charges based on revenue and payment of real estate taxes and common area charges. In addition, we lease aircraft hangar space and have certain other leases for security and office equipment. The lessor under three center leases, the aircraft hanger space lease and other office and warehouse space leases are companies controlled by our Chairman.

Our Chairman and Vice Chairman have used our aircraft for private purposes in exchange for our use of an identical aircraft owned by our Chairman and Vice Chairman. For the three and nine months ended September 30, 2006, our Chairman and Vice Chairman used our aircraft for 10.8 and 33.5 hours, respectively. For the nine months ended September 30, 2006, we used the aircraft owned by the Chairman and Vice Chairman for 1.3 hours. As a result, we are owed for approximately 43.0 hours of aircraft use time. That credit is not reflected in our balance sheet as of September 30, 2006.

Purchase Obligations

We enter into agreements with vendors to purchase furniture, fixtures and other items used to open new centers. These purchase commitments typically extend for a period of two to three months after the opening of a new center. As of September 30, 2006, our purchase obligations totaled approximately $2.1 million.

Critical Estimates, Uncertainties or Assessments in the Financial Statements

The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In applying the accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As might be expected, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Actual results related to the estimates and assumptions made in preparing our consolidated financial statements will emerge over periods of time, such as estimates and assumptions underlying the determination of allowance for doubtful accounts. These estimates and assumptions 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 estimates and assumptions because of the period over which actual results may emerge, this risk is mitigated by the ability to make changes to these estimates and assumptions over the same period.

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

Impact of Inflation

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

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FORWARD-LOOKING STATEMENTS

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

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

·federal and state governmental regulation of payday cash advance services, consumer lending and related financial products and services;

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

·our ability to identify and successfully implement new product and service offerings;

·current and future litigation and regulatory proceedings against us, including but not limited to those against us in Pennsylvania;

·the accuracy of our estimates of losses;

·theft and employee errors;

·the availability of adequate financing, suitable centers and experienced management employees to implement our growth strategy;

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

·the other matters set forth under “Part II. Item 1A. Risk Factors” below.

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

You are cautioned not to rely unduly on any forward-looking statements. These risks and uncertainties are discussed in more detail elsewhere in this Quarterly Report, including under “Part II. Item 1A. Risk Factors” and in this Item.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Interest Rate Risk

We are exposed to interest rate risk on our revolving credit facility. Our variable interest expense is sensitive to changes in the general level of interest rates. We may from time to time enter into interest rate swaps, collars or similar instruments with the objective of reducing our volatility in borrowing costs. We do not use derivative financial instruments for speculative or trading purposes. We had no derivative financial instruments outstanding as of December 31, 2005 or September 30, 2006. The weighted average interest rate on our $37.9 million of variable interest debt as of December 31, 2005 was approximately 7.38%. The weighted average interest rate on our $96.8 million of variable interest debt as of September 30, 2006 was approximately 7.97%.

We had total interest expense of $1.4 million and $2.2 million for the three months ended September 30, 2005 and 2006, respectively. We had total interest expense of $2.9 million and $4.0 million for the nine months ended September 30, 2005 and 2006, respectively. The estimated change in interest expense from a hypothetical 200 basis-point change in applicable variable interest rates would have been approximately $0.2 million and $0.3 million for the three months ended September 30, 2005 and 2006, respectively, and approximately $0.2 million and $0.4 million for the nine months ended September 30, 2005 and 2006, respectively.

ITEM 4.CONTROLS AND PROCEDURES.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, and our internal control over financial reporting, as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

Risks Related to Our Business and Industry

Our business is highly regulated. Changes in applicable laws and regulations, or our failure to comply with such laws and regulations, could have a material adverse effect on our business, results of operations and financial condition.

Our business is subject to numerous federal, state and local laws and regulations, which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. These regulations govern or affect, among other things, interest rates and other fees, check cashing fees, lending practices, recording and reporting of certain financial transactions, privacy of personal consumer information and collection practices. As we develop new product and service offerings, we may become subject to additional federal, state and local regulations. State and local governments may also seek to impose new licensing requirements or interpret or enforce existing requirements in new ways. In addition, changes in current laws and future laws or regulations may restrict our ability to continue our current methods of operation or expand our operations. Changes in laws or regulations, or our failure to comply with such laws and regulations, may have a material adverse effect on our business, results of operations and financial condition.

Our industry is highly regulated under state law. Changes in state laws and regulations, or our failure to comply with such laws and regulations, could have a material adverse effect on our business, results of operations and financial condition.

