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Advance America, Cash Advance Centers 10-K 2007

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 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 Identification No.)

incorporation or organization)

 

 

135 North Church Street

 

 

Spartanburg, South Carolina

 

29306

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  864-342-5600

Securities registered pursuant to Section 12(b) of the Act:

 

Name of Each Exchange

Title of Each Class

 

on which Registered

Common Stock, par value $.01 per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 a check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o  No x

As of June 30, 2006, the aggregate market value of voting stock (based upon the last reported sales price on the New York Stock Exchange) held by nonaffiliates of the registrant was $1,187,751,093.

At February 26, 2007, there were 79,543,637 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of this report is incorporated herein by reference from the registrant’s proxy statement for the registrant’s Annual Meeting of Stockholders to be held on May 24, 2007.

 




ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.

Form 10-K

For the year ended December 31, 2006

PART I

 

 

 

 

 

Item 1.

 

Business

 

4

 

Item 1A.

 

Risk Factors

 

17

 

Item 1B.

 

Unresolved Staff Comments

 

29

 

Item 2.

 

Properties

 

29

 

Item 3.

 

Legal Proceedings

 

29

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

32

 

PART II

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

33

 

Item 6.

 

Selected Financial Data

 

36

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

39

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

64

 

Item 8.

 

Financial Statements and Supplementary Data

 

65

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

102

 

Item 9A.

 

Controls and Procedures

 

102

 

Item 9B.

 

Other Information

 

103

 

PART III

 

 

 

 

 

Item 10.

 

Directors and Executive Officers of the Registrant

 

103

 

Item 11.

 

Executive Compensation

 

104

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

104

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

104

 

Item 14.

 

Principal Accountant Fees and Services

 

104

 

PART IV

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

105

 

SIGNATURES

 

108

 

 

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FORWARD-LOOKING STATEMENTS

The matters discussed in this Annual Report on Form 10-K 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 “Item 1A. Risk Factors,” as well as any cautionary language in this Annual 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 “Item 1A. Risk Factors.”

Forward-looking statements speak only as of the date of this Annual 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 Annual 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 Annual 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

ITEM 1. BUSINESS.

Overview

We are the largest provider of payday cash advance services in the United States, as measured by the number of centers operated. As of December 31, 2006, we operated 2,853 centers in 36 states. We do not franchise any of our centers. Payday cash advances are small-denomination, short-term, unsecured advances that are typically due on the customer’s next payday. We focus primarily on providing payday advance services to middle-income working individuals and do not provide pawn lending, title lending or similar services. During 2006, we began offering customers in Pennsylvania the Advance America Choice-Line of Credit product. We previously marketed, processed and serviced installment loans made by lending banks under our former agency business model, and during 2006 we began offering installment loans directly to customers in Illinois. In the fall of 2006, we introduced a prepaid debit card as an additional product in our centers. In the future we intend to expand further our product and service offerings. The table below shows selected demographics of the customers we serve:

 

 

Customers(1)

 

U.S. Census 2000

 

Average age (years)

 

 

39

 

 

 

35.8

 

 

Percentage between 18-44

 

 

66

%

 

 

40

%

 

Median household income

 

 

$

40,557

 

 

 

$

41,994

 

 

Percentage homeowners

 

 

45

%

 

 

66

%

 

Percentage with high school degrees

 

 

86

%

 

 

80

%(2)

 


(1)         Based on a study performed for us of the approximately 52% of customers served during the twelve months ended April 2005 for whom this information was available.

(2)         Percentage of population 25 years old and older who are high school graduates or higher.

Our goal is to attract customers by offering straightforward, rapid access to temporary funding while providing high-quality, professional customer service. We believe that our services represent a competitive source of liquidity to the customer relative to other credit alternatives, which typically include overdraft privileges or bounced check protection, late bill payments, checks returned for insufficient funds and short-term collateralized loans.

4




The following table presents key operating data for our business:

 

 

Year Ended December 31,

 

 

 

2004

 

2005

 

2006

 

Number of centers open at end of period

 

2,408

 

2,604

 

2,853

 

Number of customers served—all credit products (thousands)

 

1,412

 

1,534

 

1,494

 

Number of payday cash advances originated (thousands)

 

11,586

 

11,620

 

11,539

 

Aggregate principal amount of payday cash advances originated (thousands)

 

$

3,804,096

 

$

3,943,815

 

$

4,082,865

 

Average amount of payday cash advance originated

 

$

328

 

$

339

 

$

353

 

Average charge to customers for providing and processing a payday cash advance

 

$

52

 

$

55

 

$

55

 

Average duration of a payday cash advance (days)

 

15.4

 

15.8

 

16.2

 

Average number of lines of credit outstanding during the period (thousands)

 

 

 

20

 

Average amount of aggregate principal on lines of credit outstanding during the period (thousands)

 

 

 

$

8,963

 

Average principal amount on lines of credit outstanding during the period

 

 

 

$

448

 

Number of installment loans originated (thousands)

 

 

68

 

29

 

Aggregate principal amount of installment loans originated (thousands)

 

 

$

34,541

 

$

13,905

 

Average amount of installment loan originated

 

 

$

508

 

$

486

 

Average charge to customers for providing and processing an installment loan(1)

 

 

$

337

 

$

357

 


(1)          This calculation for 2006 excludes the Illinois installment loan product which was rolled out in October 2006 because that product was not available long enough for an average charge in Illinois to be determined.

Our centers, which we design to have the appearance of a mainstream financial institution, are typically located in middle-income shopping areas with high retail activity. As of December 31, 2006, we operated 2,769 centers under the “Advance America” brand and 84 centers under the “National Cash Advance” brand.

Our Industry

The payday cash advance services industry has grown steadily since the early 1990s in response to a shortage of available short-term consumer credit alternatives from traditional banking institutions. The rapid increase in the charges associated with having insufficient funds in one’s bank account, as well as other late/penalty fees charged by financial institutions and merchants, have also helped increase customer demand for advances. An advance typically involves a single charge, unlike other alternatives that often require collateral, origination and administration fees, interest payments, additional incremental charges and prepayment penalties and charges for other services such as credit life insurance. Other alternatives, such as bounced checks and late bill payments, may also have negative credit consequences. We believe customers use short-term advances as a simple, quick and confidential way to meet short-term cash needs between paydays while avoiding the potentially higher costs and negative credit consequences of other alternatives.

We believe many banks and other traditional financial institutions reduced or eliminated their provision of small-denomination, short-term consumer loans, in part due to the costs associated with originating these loans. As a result, a significant number of companies now offer short-term consumer loans, or advances, to lower-income and middle-income individuals. The providers of these types of services are fragmented and range from specialty finance offices, like our centers, to retail stores in other industries that offer short-term consumer loans as ancillary services. Because of the relatively low cost of

5




entry and the regulatory safe harbor that many state statutes provide for advances, the industry has experienced significant growth in the number of centers. Other entrants to the industry offer advances and short-term loans over the internet as well as by telephone.

We believe the payday cash advance services industry is growing, fueled by overall increases in the population and increased consumer and legislative acceptance of payday cash advances. The number of jurisdictions with specific legislation and/or regulations permitting payday cash advances or small loans has grown from 16 states in 1997, the year in which we commenced operations, to 39 states and the District of Columbia as of December 31, 2006.