Our business is regulated under a variety of enabling state statutes, including payday advance, deferred presentment, check-cashing, small loan and credit services organization state laws, all of which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. As of September 30, 2006, 39 states and the District of Columbia had specific laws that permitted payday cash advances or allowed a form of payday cash advances under small loan laws. As of September 30, 2006, we operated in 35 of these 39 states. We do not currently conduct business in the remaining four states or in the District of Columbia because we do not believe it is economically attractive to operate in these jurisdictions due to specific legislative restrictions such as interest rate ceilings, an unattractive population density or unattractive location characteristics. The remaining 11 states do not have laws specifically authorizing the payday cash advance business. Despite the lack of specific payday advance laws, other laws may permit us to do business in these states. As of September 30, 2006, we operated in one of these 11 states.

During the last few years, legislation has been adopted in some states that prohibits or severely restricts payday cash advance services. Many bills have also been introduced in state legislatures. In 2005, bills that severely restrict or effectively prohibit payday cash advances were introduced in 26 states. In addition, two states have sunset provisions in their payday cash advance laws that require renewal of the laws by the state legislatures at periodic intervals. Rules currently under consideration in New Mexico may effectively prohibit, or at least significantly restrict, our operations there. Oregon has enacted legislation that is currently slated to become effective in July 2007 that will provide for significant additional restrictions on the payday cash advance industry. Any such legislation could have a material adverse impact on our results from operations. Similar laws prohibiting payday cash advance services or making them

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unprofitable could be passed in any other state at any time or existing payday cash advance laws could expire or be amended, any of which would have a material adverse effect on our business, results of operations and financial condition.

Statutes authorizing payday cash advance services typically provide the state agencies that regulate banks and financial institutions with significant regulatory powers to administer and enforce the law. In most states, we are required to apply for a license, file periodic written reports regarding business operations and undergo comprehensive state examinations to ensure that we comply with applicable laws. Under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that impact the way we do business and may force us to terminate or modify our operations in particular states. They may also impose rules that are generally adverse to our industry. Any new licensing requirements or rules could have a material adverse effect on our business, results of operations and financial condition.

In some cases, we rely on the interpretations of the staff of state regulatory bodies with respect to the laws and regulations of their respective jurisdictions. These staff interpretations generally are not binding legal authority and may be subject to challenge in administrative or judicial proceedings. Additionally, as the staff of state regulatory bodies change, it is possible that their interpretations of applicable laws and regulations also may change and negatively affect our business. As a result, our reliance on staff interpretations could therefore have a material adverse effect on our business, results of operations and financial condition.

Additionally, state attorneys general and banking regulators have begun to scrutinize payday cash advances and other alternative financial products and take actions that could require us to modify, suspend or cease operations in their respective states. In December 2005, after the conclusion of a contested case, the Commissioner of Banks for North Carolina ordered that our North Carolina subsidiary immediately cease all business operations. See “Part I. Item 1. Financial Statements—Notes to Interim Unaudited Financial Statements—Note 7. Commitments and Contingencies.” As a result, we closed 118 centers in North Carolina. The lost revenues from such closures may have a material adverse effect on our results of operations and financial condition. In addition, the newly introduced Advance America Choice-Line of Credit is being challenged by the Office of the Pennsylvania Secretary of Banking in a lawsuit filed in the Commonwealth Court of Pennsylvania. See “Part I. Item 1. Financial Statements—Notes to Interim Unaudited Financial Statements—Note 7. Commitments and Contingencies.” An adverse ruling in this case could significantly impair our business or force us to cease offering that new product in Pennsylvania.

Our industry is regulated under federal law and subject to federal and state unfair and deceptive practices statutes. Our failure to comply with such regulations or changes in federal laws and regulations, or changes to such laws, could have a material adverse effect on our business, results of operations and financial condition.

Although states provide the primary regulatory framework under which we offer advances, certain federal laws also impact our business. Because advances are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and Regulation Z adopted under that Act. Additionally, we are subject to the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act. Any failure to comply with any of these federal laws and regulations could have a material adverse effect on our business, results of operations and financial condition.

Additionally, since 1999, various anti-payday cash advance legislation has been introduced in the U.S. Congress. Congressional members continue to receive pressure from consumer advocates and other industry opposition groups to adopt such legislation. Recent attention has focused on the use of short term

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lending and payday cash advances by military personnel. On September 29, 2006, the John Warner National Defense Authorization Act for Fiscal Year 2007 (the “Act”) conference report was filed and the Act was signed into law on October 17, 2006. The Act places, among other restrictions, a federal limit of 36% on extensions of credit, including payday cash advances, to active members of the military and their dependents. Any federal legislative or regulatory action that restricts or prohibits payday cash advance services could have a material adverse impact on our business, results of operations and financial condition. On October 15, 2006, the Company voluntarily ceased offering its services to active, full-time military personnel by no longer qualifying customers for advances based on income from military service.