Competitive Strengths

Market Leader with Economies of Scale.   With 2,853 centers located in 36 states as of December 31, 2006, we are the largest provider of payday cash advance services in the United States, as measured by the number of centers operated, with approximately twice as many centers as the next largest provider of payday cash advance services. We believe our scale provides us with a leadership position in the industry, allows us to leverage our brand name in opening centers in existing and new markets and enables us to benefit from economies of scale and to enter favorable relationships with landlords, strategic vendors and other suppliers. We have centralized most center support functions, including marketing and advertising, accounting and finance, treasury management, human resources, regulatory compliance, information technology support and customer support systems. We believe these centralization efforts will enable us to continue to expand our network of centers while controlling our costs.

Successful Execution of Growth Strategy.   We believe we have successfully executed an effective growth strategy, including identifying attractive locations for new centers, rapidly entering into new leases and establishing the necessary procedures and systems to manage the overall growth process. We use our database of over 4.0 million customer records to analyze market opportunities and make management decisions regarding expanding our network of centers. In 2006, we opened 302 new centers in 32 states, and in 2005, we opened 361 new centers in 32 states.

Continued Focus on Government Affairs.   We have experience with the legislative and regulatory environment in all of the states in which we operate as well as at the federal level. We are a founding member of the Community Financial Services Association of America (“CFSA”), an industry trade group comprised of our company and more than 100 other companies engaged in the payday cash advance services industry. Our internal government affairs team, together with the CFSA, seeks to encourage favorable legislation that permits us to operate profitably within a balanced regulatory framework. In 2006, 2005 and 2004, payday cash advance legislation we supported was adopted in 3 states, 9 states and 15 states, respectively. Our approach is to continue to work with policymakers and grass roots organizations to provide a predictable and favorable legislative environment for the payday cash advance services industry.

Ability to Respond Rapidly to Regulatory Changes.   Our regulatory department, along with our internal government affairs team and outside counsel, monitors the various state and federal legislatures and rule-making bodies to keep abreast of changes in laws and regulations relevant to our business. Our organization is designed to be able to respond rapidly to these regulatory developments. We believe that our strong internal regulatory team enables us to seize opportunities for growth in new jurisdictions, permits us to conduct our business in compliance with often changing laws and regulations and allows us to react quickly to those changes.

Rigorous Implementation of Center Level Controls.   We believe that our management information systems, our cash management systems and our internal compliance systems are critical to our success and continued growth. We employ a proprietary point-of-sale system used to record transactions in our centers. This information is recorded daily and analyzed at our centers and at our headquarters. We also employ a third-party cash reconciliation software system to balance and monitor cash receipts and disbursements. The principal benefits from our use of these two systems are our quick recognition of variances from

6




expected operating results, our early detection of theft and fraud and our ability to monitor compliance with various federal and state laws.

Geographical Diversification of Our Centers.   With centers located in 36 states as of December 31, 2006, we believe we have developed a significant presence throughout the United States that helps us to mitigate the risk and possible financial impact of unfavorable changes in state legislation or in the economic environment of a particular region or state and allows us to take advantage of competitive opportunities in those markets. For the year ended December 31, 2006, California and Texas, which accounted for approximately 10.5% and 11.6%, respectively, of our total revenues, were the only states that accounted for more than 10% of our total revenues.

Business Strategy

Continue to Open Centers Systematically.   A key objective of our growth strategy is to become the leading provider of payday cash advance services in each market we enter by rapidly opening proprietary, wholly owned centers. We do not intend to franchise our centers. We opened 302 centers in 2006, and we expect to continue our rapid roll-out of new centers. We believe that internal development of new centers is currently generally more economical than acquiring and integrating existing centers. However, from time to time, we also may consider opportunities to acquire payday cash advance companies or businesses, particularly in markets we do not currently serve. We believe that by offering the convenience of a high density of centers, as well as exceptional customer service, we will maintain a high level of customer satisfaction.

Drive New Center Operating Performance.   In our operating centers that opened in 2006 and 2005, we are striving to match the operating performance of our centers that have been open at least 24 months. To do this, our employees are evaluated and compensated, in part, based on their achievement of operational goals, which we adjust each year to account for the continued improvement in our business. The three key metrics we reward are (1) maintaining a high level of compliance with applicable laws and regulations, (2) meeting stated growth objectives and (3) meeting collection targets. We believe that by focusing on these specific goals and tying them to employee compensation, we can achieve operating performance in our newer centers comparable to the operating performance at our mature centers.

Maximize the Efficiency of Our Infrastructure.   We have made significant investments in technology, infrastructure and monitoring/compliance systems that we believe are highly scalable. As we continue to expand our network of centers, we expect that our general and administrative expenses will decline as a percentage of our net revenues.

Support Improvement of the Legislative and Regulatory Environment.   As of December 31, 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. Our goal is to work with policymakers and grass roots organizations to facilitate the implementation of a balanced, visible and predictable regulatory framework that protects the interests of the customers we serve while allowing us to operate profitably in every state.

Expand Our Product and Service Offerings.   We are actively exploring complementary product and service offerings to take advantage of our brand name and national footprint. During 2006, we introduced a prepaid debit card called the CashVantage Card. We believe this and other new offerings will increase customer satisfaction and drive incremental revenue.

Our Services

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 a 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

7




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 an agent under the agency business model as lending banks. Our advance services consist primarily of payday cash advances. We currently also offer lines of credit in Pennsylvania and installment loans in Illinois.

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 a payday cash advance. Fees and interest for installment loans are larger relative to the size of the advance because of the longer term of this product. Fees and interest for the line of credit product consist of a monthly service fee for the line of credit plus interest on the average outstanding balance.

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 three states, we are also permitted to charge a late fee, the amount of which varies by state. In Texas, where we provide credit services as a Credit Services Organization (“CSO”), the third-party lender charges a late fee on its loan in accordance with state law. In two other states, a late fee was charged by the lending bank on the installment loan, the amount of which was determined by the lending bank. For the years ended December 31, 2006 and 2005, total NSF fees collected by us, the third-party lender in Texas and the lending banks were approximately $3.3 million and $2.8 million, respectively, and total late fees collected by us, the third-party lender in Texas and the lending banks were approximately $768,000 and $254,000, respectively.

We provide advance services and small-denomination, short-term unsecured consumer credit because we believe that many consumers have limited access to alternative sources of liquidity. To obtain an advance, a new customer first completes an application that includes personal information such as his or her name, address, phone number, employment information or source of income, and references. This information is entered into our information system. The new customer then presents the required documentation, usually proof of identification, a pay stub or other evidence of income, and a bank statement, to our center employee. 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.

Under the standard business model, we determine whether to approve an advance to our customers. Using this model, 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 used third-party credit scores to evaluate and approve each customer’s application. We currently act as a CSO in our centers in Texas. 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, who determines whether to approve the loan and establishes all of the loan underwriting criteria and terms, conditions and features of the loan agreement with the customer.

After the documents presented by the customer have been reviewed for completeness and accuracy, copied for record-keeping purposes and the advance has been approved, the customer enters into an agreement governing the terms of the advance. The customer then 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 a specified due date, typically his or her next payday for payday cash advances, to repay the advance plus the applicable charges. At the specified due date, the customer is required to pay off the advance in full, which is usually accomplished by the customer returning to the center with cash.

8




In our CSO centers, we also assist the customer by agreeing to reimburse the lender for the full amount of the loan and all related fees that are not collected from the customers. If the customer has chosen the consumer-reporting option, we report the repayment information from the lender to Payment Reporting Builds Credit, Inc. (“PRBC”), a consumer credit reporting agency. Reporting to PRBC may assist the customer in improving his or her credit if the customer repays the loan in accordance with its terms and if that positive repayment is viewed favorably by users of the PRBC report. In addition, we provide access to free financial tools, services and information to help customers with their personal finances, budgets and credit ratings.

Upon a repayment in full, we are obligated to return the customer’s personal check to the customer. If the customer does not repay the outstanding advance or loan in full on or before the due date, we will seek to collect from the customer the amount of the advance or loan and any applicable fees, including late and NSF fees due, and may deposit the customer’s personal check.

In the fall of 2006, we began selling a prepaid debit card called the CashVantage Card in select states. The CashVantage Card allows a cardholder to “load” cash onto the card and use it wherever VISA debit cards are accepted. We earn a fee from the original purchase of the card by the customer and a convenience fee for loads on the cards. In addition, we earn fees and incur expenses related to cardholder transactions such as purchases, ATM withdrawals made with the cards, account maintenance and subscription fees. For the year ended December 31, 2006, we sold approximately 40,000 prepaid cards on which we loaded approximately $11.6 million.

Seasonality

Our business is seasonal due to the impact of fluctuating demand for advances and fluctuating collection rates throughout the year. Demand has historically been higher 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.

Collection Procedures

As part of the closing process for each advance, we typically establish the expectation with the customer that they will return by scheduling an appointment for them to return to our center to repay their advance on its due date. The day before the due date, we generally call the customer to confirm their appointment.

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. We also may permit a customer to enter into an extended payment plan if the customer is not able to meet his or her current repayment obligation.

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. Additional collection efforts are not required if the customer’s deposited check clears. 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 the center employees and typically include contacting the customer by telephone or in person to obtain payment or a promise to pay and attempting to exchange the customer’s check for a cashier’s check if funds become available. We also send out a series of collection letters centrally which are automatically triggered based on a set of pre-determined criteria.

9




Center Operations

Centers

With 2,853 centers as of December 31, 2006, we operate the largest network of payday cash advance centers in the United States. The following table illustrates the growth of our center network since December 31, 2004:

 

 

As of December 31,

 

State

 

 

 

2004

 

2005

 

2006

 

Alabama

 

127

 

140

 

140

 

Arizona

 

49

 

53

 

60

 

Arkansas

 

30

 

30

 

30

 

California

 

290

 

298

 

302

 

Colorado

 

56

 

62

 

67

 

Delaware

 

10

 

13

 

14

 

Florida

 

173

 

211

 

248

 

Idaho

 

8

 

13

 

15

 

Illinois

 

61

 

60

 

72

 

Indiana

 

91

 

116

 

123

 

Iowa

 

21

 

35

 

37

 

Kansas

 

 

42

 

56

 

Kentucky

 

33

 

39

 

43

 

Louisiana

 

64

 

75

 

76

 

Michigan

 

87

 

111

 

137

 

Mississippi

 

51

 

53

 

53

 

Missouri

 

62

 

70

 

84

 

Montana

 

8

 

9

 

8

 

Nebraska

 

25

 

25

 

24

 

Nevada

 

10

 

10

 

11

 

New Hampshire

 

15

 

16

 

20

 

New Mexico

 

12

 

12

 

12

 

North Carolina(1)

 

118

 

 

 

North Dakota

 

 

7

 

8

 

Ohio

 

178

 

210

 

231

 

Oklahoma

 

68

 

67

 

67

 

Oregon

 

42

 

56

 

53

 

Pennsylvania

 

101

 

101

 

99

 

Rhode Island

 

 

3

 

15

 

South Carolina

 

105

 

112

 

129

 

South Dakota

 

10

 

11

 

12

 

Tennessee

 

59

 

62

 

65

 

Texas

 

204

 

207

 

231

 

Virginia

 

109

 

120

 

142

 

Washington

 

90

 

105

 

110

 

Wisconsin

 

37

 

45

 

52

 

Wyoming

 

4

 

5

 

7

 

Total

 

2,408

 

2,604

 

2,853

 


(1)     We suspended operations and closed all our centers in North Carolina in December 2005.

 

10




Internal Compliance Audit

We have a staff of internal regulatory auditors based throughout the United States whose function is to monitor compliance by our centers with applicable federal and state laws and regulations, the CFSA’s Best Practices and our company policies and procedures. The auditors conduct periodic unannounced audits of our centers. They typically spend one to two days in each center, although the time may vary if a more extensive investigation is needed. The auditors typically review customer files, reports, held checks, cash controls and compliance with state specific legal requirements and disclosures. Upon completion of an audit, the auditor will conduct an exit interview with the center personnel and/or the divisional director and discuss issues found during the review. As part of the internal audit program, reports for management regarding audit results are prepared to help identify compliance issues that need to be addressed and areas for further training.

Prior Relationships with the Lending Banks

Under marketing, processing and servicing agreements (“MP&S Agreements”) with the lending banks under the former agency business model, we were compensated by the lending banks for marketing, processing and servicing the payday cash advances and installment loans the lending banks made to their customers. Approximately 1.8%, 15.9% and 24.4% of our total revenues in the years ended December 31, 2006, 2005 and 2004, respectively, were derived from the agency business model. As of December 31, 2004, we operated as a marketing, processing and servicing agent for lending banks in Arkansas, Michigan, North Carolina, Pennsylvania and Texas. In response to revised guidance issued by the FDIC in March 2005 (the “Revised Guidance”), we began instead to offer check-cashing and deferred-presentment services in our centers in Michigan in June 2005 and CSO services in our centers in Texas in July 2005. Additionally, the lending bank in North Carolina ceased operations in December 2005. In response to a communication from the FDIC in February 2006, the lending banks in Pennsylvania and Arkansas ceased originating payday cash advances and installment loans during the first and second quarters of 2006. During June 2006, we began operating in Pennsylvania and Arkansas pursuant to existing state-based legislation. As a result, we now operate under the standard business model in all of our centers.

Although we marketed, processed and serviced payday cash advances and installment loans offered, made and funded by the lending banks under the former agency business model, 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 or in determining their approval procedures or criteria 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 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 portion of the losses on their advances and loans. Therefore, our marketing, processing and servicing fees increased by the lending bank’s contractual obligation for losses. If actual losses by a lending bank exceeded the percentage specified in its MP&S Agreement, 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 and loans, less the lending bank’s contractually obligated portion of the losses.