Our marketing efforts and the representations we make about our payday cash advances also are subject to federal and state unfair and deceptive practices statutes. The Federal Trade Commission (“FTC”) enforces the Federal Trade Commission Act and the state attorneys general and private plaintiffs enforce the analogous state statutes. If we are found to have violated any of these statutes, that violation could have a material adverse effect on our business, results of operations and financial condition.

Our industry is subject to various local rules and regulations. Changes in these local regulations could have a material adverse effect on our business, results of operations and financial condition.

In addition to state and federal laws and regulations, our business can be subject to various local rules and regulations such as local zoning regulations. For example, several cities in Oregon have recently adopted local ordinances that have the effect of limiting our business. Any actions taken in the future by local zoning boards or other local governing bodies to require special use permits for, or impose other restrictions on, payday cash advance service providers could have a material adverse effect on our business, results of operations and financial condition.

From time to time, we may also choose to operate in a state even if legislation or regulations cause us to lose money on our operations in that state. The passage of a 2002 Indiana statute established a rate structure at which we could not operate on a profitable basis. However, we continued to provide payday cash advances in the state while experiencing operating losses until a new, less restrictive, law was passed in March 2004. Further regulatory changes in Indiana and recently adopted legislation in Illinois have also reduced our revenue and profitability in those states. Any of these actions or events could have a material adverse effect on our business, results of operations and financial condition.

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

Our business is subject to lawsuits and regulatory proceedings that could generate adverse publicity and cause us to incur substantial expenditures. See “Part I. Item 1. Financial Statements—Notes to Interim Unaudited Financial Statements - Note 7. Commitments and Contingencies.” Adverse rulings in some of these lawsuits or regulatory proceedings could significantly impair our business or force us to cease doing business in one or more states.

We are likely to be subject to further litigation and proceedings in the future. The consequences of an adverse ruling in any current or future litigation or proceeding could cause us to have to refund fees and/or interest collected, refund the principal amount of payday cash advances or other forms of credit, pay treble or other multiple damages, pay monetary penalties and/or modify or terminate our operations in particular states. We may also be subject to adverse publicity. Defense of any lawsuits or proceedings, even if successful, requires substantial time and attention of our senior officers and other management personnel that would otherwise be spent on other aspects of our business and requires the expenditure of significant amounts for legal fees and other related costs. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

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Competition in the retail financial services industry could cause us to lose market share or reduce our interest and fees, possibly resulting in a decline in our future revenues and earnings.

The industry in which we operate has low barriers to entry and is highly fragmented and very competitive. We believe that the market may become even more competitive as the industry grows and/or consolidates. We compete with services provided by traditional financial institutions, such as overdraft protection, and with other payday cash advance providers, small loan providers, credit unions, short-term consumer lenders, other financial service entities and other retail businesses that offer consumer loans or other products and services that are similar to ours. We also compete with companies offering payday cash advances and short-term loans over the internet as well as by phone. Some of these competitors have larger local or regional customer bases, more locations and substantially greater financial, marketing and other resources than we have. Most recently, we are experiencing competition from governmental agencies themselves, such as the Pennsylvania Department of Banking, which is supporting the Pennsylvania Credit Union Association and Pennsylvania State Treasurer in the offering of unsecured 90 day loans. As a result of this increasing competition, we could lose market share or we may need to reduce our interest and fees, possibly resulting in a decline in our future revenues and earnings.

The concentration of our revenues in certain states could adversely affect us.

Our centers currently operate in 36 states and, for the three months ended September 30, 2005 and 2006, our five largest states (measured by total revenues) accounted for approximately 40% and 48%, respectively, of our total revenues. For the nine months ended September 30, 2005 and 2006, our five largest states (measured by total revenues) accounted for approximately 41% and 47%, respectively, of our total revenues. While we believe we have a diverse geographic presence, for the near term we expect that significant revenues will continue to be generated by certain states, largely due to the currently prevailing economic, demographic, regulatory, competitive and other conditions in those states. Furthermore, our five largest states, as measured by revenues, are not in all instances our five largest states as measured by the number of centers operated. Changes to prevailing economic, demographic, regulatory or any other conditions in the markets in which we operate could lead to a reduction in demand for our products and services, a decline in our revenues or an increase in our provision for doubtful accounts that could result in a deterioration of our financial condition.

Media reports and public perception of payday cash advances as being predatory or abusive could materially adversely affect our business, results of operations and financial condition.

Over the past few years, consumer advocacy groups and certain media reports have advocated with increasing frequency governmental and regulatory action to prohibit or severely restrict payday cash advances. The consumer groups and media reports typically focus on the cost to a consumer for an advance. The consumer groups and media reports typically characterize these advances as predatory or abusive toward consumers. If this negative characterization of advances becomes widely accepted by consumers, demand for advance services could significantly decrease, which could materially adversely affect our business, results of operations and financial condition. Negative perception of advances or other activities could also result in increased regulatory scrutiny and increased litigation, and encourage restrictive local zoning rules and make it more difficult to obtain government approvals necessary to open new centers. These trends could materially adversely affect our business, results of operations and financial condition.

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The provision for doubtful accounts may increase and net income may decrease if we are unable to collect customers’ personal checks that are returned due to non-sufficient funds (“NSF”) in the customers’ accounts or other reasons.

For the three months ended September 30, 2005 and 2006, we deposited approximately 6.4% and 6.2%, respectively, of all the customer checks we received and approximately 80% and 75%, respectively, of these deposited customer checks were returned unpaid because of non-sufficient funds in the customers’ bank accounts or because of closed accounts or stop-payment orders. For the nine months ended September 30, 2005 and 2006, we deposited approximately 5.5% and 5.7%, respectively, of all the customer checks we received and approximately 79% and 77%, respectively, of these deposited customer checks were returned unpaid because of non-sufficient funds in the customers’ bank accounts or because of closed accounts or stop-payment orders. Total charge-offs, net of recoveries, for the three months ended September 30, 2005 and 2006 were approximately $31.8 million and $34.3 million, respectively. Total charge-offs, net of recoveries, for the nine months ended September 30, 2005 and 2006 were approximately $65.7 million and $73.4 million, respectively. If the number of customer checks that we deposit increases or the percent of the customers’ returned checks that we charge-off increases, our provision for doubtful accounts will increase and our net income will decrease.

If our estimates of losses are not adequate, our provision for doubtful accounts would increase. This would result in a decline in our future revenues and earnings, which could have a material adverse effect on our stock price.

We maintain an allowance for doubtful accounts for estimated losses for advances we make directly to consumers and check-cashing, deferred-presentment and other credit services we offer under the standard business model. To estimate the appropriate allowance for doubtful accounts, we consider the amount of outstanding advances owed to us, historical charge-offs, our current collection patterns and the current economic trends in the markets we serve.

As of September 30, 2006, our allowance for doubtful accounts was $53.4 million. This amount, however, is an estimate, and we have less experience upon which to base our estimates of losses from check-cashing, deferred-presentment or credit services than with payday cash advances. If our actual advance, check-cashing, deferred-presentment or credit services losses are greater than our allowance for doubtful accounts, our provision for doubtful accounts would increase. This would result in a decline in our future revenues and earnings, which could have a material adverse effect on our stock price.

We currently lack product and business diversification; as a result, our future revenues and earnings may be disproportionately negatively impacted by external factors and may be more susceptible to fluctuations than more diversified companies.

Our primary business activity is offering payday cash advance services. If we are unable to maintain and grow our advance services business, our future revenues and earnings could decline. Our current lack of product and business diversification could inhibit our opportunities for growth, reduce our revenues and profits and make us more susceptible to earnings fluctuations than many of our competitors who are more diversified and provide other services such as pawn lending, title lending or other similar services. External factors, such as changes in laws and regulations, new entrants and enhanced competition, could also make it more difficult for us to operate as profitably as a more diversified company could operate. Any internal or external change in our industry could result in a decline in our future revenues and earnings, which could have a material adverse effect on our stock price.

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Our inability to efficiently and profitably introduce or manage new products or alternative methods for conducting business could have a material adverse effect on our business, results of operations and financial condition.

In July 2005, we began offering credit services as a CSO to customers in Texas. In June 2006, we began offering consumers in Pennsylvania a new financial service called the Advance America Choice-Line of Credit, operating under an existing state check cashing law in Arkansas, and offering advances under a deferred presentment service transactions act in Michigan. In October 2006, we began offering installment loans in Illinois and selling a prepaid debit card called the CashVantage Card in select states. Further, we intend to introduce additional new products and services in the future. In order to offer such new products, we will need to comply with additional regulatory and licensing requirements. Each of these changes, alternative methods of conducting business and new products are subject to risk and uncertainty and require significant investment in time and capital. Due to our lack of experience in offering some of these alternative services and products, we cannot assure you that we will be able to successfully implement any of these changes or successfully introduce any new products, or to do so in a timely manner. Furthermore, we cannot predict the demand for any of these new services or products, nor do we know if we will be able to offer these new services or products in an efficient manner or on a profitable basis. Our failure to do so, or low customer demand for any of these new services or products, could have a material adverse effect on our business, results of operations and financial condition.