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Competition

We believe that the principal competitive factors in the payday cash advance services industry are location, customer service, convenience, speed and confidentiality. We face intense competition in an industry with low barriers to entry, and we believe that the payday cash advance market is becoming more competitive as the industry matures and consolidates. We also compete with services offered by traditional financial institutions, such as overdraft protection, and with other payday cash advance providers, small loan providers, credit unions, short-term consumer lenders and other financial services entities and retail businesses that offer consumer loans or other products and services that are similar to ours. Businesses offering payday cash advances and short-term loans over the internet as well as by phone also compete with us.

The payday cash advance services industry is highly fragmented. In March 2006, Stephens, Inc. estimated that there were approximately 23,000 outlets (including our own centers) in the United States. Our network of 2,853 centers as of December 31, 2006 represents the largest network of such centers in the United States. We believe that our two largest single service payday cash advance company competitors, Check ‘n Go and Check into Cash, have over 1,400 and 1,200 payday cash advance centers, respectively. Another competitor is QC Holdings, Inc., which we believe has over 500 locations in the United States. The remaining competitors are local chains and single-unit operators.

To a lesser extent, we compete with other companies that offer payday cash advances as an ancillary financial product to complement their primary business of cashing checks, selling money orders, providing money transfer services or offering similar financial services. These competitors include Dollar Financial Corp. and ACE Cash Express, Inc.

Our centers also have been facing increased competition from banks that offer their account holders payday cash advances as well as other products such as overdraft privileges and bounced check protection, which are similar to our advance services.

Because of the relatively low cost of entry and the regulatory safe harbor that many state statutes provide for payday cash advances, the payday cash advance services industry has experienced significant growth in the number of centers.

Marketing and Advertising

We design our marketing efforts to increase our revenues by (1) introducing new customers to our services and (2) creating customer loyalty. We believe that our mass media advertising campaigns (primarily through television, direct mail and the yellow pages) increase awareness and acceptance of our services. Our advertising expenditures occur primarily during key seasonal periods, such as the back-to-school and holiday seasons in the third and fourth quarters of each year, when consumers are most likely to have short-term liquidity needs.

We utilize marketing promotions at our centers with, we believe, high-impact, consumer relevant, point-of-purchase materials. In addition, we provide our centers with promotional materials such as brochures, pens, key chains and coupons for use in local marketing. Local marketing also includes attendance at, and sponsorship of, community events such as blood drives, food drives, voter registration programs and other charitable events.

Drawing on statistical data from our transaction database, we use direct marketing strategies to advertise to prospective customers who have demographic characteristics similar to the customers we serve.

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Information Systems

We employ a proprietary point-of-sale system that is used to record transactions in our centers. The point-of-sale system is also used at our headquarters to develop information for management. We also employ a third-party cash reconciliation software system to reconcile bank accounts and monitor cash receipts and disbursements.

The point-of-sale system is designed to facilitate customer service and speed the dissemination of information for cash flow purposes. This system records and monitors the details of every transaction, reduces the risk of transaction errors, and provides automated, integrated transactions that are designed to ensure standardization and compliance with applicable state and federal regulations.

Transaction data gathered by our point-of-sale system is integrated into our management information system, general ledger and cash reconciliation software. Our point-of-sale system and cash reconciliation software systems allow us to:

·       monitor daily revenue, deposits and disbursements on a company, state and center basis;

·       monitor and manage daily exception reports, which record cash shortages, late deposits, unusual disbursements and other items;

·       determine, on a daily basis, the amount of cash needed at each center, enabling centralized treasury personnel to maintain an optimum amount of cash in each location; and

·       facilitate compliance with regulatory requirements and company policies and procedures.

We maintain and test a disaster recovery plan for our critical networked systems, the documentation for which is hosted on a third-party vendor website. Our back-up data tapes are housed by a third party at an off-site location. We also own backup computer equipment and real-time data storage that is housed at an off-site facility to provide us with access to needed systems in the event of an emergency that disables our headquarters’ equipment.

Security

Security and loss prevention play a critical role in the daily operations of our centers. Each center is provided with 24-hour third-party monitoring. Physical security provided to each center includes: digital safes, wired hold-up alarm buttons and secure locking systems. Additionally, most of our centers are equipped with 24-hour security cameras.

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. Cash shortages from employee and third-party theft and errors were approximately $2.0 million (0.29% of total revenues) in 2006, $1.6 million (0.25% of total revenues) in 2005 and $1.2 million (0.21% of total revenues) in 2004.

Human Resources

Our center operations are divided into zones, regions and divisions, which we believe allows for a more effective management process. A zone has approximately 500 to 675 centers and includes centers in more than one state. As of December 31, 2006, we had five zones, each with a zone director responsible for the operations, administration, staffing and general supervision of the centers in his or her zone. Regions include 30 to 145 centers organized into three to 11 divisions and are supervised by regional directors who report to a zone director. Divisions include seven to 23 centers and are supervised by divisional directors who report to a regional director. Determination of region and division alignment is usually based upon geographic considerations. Regions and divisions generally do not cross state lines. As of December 31, 2006, our five zones included 29 regions and 223 divisions.

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A typical center is staffed with a manager and an assistant manager. Managers are responsible for the daily operations of the center. As volume increases, additional personnel, called customer service representatives, are added. Our policy is to add a customer service representative once a center has approximately 350 advances outstanding at one time. Thereafter, one additional customer service representative is added for every 100 to 150 additional outstanding advances at a particular center.

Employees

As of January 31, 2007, we had approximately 7,000 employees, including approximately 6,500 center employees, 228 divisional directors, 29 regional directors, five zone directors and approximately 250 corporate employees and support personnel.

We consider our employee relations to be satisfactory. Our employees are not covered by a collective-bargaining agreement and we have never experienced any organized work stoppage, strike or labor dispute.

Intellectual Property and other Proprietary Rights

We use a number of trademarks, logos and slogans in our business. AARC, Inc., one of our subsidiaries, owns all of our intellectual property and has entered into a trademark license agreement with each of our operating subsidiaries to use this intellectual property. Unauthorized use of our intellectual property by third parties may damage our brand and our reputation and could result in a loss of customers. It may be possible for third parties to obtain and use our intellectual property without our authorization. Third parties have in the past infringed or misappropriated our intellectual property or similar proprietary rights. For example, competitors of ours have used our name and other trademarks of ours on their websites to advertise their financial services. We believe infringements and misappropriations will continue to occur in the future.

Other

Advance America, Cash Advance Centers, Inc. is a Delaware corporation that was incorporated on August 11, 1997. Our principal executive offices are located at 135 North Church Street, Spartanburg, South Carolina 29306. Our telephone number at that location is (864) 342-5600. We maintain an internet website at www.advanceamericacash.com. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the “SEC”). Information on our website is not incorporated by reference into this Annual Report. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding us at www.sec.gov. In addition, any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Government Regulation

Payday cash advances are subject to extensive state and federal regulation. The regulation of payday cash advance companies is intended primarily for the protection of consumers rather than investors in our common stock and our creditors and is constantly changing as new regulations are introduced at the federal, state and local level and existing regulations are repealed, amended and modified. This evolving regulatory landscape creates various uncertainties and risks for the operation of our business, any of which

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could have a material adverse effect on our business, results of operations or financial condition. See “Item 1A. Risk Factors” and “Item 3. Legal Proceedings.”