Our ability to manage our growth may deteriorate and our ability to execute our growth strategy may be adversely affected.

We have experienced substantial growth in recent years. Our growth strategy, which is based on opening centers in existing and new markets, is subject to significant risks. We cannot assure you that we will be able to expand our market presence in our current markets or successfully enter new markets through the opening of new centers or acquisitions. Moreover, the start-up costs and the losses from initial operations attributable to each newly opened center place demands upon our liquidity and cash flow, and we cannot assure you that we will be able to satisfy these demands.

In addition, our ability to execute our growth strategy will depend on a number of other factors, some of which may be beyond our control, including:

·the prevailing laws and regulatory environment of each state in which we operate or seek to operate, which are subject to change at any time;

·our ability to obtain and maintain any regulatory approvals, government permits or licenses that may be required;

·our ability to identify, implement and manage new products and services that are compatible with our business;

·the degree of competition in new markets and for new products and services and our ability to attract new customers;

·our ability to compete for expansion opportunities in suitable locations;

·our ability to recruit, train and retain qualified personnel;

·our ability to adapt our infrastructure and systems to accommodate our growth; and

·our ability to obtain adequate financing for our expansion plans.

We cannot assure you that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Our growth has placed significant demands on all aspects of our business, including our administrative, technical and financial personnel and systems. Additional growth or

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expansion may further strain our management, financial and other resources. Our future results of operations will substantially depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. In addition, we cannot assure you that we will be able to implement our business strategy profitably in geographic areas or product lines we do not currently serve.

We may incur substantial additional debt, which could adversely affect our business, results of operations and financial condition by limiting our ability to obtain financing in the future and react to changes in our business.

We may incur substantial additional debt in the future. As of September 30, 2006, our total debt was approximately $103.1 million and our stockholders’ equity was approximately $296.8 million. The total availability under our current credit facility is $265.0 million, which we may borrow at any time, subject to compliance with certain covenants and conditions. Due to the seasonal nature of our business, our total debt is historically the lowest during the first calendar quarter and then increases during the remainder of the year. If we incur substantial additional debt, it could have important consequences to our business. For example, it could:

·restrict our operational flexibility through restrictive covenants that will limit our ability to make acquisitions, explore certain business opportunities, dispose of assets and take other actions;

·limit our flexibility in planning for, or reacting to, changes in our business;

·limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our debt instruments;

·make us vulnerable to interest rate increases, because a portion of our borrowings is, and will continue to be, at variable rates of interest;

·require us to dedicate a substantial portion of our cash flow from operations to payments on our debt obligations, which will reduce our funds available for working capital, capital expenditures and our growth strategy; and

·place us at a disadvantage compared to our competitors that have proportionately less debt.

The terms of our debt limit our ability to incur additional debt but do not prohibit us from incurring additional debt. When debt levels increase, the related risks that we now face will also increase.

If we fail to generate sufficient cash flow from future operations to meet our debt service obligations, we may need to seek refinancing of all or a portion of our indebtedness or obtain additional financing in order to meet our obligations with respect to our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing on satisfactory terms or at all.

We depend on loans and cash management services from banks to operate our business. If banks decide to stop making loans and/or providing cash management services to companies in our industry, it could have a material adverse affect on our business, results of operations and financial condition.

We depend on borrowings under our revolving credit facility to fund advances, capital expenditures to build new centers and other needs. One major regional bank announced that it had revised its credit policies to prohibit future loans to companies engaged in the payday cash advance services or car title lending industries in a letter that the bank filed with the Federal Reserve Board in connection with the bank’s application for approval of an acquisition. The bank’s letter referred to comments filed by certain consumer advocacy organizations in connection with the bank’s application, and stated that it had revised its credit policies “after considering the potential reputational risks and consumer harm” that could result from lending to companies in these industries. While this bank is not one of our existing lenders under our

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revolving credit facility, if our current or potential credit banks decided not to lend money to companies in our industry, we could face higher borrowing costs, limitations on our ability to grow our business as well as possible cash shortages, any of which could have a material adverse effect on our business, results of operations and financial condition. This bank also no longer provides cash management services, including operating depository accounts, to payday advance companies. There are other banks that have notified us and other companies in the payday cash advance and check-cashing industries, that they will no longer maintain bank accounts for these companies due to reputational risks and increased compliance costs of servicing money services businesses and other cash intensive industries. While none of our larger depository banks has requested that we close our bank accounts or put other restrictions on how we use their services, if any of our larger current or future depository banks were to take such action, we could face higher costs of managing our cash and limitations on our ability to grow our business, both of which could have a material adverse effect on our business, results of operations and financial condition.