State Regulation

Our business is regulated under a variety of enabling state statutes, including payday cash advance, deferred presentment, check-cashing, money transmission, 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 December 31, 2006, 39 states and the District of Columbia had specific laws that permitted payday cash advances or a similar form of short-term consumer credit. As of December 31, 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. However, we may find it becomes economically attractive to open centers in any of these four states or the District of Columbia if any of these variables change. The remaining 11 states do not have laws specifically authorizing the payday cash advance or short-term consumer finance business. Despite the lack of specific laws, other laws may permit us to do business in these states. As of December 31, 2006, we operated in one of these 11 states.

The scope of state regulation, including the terms on which advances may be made, varies from state to state. Most states that directly regulate advances establish allowable fees and/or interest and other charges to consumers for advances. In addition, many states regulate the maximum amount, maturity and renewal or extension of advances. The terms of our advances vary from state to state in order to comply with the laws and regulations of the states in which we operate.

The states with specific advance laws typically limit the principal amount of an advance and set maximum fees and interest rates that customers may be charged. Some states also limit a customer’s ability to renew an advance and require various disclosures to consumers. State statutes often specify minimum and maximum maturity dates for advances and, in some cases, specify mandatory cooling-off periods between transactions. Our collection activities regarding past due amounts are subject to consumer protection laws and state regulations relating to debt collection practices. In addition, some states restrict advertising content.

During the last few years, legislation has been adopted in some states that prohibits or severely restricts advance services. Many bills have also been introduced in state legislatures. In 2006, bills that severely restrict or effectively prohibit advance services were introduced in 18 states. In addition, two states have sunset provisions in their 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 offering of advances. Similar laws prohibiting advance services or making them unprofitable could be passed in any other state at any time or existing payday cash advance laws could expire or be amended.

Statutes authorizing 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.

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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 may also change and negatively affect our business.

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 our North Carolina subsidiary to immediately cease all business operations. As a result, we closed all of our centers in North Carolina. 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 “Item 3. Legal Proceedings.” It is possible that other actions taken against the industry in the future by other state attorneys general and banking regulators could require us to suspend or cease operations in such jurisdictions and have a negative effect on our financial condition.

State-specific legislative or regulatory action can reduce our revenues and/or margins in a state, cause us to temporarily operate at a loss in a state, or even cause us to cease or suspend our operations in a state. 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.

Federal Regulation

Our advance services are subject to a variety of federal laws and regulations, such as the Truth-in-Lending Act (“TILA”), the Equal Credit Opportunity Act (“ECOA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt Collection Practices Act (“FDCPA”), the Gramm-Leach-Bliley Act (“GLBA”) and the regulations promulgated for each. Among other things, these laws require disclosure of the principal terms of each transaction to every customer, prohibit misleading advertising, protect against discriminatory lending practices and proscribe unfair credit practices. TILA and Regulation Z, adopted under TILA, require disclosure of, among other things, the pertinent elements of consumer credit transactions, including the dollar amount of the finance charge and the charge expressed in terms of an annual percentage rate (“APR”).

Our marketing efforts and the representations we make about our 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.

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 lending and payday cash advances by military personnel. In October 2006, a federal law passed that places, among other restrictions, a limit on the effective annual percentage rate of 36% on extensions of credit, including payday cash advances, to active members of the military and their dependents. In October 2006, we voluntarily ceased qualifying customers for advances based on income from military service.

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The lending banks for which we acted as marketing, processing and servicing agent were subject to extensive federal and state banking regulations. As state-chartered banks, the lending banks were subject to supervision by the FDIC as well as regular examination by other state and federal regulatory authorities.

In July 2003 and March 2005, the FDIC issued guidance governing permissible agency arrangements between state-chartered banks and marketing, processing and servicing agents for the banks’ payday cash advances, such as us. In July 2005, the lending banks implemented new procedures and limits in response to the FDIC guidance and began offering installment loans as an alternative credit product. In February 2006, the FDIC instructed certain lending banks, including the lending banks for which we acted as a marketing, processing and servicing agent, to discontinue offering payday cash advances and alternative credit products if they could not adequately address the FDIC’s continuing concerns regarding those products. In response to this communication from the FDIC, the lending bank in Pennsylvania discontinued offering payday cash advances and installment loans in March 2006, and the lending bank in Arkansas discontinued offering installment loans in April 2006 and payday cash advances in June 2006. In June 2006, we began operating in Pennsylvania and Arkansas pursuant to existing state-based legislation.

Local Regulation

In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning regulations. These local rules and regulations are subject to change and vary widely from state to state and city to city. For example, several cities in Oregon have recently adopted local ordinances that have the effect of limiting our business.

Environmental, Health and Safety Matters

We are subject to general provisions of federal laws and regulations to ensure a safe and healthful work environment for employees. In addition, we comply with those state laws that require a written health and safety program or other mandated safety requirements. To reduce the possibility of physical injury or property damage resulting from robberies, our Loss Prevention department has established operational procedures, conducts periodic safety training and awareness programs for employees, hires security guards as needed and regularly monitors the marketplace for new technology or methods of improving workplace safety.

Other than standard cleaning products, we do not use chemicals or other agents governed by federal, state or local environmental laws in conducting business operations. Based upon these measures, we believe that our centers are in substantial compliance with all applicable environmental, health and safety requirements.

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. If we expand our business to include international operations, we will become subject to foreign laws and regulations. State and local

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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, money transmission, 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 December 31, 2006, 39 states and the District of Columbia had specific laws that permitted payday cash advances or a similar form of short-term consumer loans. As of December 31, 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. However, we may open centers in any of these states or the District of Columbia if we believe doing so may become economically attractive because of a change in any of these variables. The remaining 11 states do not have laws specifically authorizing the payday cash advance or short-term consumer finance business. Despite the lack of specific laws, other laws may permit us to do business in these states. As of December 31, 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 and similar services. Many bills have also been introduced in state legislatures. In 2006, bills that severely restrict or effectively prohibit payday cash advances were introduced in 18 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 industry. Any such legislation could have a material adverse impact on our results from operations. Laws prohibiting payday cash advance and similar services or making them unprofitable could be passed in any other state at any time or existing enabling 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 and similar 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

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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 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 our North Carolina subsidiary to immediately cease all business operations. See “Item 3. Legal Proceedings.” As a result, we closed all of our centers in North Carolina. The lost revenues from these closures had a negative impact 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 “Item 3. Legal Proceedings.” 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. See “Item 1. Business—Federal Regulation.” 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 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 limit on the effective annual percentage rate 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 and similar services could have a material adverse impact on our business, results of operations and financial condition. On October 15, 2006, we voluntarily ceased qualifying customers for advances based on income from military service.

Our marketing efforts and the representations we make about our 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

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local zoning boards or other local governing bodies to require special use permits for, or impose other restrictions on, providers of payday cash advances and similar services 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 similar 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 “Item 3. Legal Proceedings.” 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 advances, 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.

Competition in our 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 operated in 36 states during the year ended December 31, 2006, and our five largest states (measured by total revenues) accounted for approximately 47% 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

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be generated by certain states, largely due to the currently prevailing economic, demographic, regulatory, competitive and other conditions in those states. For example, during 2006, California and Texas each accounted for more than 10% of our total revenues. 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 and similar loans as being predatory or abusive could adversely affect our business, results of operations and financial condition.