We depend to a substantial extent on borrowings under our revolving credit facility to fund our liquidity needs.

We have an existing revolving credit facility that allows us to borrow up to $265.0 million, assuming we are in compliance with a number of covenants and conditions. Because we typically use substantially all of our available cash generated from our operations to repay borrowings on our revolving credit facility on a current basis, we have limited cash balances and we expect that a substantial portion of our liquidity needs, including any amounts to pay any future cash dividends on our common stock, will be funded primarily from borrowings under our revolving credit facility. As of September 30, 2006, we had approximately $164.3 million available for future borrowings under this facility. Due to the seasonal nature of our business, our borrowings are historically the lowest during the first calendar quarter and increase during the remainder of the year. If our existing sources of liquidity are insufficient to satisfy our financial needs, we may need to raise additional debt or equity in the future.

Our revolving credit facility contains restrictions and limitations that could significantly affect our ability to operate our business.

Our revolving credit facility contains a number of significant covenants that could adversely affect our business. These covenants restrict our ability, and the ability of our subsidiaries to, among other things:

·incur additional debt;

·create liens;

·effect mergers or consolidations;

·make investments, acquisitions or dispositions;

·pay dividends, repurchase stock or make other payments;

·enter into certain sale and leaseback transactions;

·become subject to further restrictions on the creation of liens; and

·have foreign subsidiaries.

The breach of any covenant or obligation in our revolving credit facility will result in a default. If there is an event of default under our revolving credit facility, the lenders under the revolving credit facility could cause all amounts outstanding thereunder to be due and payable, subject to applicable grace periods. This could trigger cross-defaults under our other existing or future debt instruments. As a result, our ability to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might further our

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growth strategy. If we are unable to repay, refinance or restructure our indebtedness under our revolving credit facility, the lenders under that facility could proceed against the collateral securing that indebtedness. Our obligations under the revolving credit facility are guaranteed by each of our existing and future subsidiaries. The borrowings under the revolving credit facility and the subsidiary guarantees are secured by substantially all of our assets and the assets of the subsidiary guarantors. In addition, borrowings under the revolving credit facility are secured by a pledge of substantially all of the capital stock, or similar equity interests, of the subsidiary guarantors. In the event of our insolvency, liquidation, dissolution or reorganization, the lenders under our revolving credit facility and any other existing or future debt of ours would be entitled to payment in full from our assets before distributions, if any, were made to our stockholders.

Our business is seasonal in nature, which causes our revenues, collection rates and earnings to fluctuate. These fluctuations could have a material adverse effect on our results of operations and stock price.

Our business is seasonal due to the impact of fluctuating demand for advances and fluctuating collection rates throughout the year. Demand has historically been highest in the third and fourth quarters of each year, corresponding to the back-to-school and holiday seasons, and lowest in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds. Our provision for doubtful accounts and allowance for doubtful accounts are historically lowest as a percentage of revenues in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds, and increase as a percentage of revenues for the remainder of each year. This seasonality requires us to manage our cash flows over the course of the year. If our revenues or collections were to fall substantially below what we would normally expect during certain periods, our ability to service our debt, pay dividends on our common stock and meet our other liquidity requirements may be adversely affected, which could have a material adverse effect on our results of operations and stock price.

In addition, our quarterly results have fluctuated in the past and are likely to continue to fluctuate in the future because of the seasonal nature of our business. Therefore, our quarterly revenues and results of operations are difficult to forecast, which, in turn could cause our future quarterly results to not meet the expectations of securities analysts or investors. Our failure to meet expectations could cause a material drop in the market price of our common stock.

Because we maintain a significant supply of cash in our centers, we may be subject to cash shortages due to employee and third-party theft and errors. We also may be subject to liability as a result of crimes at our centers.