Consumer advocacy groups and certain media reports advocate for governmental and regulatory action to prohibit or severely restrict payday cash advances and similar loans. The consumer groups and media reports typically focus on the cost to a consumer for an advance and 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 our other activities could also result in increased regulatory scrutiny and litigation, encourage restrictive local zoning rules, make it more difficult to obtain government approvals necessary to open new centers and cause payday cash advance industry trade groups, such as the CSFA, to promote polices that cause our business to be less profitable. These trends could materially adversely affect our business, results of operations and financial condition.

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 years ended December 31, 2006 and 2005, we deposited approximately 5.7% and 5.5%, respectively, of all the customer checks we received and approximately 78% and 79%, 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 years ended December 31, 2006 and 2005 were approximately $110.4 million and $100.5 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. 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 December 31, 2006, our allowance for doubtful accounts was $57.4 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, credit services, installment loans and lines of credit than with payday cash advances. If our actual 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.

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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.

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 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. We also intend to introduce additional services and products in the future. In order to offer new products, we will need to comply with additional regulatory and licensing requirements. Each of these changes, alternative methods of conducting business and new services and 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 services or 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, such as foreign markets or states where we do not currently operate, 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 jurisdiction in which we operate or seek to operate, which are subject to change at any time;

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·       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 expansion may further strain our management, financial and other resources. Any international operations would increase the complexity of our organization, our administrative costs and the regulatory risks we face and therefore could destabilize our business, results of operations and financial condition. 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 December 31, 2006, our total debt was approximately $111.1 million and our stockholders’ equity was approximately $299.9 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 dividends, stock repurchases, working capital, capital expenditures and our growth strategy; and

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·       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. If our current or potential credit banks decide 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. Certain banks 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 December 31, 2006, we had approximately $156.3 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;

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·       pay dividends, repurchase stock or make other payments;

·       enter into certain sale and leaseback transactions; and

·       become subject to further restrictions on the creation of liens.

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 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 domestic 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. Typically, our provision for doubtful accounts and allowance for doubtful accounts are 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, repurchase 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

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and errors will not occur. Cash shortages from employee and third-party theft and errors were approximately $2.0 million (0.29% of total revenues) in 2006, $1.6 million (0.25% of total revenues) in 2005 and $1.2 million (0.21% of total revenues) in 2004. 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.

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

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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.

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 December 31, 2006, among our center managers was approximately 53% and among our other center employees was approximately 106%. 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 were formerly 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.

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 family members and trusts for their benefit, control approximately 24% 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.

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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.

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 1B.       UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.                PROPERTIES.

Our average center size is approximately 1,500 square feet. We try to locate our centers in highly visible, accessible locations. Our centers, which we design to have the appearance of a mainstream financial institution, are typically located in middle-income shopping areas with high retail activity. Other tenants in these shopping areas typically include grocery stores, discount retailers and national video rental stores. All of our centers are leased, with typical lease terms of three years with an option to renew at the end of the lease term. Our leases usually require that we pay all maintenance costs, insurance costs and property taxes.

See “Item 1. Business—Center Operations—Centers” for a listing of the number of centers we operated in the various states as of December 31, 2006.

We own our corporate headquarters in Spartanburg, South Carolina. Our headquarters building, which is approximately 75,000 square feet, and related land are subject to a mortgage payable to a lender, the principal amount of which was approximately $5.8 million at December 31, 2006. 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 2006, respectively.

We believe that our facilities, equipment, furniture and fixtures and aircraft are in good condition and well maintained, and that our offices are sufficient to meet our present needs.

ITEM 3.                LEGAL PROCEEDINGS.

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

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

We, our 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 us were governed by Florida’s usury laws and not governed by the Florida Money Transmitters’ Code as we 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 us, it is too early in this proceeding to identify the amount of potential losses to us, if any, since the case is still in its early stages and several material issues have yet to be addressed by the courts.

Ms. Reuter’s 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

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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 v. 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 us, our 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. We 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 we will proceed with defending this second lawsuit. Discovery is now ongoing.

Pennsylvania Department of Banking v. NCAS of Delaware, LLC

In September 2006, the Pennsylvania Department of Banking filed a lawsuit in the Commonwealth Court of Pennsylvania alleging that our Delaware subsidiary is providing lines of credit to borrowers in Pennsylvania without a license required under Pennsylvania law and with interest and fees in excess of the amounts permitted by Pennsylvania law. The Pennsylvania Department of Banking has filed a Motion for Judgment on the Pleadings for Declaratory Relief and Permanent Injunction, seeking: (1) a declaration as a matter of law that our Delaware subsidiary is violating Pennsylvania lending laws and (2) a permanent injunction enjoining the Delaware subsidiary from issuing new lines of credit and from collecting on or enforcing currently outstanding lines of credit or other loan products in Pennsylvania. We filed a brief in opposition and a cross motion for judgment on the pleadings. Further briefing has been scheduled and oral argument for both parties’ motions is scheduled for April 2007.

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

In April 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 our Pennsylvania subsidiary. The parties have mutually agreed to end this lawsuit because the plaintiff (and another party) filed another separate putative class action lawsuit in the United States District Court for the Eastern District of Pennsylvania. The parties notified the court of their mutual agreement and the Court of Commons Pleas discontinued this action in February 2007.

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

In January 2007, Raymond King and Sandra Coates, who were customers of BankWest, the lending bank for which we marketed, processed and serviced payday cash advances in Pennsylvania, filed a putative class action lawsuit in the United States District Court, Eastern District of Pennsylvania against us alleging various causes of action, including that the Pennsylvania subsidiary made illegal payday loans in Pennsylvania in violation of Pennsylvania’s usury law, the Pennsylvania Consumer Discount Company Act, the Pennsylvania Unfair Trade Practices and Consumer Protection Law, the Pennsylvania Fair Credit Extension Uniformity Act and the Pennsylvania Credit Services Act. The complaint alleges that BankWest was not the “true lender” on the advances that we marketed, processed and serviced for BankWest in Pennsylvania and that we were the “lender in fact.” The complaint seeks compensatory damages, attorneys’ fees, punitive damages and the trebling of any compensatory damages. We intend to file our response to the Complaint in March 2007.

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

In August 2004, Tahisha King and James E. Strong, who were customers of BankWest, the lending bank for which we marketed, processed and serviced payday cash advances in Georgia, filed a putative class action lawsuit in the State Court of Cobb County, Georgia against us, William M. Webster IV, our 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 we marketed, processed and serviced for BankWest in Georgia and that we were the “de facto” lender. The complaint seeks compensatory damages, attorneys’ fees, punitive damages and the trebling of any compensatory damages. We 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. We intend to continue to deny plaintiffs’ claims and resist plaintiffs’ efforts to conduct class arbitration.

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

Our 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. In March 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 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 us.

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

In July 2004, John Kucan, Welsie Torrence and Terry Coates, each of whom was a customer of Republic Bank & Trust Company (“Republic”), the lending bank for which we 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 us and Mr. Webster, alleging, among other things, that the relationship between our 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. In December 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

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currently before the Court of Appeals filed a petition, which we have opposed, for discretionary review and consolidation of the cases. The Court of Appeals heard oral argument on the consolidated cases in January 2007. We are awaiting a ruling from the Court of Appeals.

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 us to produce documents, respond to written questions and have a corporate representative appear for a deposition regarding the relationship between our North Carolina subsidiary and the lending bank in North Carolina, Republic, to determine whether our operations in North Carolina were in compliance with North Carolina law. In February 2005, the Commissioner of Banks initiated a contested case against our 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 our North Carolina subsidiary immediately cease and desist operating. In accordance with the Commissioner of Banks’ Order, our 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 we filed an appeal with the North Carolina Superior Court. The appeal was dismissed and we are currently appealing the dismissal to the North Carolina Court of Appeals.

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

In February 2006, we 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, we have not made any changes in our New Mexico operations and are monitoring the litigation to determine what, if any, changes may be required to our New Mexico operations in the future.

Department of Labor Investigations

The United States Department of Labor has periodically initiated investigations of our practices regarding the payment of overtime wages to certain employees. The Department of Labor recently concluded some of these investigations and we are 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

We are 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.

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

None.

32




PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol “AEA.” Our common stock was initially offered to the public on December 15, 2004 at a price of $15.00. The following table sets forth the quarterly high and low sales prices of our common stock as reported by NYSE as well as the quarterly cash dividend declared per share for 2005 and 2006:

 

 

Sales Prices

 

Cash

 

 

 

High

 

Low

 

Dividend

 

2005:

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2005

 

$

23.94

 

$

14.20

 

 

$

0.09

 

 

Quarter ended June 30, 2005.

 

16.85

 

11.45

 

 

0.09

 

 

Quarter ended September 30, 2005

 

17.85

 

12.06

 

 

0.09

 

 

Quarter ended December 31, 2005

 

14.17

 

11.58

 

 

0.11

 

 

2006:

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2006

 

$

15.02

 

$

12.29

 

 

$

0.11

 

 

Quarter ended June 30, 2006.

 

17.71

 

14.03

 

 

0.11

 

 

Quarter ended September 30, 2006

 

18.33

 

12.97

 

 

0.11

 

 

Quarter ended December 31, 2006

 

15.47

 

13.84

 

 

0.11

 

 

 

At February 21, 2007, there were approximately 143 holders of record of our common stock, and there were approximately 6,900 beneficial holders of the common stock held in nominee or street name.

We are not required to pay any dividends. Any determination to pay dividends, and the amounts of any dividends, will be at the sole discretion of our Board of Directors and will depend on a number of factors, including: our subsidiaries’ payment of dividends to us; our net income, results of operations and cash flows and our other cash needs; our financial position and capital requirements; general business conditions and the outlook for our company; any legal, tax, regulatory and any other factors our Board of Directors deems relevant. In addition, our revolving credit facility restricts our ability to pay dividends depending on the absence of any default or event of default, our net income, and the ratio of our consolidated senior funded debt to our consolidated EBITDA and our consolidated fixed charge coverage ratio (as defined in our revolving credit facility). Our Board of Directors may at any time modify or revoke our dividend policy.

On January 24, 2007, our Board of Directors declared a quarterly cash dividend of $0.125 per common share, payable on March 9, 2007, to stockholders of record on February 28, 2007.

33




PERFORMANCE GRAPH

The following graph compares the change in the cumulative value of $100 invested for the period beginning on December 16, 2004, the first day of trading following our IPO, and ending on December 29, 2006, in (1) our Common Stock, (2) the Standard & Poor’s 500 Index, (3) the NASDAQ Other Financial Index and (4) the NYSE Financial Sector Index. The values of each investment are based upon the share price appreciation and reinvestment of dividends, on a quarterly basis.

GRAPHIC

 

 

Advance America,
Cash Advance Centers, Inc.
(AEA)

 

Standard & Poors 500
Index (S&P 500)

 

NASDAQ Other
Financial Index
(IXFN)

 

NYSE Financial Sector
Index (NYK.ID)

 

12/16/04

 

 

$

100.00

 

 

 

$

100.00

 

 

 

$

100.00

 

 

 

$

100.00

 

 

12/31/04

 

 

$

111.71

 

 

 

$

100.72

 

 

 

$

103.18

 

 

 

$

102.30

 

 

3/31/05

 

 

$

74.29

 

 

 

$

98.12

 

 

 

$

92.29

 

 

 

$

96.83

 

 

6/30/05

 

 

$

77.78

 

 

 

$

99.01

 

 

 

$

102.31

 

 

 

$

98.67

 

 

9/30/05

 

 

$

65.24

 

 

 

$

102.13

 

 

 

$

108.37

 

 

 

$

102.36

 

 

12/30/05

 

 

$

62.16

 

 

 

$

103.75

 

 

 

$

115.50

 

 

 

$

109.17

 

 

3/31/06

 

 

$

72.64

 

 

 

$

107.62

 

 

 

$

128.22

 

 

 

$

115.96

 

 

6/30/06

 

 

$

89.16

 

 

 

$

105.57

 

 

 

$

118.53

 

 

 

$

114.24

 

 

9/29/06

 

 

$

73.86

 

 

 

$

111.02

 

 

 

$

131.13

 

 

 

$

121.69

 

 

12/29/06

 

 

$

75.60

 

 

 

$

117.88

 

 

 

$

135.64

 

 

 

$

130.40

 

 

 

34




The following table sets forth information about our stock repurchases for the three months ended December 31, 2006:

Period(1)

 

 

 

Total
Number of
Shares Purchased(2)

 

Average
Price Paid
per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(2)

 

Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under the
Plans or Programs(3)

 

October 1 to October 31

 

 

323,100

 

 

 

$

14.56

 

 

 

323,100

 

 

 

$

80,517,685

 

 

November 1 to November 30

 

 

 

 

 

 

 

 

 

 

 

$

80,517,685

 

 

December 1 to December 31

 

 

5,482

 

 

 

$

14.67

 

 

 

5,482

 

 

 

$

80,437,292

 

 

Total

 

 

328,582

 

 

 

$

14.56

 

 

 

328,582

 

 

 

$

80,437,292

 

 


(1)          Based on trade date.

(2)          Includes 5,482 shares that were surrendered by employees to satisfy their tax obligations with respect to the vesting of shares of restricted stock awarded pursuant to our 2004 Omnibus Stock Plan.

(3)          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.

See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for information about our equity compensation plans.

35




ITEM 6.                SELECTED FINANCIAL DATA.

The following tables set forth our summary consolidated financial information and other financial and statistical data for the periods ended and as of the dates indicated. The financial information for the years ended December 31, 2006, 2005 and 2004, and as of December 31, 2006 and 2005, has been derived from our audited financial statements included elsewhere in this report. The financial information for the years ended December 31, 2003 and 2002, and as of December 31, 2004, 2003 and 2002 has been derived from our audited financial statements not included in this report. The historical selected financial information may not be indicative of our future performance and should be read in conjunction with the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data.”