Because our business requires us to maintain a significant supply of cash in each of our centers, we are subject to the risk of cash shortages resulting from employee and third-party theft and errors. Although we have implemented various programs to reduce these risks, maintain insurance coverage for theft and provide security for our employees and facilities, we cannot assure you that employee and third-party theft and errors will not occur. Cash shortages from employee and third-party theft and errors were approximately $0.5 million (0.27% of total revenues) and $0.7 million (0.40% of total revenues) in the three months ended September 30, 2005 and 2006, respectively. Cash shortages from employee and third-party theft and errors were approximately $1.0 million (0.23% of total revenues) and $1.4 million (0.30% of total revenues) in the nine months ended September 30, 2005 and 2006, respectively. Theft and errors could lead to cash shortages and could adversely affect our business, results of operations and financial condition. It is also possible that crimes such as armed robberies may be committed at our centers. We could experience liability or adverse publicity arising from such crimes. For example, we may be liable if an employee, customer or bystander suffers bodily injury, emotional distress or death. Any such event may have a material adverse effect on our business, results of operations and financial condition.

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Any disruption in the availability of our information systems could adversely affect operations at our centers.

We rely upon our information systems to manage and operate our centers and business. Each center is part of an information network that is designed to permit us to maintain adequate cash inventory, reconcile cash balances on a daily basis and report revenues and expenses to our headquarters. Our back-up systems and security measures could fail to prevent a disruption in our information systems. Any disruption in our information systems could adversely affect our business, results of operations and financial condition.

Our centralized headquarters functions are susceptible to disruption by catastrophic events, which could have a material adverse effect on our business, results of operations and financial condition.

Our headquarters building is located in Spartanburg, South Carolina. Our information systems and administrative and management processes are primarily provided to our zone and regional management and to our centers from this centralized location, and they could be disrupted if a catastrophic event, such as a tornado, power outage or act of terror, destroyed or severely damaged our headquarters. Any of these catastrophic events could have a material adverse effect on our business, results of operations and financial condition.

Potential future acquisitions could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our business, results of operations and financial condition.

We may consider acquisitions of companies, technologies and products that we feel could accelerate our ability to compete or allow us to enter new markets. Acquisitions involve numerous risks, including:

·difficulties in integrating operations, technologies, accounting and personnel;

·difficulties in supporting and transitioning customers of our acquired companies;

·diversion of financial and management resources from existing operations;

·risks of entering new markets;

·potential loss of key employees; and

·inability to generate sufficient revenues to offset acquisition costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate, either of which could have a material adverse effect on our business, results of operations and financial condition.

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Regular turnover among our managers and employees at our centers makes it more difficult for us to operate our centers and increases our costs of operations, which could have an adverse effect on our business, results of operations and financial condition.

The annual turnover as of September 30, 2006, among our center managers was approximately 52% and among our other center employees was approximately 103%. Approximately 50% of the turnover has traditionally occurred in the first six months following the hire date of our center managers and employees. This turnover increases our cost of operations and makes it more difficult to operate our centers. If we are unable to retain our employees in the future, our business, results of operations and financial condition could be adversely affected.

We used to be taxed as an S corporation under Subchapter S of the Internal Revenue Code and claims of taxing authorities related to our prior status as an S corporation could harm us.

Between October 1, 2001, and the closing of our initial public offering (“IPO”) on December 21, 2004, we were taxed as a “pass-through” entity under Subchapter S of the Internal Revenue Code. Currently, we are taxed as a C corporation under Subchapter C of the Internal Revenue Code, which is applicable to most corporations and treats the corporation as an entity that is separate and distinct from its stockholders. If our tax returns for the years in which we were an S corporation were to be audited by the Internal Revenue Service or another taxing authority and we were determined not to have qualified for, or to have violated, our S corporation status, we could be obligated to pay back taxes, interest and penalties. These amounts could include taxes on all of our net income while we were an S corporation. Taxable income during the period we were an S corporation was $211.0 million. Any such claims could result in additional costs to us and could have a material adverse effect on our business, results of operations and financial condition.

Following the filing of our final S corporation tax returns, we recorded an additional $0.6 million of deferred income tax liability that resulted in a $0.6 million increase in tax expense for the quarter ended September 30, 2006.

Risks Related to Our Common Stock

Our executive officers and directors may be able to exert significant influence over our future direction.

Our executive officers and directors together with certain trusts for the benefit of some of the family members of certain directors, control approximately 25% of our outstanding common stock. As a result, these stockholders, if they act together, may be able to influence any matter requiring our stockholders’ approval, including the election of directors and approval of significant corporate transactions. As a result, this concentration of ownership may delay, prevent or deter a change in control, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or its assets and might reduce the market price of our common stock.

Applicable laws and our certificate of incorporation and bylaws may discourage takeovers and business combinations that our stockholders might consider in their best interest.

State laws and our certificate of incorporation and bylaws may delay, defer, prevent or render more difficult a takeover attempt that our stockholders might consider in their best interests. For instance, they may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

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State laws and our certificate of incorporation and bylaws may also make it difficult for stockholders to replace or remove our directors. These provisions may facilitate entrenchment of directors that may delay, defer or prevent a change in our control, which may not be in the best interests of our stockholders.

The following provisions that are included in our certificate of incorporation and bylaws have anti-takeover effects and may delay, defer or prevent a takeover attempt that our stockholders might consider in their best interests. In particular, our certificate of incorporation and bylaws:

·permit our Board of Directors to issue one or more series of preferred stock;

·prohibit stockholders from filling vacancies on our Board of Directors;

·prohibit stockholders from calling special meetings of stockholders and from taking action by written consent;

·impose advance notice requirements for stockholder proposals and nominations of directors to be considered at stockholder meetings; and

·require the approval by the holders of at least 80% of the voting power of our outstanding capital stock entitled to vote on the matter for the stockholders to amend the provisions of our bylaws and certificate of incorporation described in the second through fourth bullet points above and in this bullet point.

In addition, many of our subsidiaries are licensed by, and subject to, the regulatory and supervisory jurisdiction of the states where they do business. Under change in control statutes of some of these states, any person, acting alone or with others, who is seeking to acquire, directly or indirectly, 5% or more of our outstanding common stock may need to be approved by the authorities within those states. As a result, prospective investors who intend to acquire a substantial portion of our common stock may need to be aware of and to comply with those state requirements, to the extent applicable.

In addition, Section 203 of the General Corporation Law of the State of Delaware may limit the ability of an “interested stockholder” to engage in business combinations with us. An interested stockholder is defined to include persons owning 15% or more of our outstanding voting stock.

We can redeem your common stock if you are or if you become a disqualified person.

Federal and state laws and regulations applicable to providers of payday cash advance services or other financial products or services that we may introduce in the future may now or in the future restrict direct or indirect ownership or control of providers of such products or services by disqualified persons (such as convicted felons). Our certificate of incorporation provides that we may redeem shares of your common stock to the extent deemed necessary or advisable, in the sole judgment of our Board of Directors, to prevent the loss of, or to secure the reinstatement or renewal of, any license or permit from any governmental agency that is conditioned upon some or all of the holders of our common stock possessing prescribed qualifications or not possessing prescribed disqualifications. The redemption price will be the average closing sale price per share of our common stock during the 20-trading-day period ending on the second business day preceding the redemption date fixed by our Board of Directors. At the discretion of our Board of Directors, the redemption price may be paid in cash, debt or equity securities or a combination of cash and debt or equity securities.

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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table sets forth information about our stock repurchases for the three months ended September 30, 2006:

Period (1)	Total Number of Shares Purchased (1)		Average Price Paid per Share (2)			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 (2)
July 1 to July 31		116,800		$	13.15		116,800		$	22,859,599
August 1 to August 31		1,734,200		$	14.00		1,734,200		$	94,613,772
September 1 to September 30		641,200		$	14.65		641,200		$	85,221,417
Total		2,492,200		$	14.13		2,492,200		$	85,221,417

(1)Based on trade date.

(2)On May 4, 2005, we announced a stock repurchase program pursuant to which we were authorized to repurchase up to $50.0 million of our outstanding common stock. On August 16, 2006, we announced an extension of our stock repurchase program pursuant to which we were authorized to repurchase up to $100.0 million of our outstanding common stock beginning on that date.

ITEM 6.EXHIBITS.

Exhibit
Number	Description
10.1	Fifth Amendment, dated August 16, 2006, to the Amended and Restated Credit Agreement dated as of July 16, 2004 (incorporated herein by reference to Exhibit 10.1 to Advance America, Cash Advance Centers, Inc.’s Current Report on Form 8-K dated August 14, 2006).
31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer of Advance America, Cash Advance Centers, Inc. pursuant to 18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).
32.2	Certification of Chief Financial Officer of Advance America, Cash Advance Centers, Inc. pursuant to 18 U.S.C. Section 1350 (Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).

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SIGNATURES

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

	ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.
November 9, 2006	By:	/s/ JOHN I. HILL
		Executive Vice President and Chief Financial Officer
		(Duly authorized officer and principal financial officer)

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INDEX TO EXHIBITS

Exhibit Number	Description
10.1	Fifth Amendment, dated August 16, 2006, to the Amended and Restated Credit Agreement dated as of July 16, 2004 (incorporated herein by reference to Exhibit 10.1 to Advance America, Cash Advance Centers, Inc.’s Current Report on Form 8-K dated August 14, 2006).
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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