 

 

Year ended December 31,

 

Consolidated Financial Information

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

 

 

(Dollars in thousands, except per share data
and other financial data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Fees and interest charged to customers

 

$

298,432

 

$

362,262

 

$

430,859

 

$

529,953

 

$

659,876

 

Marketing, processing and servicing fees

 

113,894

 

127,272

 

139,329

 

100,113

 

12,418

 

Total revenues

 

412,326

 

489,534

 

570,188

 

630,066

 

672,294

 

Provision for doubtful accounts and agency bank losses

 

(54,842

)

(64,681

)

(89,236

)

(115,060

)

(120,855

)

Net revenues

 

357,484

 

424,853

 

480,952

 

515,006

 

551,439

 

Center expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries and related payroll costs

 

117,036

 

131,369

 

160,047

 

171,092

 

185,938

 

Occupancy costs

 

43,620

 

51,798

 

67,305

 

80,540

 

87,276

 

Center depreciation expense

 

10,416

 

11,603

 

13,719

 

14,902

 

16,233

 

Advertising expense

 

23,921

 

23,857

 

26,082

 

24,137

 

20,375

 

Other center expenses

 

35,078

 

41,300

 

47,087

 

52,712

 

54,986

 

Total center expenses

 

230,071

 

259,927

 

314,240

 

343,383

 

364,808

 

Center gross profit

 

127,413

 

164,926

 

166,712

 

171,623

 

186,631

 

Corporate and other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

33,578

 

36,434

 

44,102

 

51,758

 

53,363

 

Corporate depreciation expense

 

2,796

 

3,433

 

3,942

 

4,483

 

3,661

 

Options purchase expense

 

21,462

 

3,547

 

 

 

 

Lending bank contract termination expense

 

 

6,525

 

 

 

 

Interest expense

 

14,973

 

15,983

 

17,165

 

4,331

 

7,129

 

Interest income

 

(318

)

(86

)

(161

)

(351

)

(538

)

Loss on disposal of property and equipment

 

739

 

990

 

814

 

715

 

960

 

Loss on impairment of assets

 

 

 

1,288

 

2,918

 

 

Transaction related expense

 

 

 

2,466

 

 

 

Income before income taxes

 

54,183

 

98,100

 

97,096

 

107,769

 

122,056

 

Income tax expense(1)

 

638

 

1,925

 

14,041

 

43,776

 

48,858

 

Income before income of consolidated variable interest entity

 

53,545

 

96,175

 

83,055

 

63,993

 

73,198

 

Income of consolidated variable interest entity

 

 

 

 

(1,003

)

(3,047

)

Net income

 

$

53,545

 

$

96,175

 

$

83,055

 

$

62,990

 

$

70,151

 

 

36




 

 

 

Year Ended December 31,

 

Consolidated Financial Information (Continued)

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

 

 

(Dollars in thousands, except per share data

 

 

 

and other financial data)

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.78

 

$

1.40

 

$

1.20

 

$

0.76

 

$

0.87

 

Diluted

 

$

0.71

 

$

1.40

 

$

1.20

 

$

0.76

 

$

0.87

 

Cash dividends paid per common share

 

$

0.58

 

$

1.48

 

$

1.15

 

$

0.38

 

$

0.44

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

69,042

 

68,667

 

69,126

 

83,124

 

80,889

 

Effect of dilutive options and unvested restricted stock

 

5,896

 

120

 

 

 

28

 

Diluted

 

74,938

 

68,787

 

69,126

 

83,124

 

80,917

 

Pro Forma Data (unaudited)(1):

 

 

 

 

 

 

 

 

 

 

 

Historical income before taxes

 

 

 

 

 

$

97,096

 

 

 

 

 

Pro forma income tax expense(2)

 

 

 

 

 

39,247

 

 

 

 

 

Net income adjusted for pro forma income tax expense

 

 

 

 

 

$

57,849

 

 

 

 

 

Pro forma net income per common share—basic

 

 

 

 

 

$

0.84

 

 

 

 

 

Pro forma net income per common share—diluted

 

 

 

 

 

$

0.84

 

 

 

 

 

Weighted average pro forma number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

69,126

 

 

 

 

 

Effect of dilutive options

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

69,126

 

 

 

 

 

Balance Sheet Data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents.

 

$

6,675

 

$

10,484

 

$

18,224

 

$

27,259

 

$

67,245

 

Advances and fees receivable, net

 

116,941

 

138,204

 

155,009

 

193,468

 

237,725

 

Goodwill

 

122,324

 

122,324

 

122,324

 

122,586

 

122,627

 

Total assets

 

316,455

 

348,043

 

397,539

 

436,388

 

525,092

 

Total debt

 

184,589

 

219,259

 

46,637

 

44,621

 

111,050

 

Total stockholders’ equity

 

95,007

 

91,039

 

296,290

 

303,025

 

299,897

 

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by operating activities

 

$

113,818

 

$

153,670

 

$

163,910

 

$

189,382

 

$

186,125

 

Cash flows used in investing activities

 

(81,991

)

(83,544

)

(97,055

)

(139,880

)

(156,216

)

Cash flows (used in) provided by financing activities

 

(43,204

)

(66,317

)

(59,115

)

(40,467

)

10,077

 

 

37




 

 

 

Year Ended December 31,

 

Consolidated Financial Information (Continued)

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

Other Financial and Statistical Data:

 

 

 

 

 

 

 

 

 

 

 

Number of centers open at end of period

 

1,741

 

2,039

 

2,408

 

2,604

 

2,853

 

Number of payday cash advances originated (thousands)

 

8,766

 

10,179

 

11,586

 

11,620

 

11,539

 

Aggregate principal amount of payday cash advances originated (thousands)

 

$

2,743,847

 

$

3,271,235

 

$

3,804,096

 

$

3,943,815

 

$

4,082,865

 

Average amount of payday cash advance originated

 

$

313

 

$

321

 

$

328

 

$

339

 

$

353

 

Average charge to customers for providing and processing a payday cash advance

 

$

51

 

$

52

 

$

52

 

$

55

 

$

55

 

Average duration of a payday cash advance (days)

 

14.5

 

15.1

 

15.4

 

15.8

 

16.2

 

Average number of lines of credit outstanding during the period (thousands)

 

 

 

 

 

20

 

Average amount of aggregate principal on lines of credit outstanding during the period (thousands)

 

 

 

 

 

$

8,963

 

Average principal amount on lines of credit outstanding during the period

 

 

 

 

 

$

448

 

Number of installment loans originated (thousands)

 

 

 

 

68

 

29

 

Aggregate principal amount of installment loans originated (thousands)

 

 

 

 

$

34,541

 

$

13,905

 

Average amount of installment loan originated

 

 

 

 

$

508

 

$

486

 

Average charge to customers for providing and processing an installment loan(3)

 

 

 

 

$

337

 

$

357

 


(1)          Effective October 1, 2001, we filed an election to convert to S corporation status for federal and most state income tax purposes under Subchapter S of the Internal Revenue Code. Under Subchapter S, our stockholders pay federal and state income tax on our taxable income. In connection with our initial public offering on December 21, 2004 we revoked our Subchapter S election and once again became a C corporation taxed under Subchapter C of the Internal Revenue Code. We have provided unaudited proforma data as if we were a C corporation for the year ended December 31, 2004.

(2)          Pro forma income tax expense shown here has been determined as if we had been a C corporation rather than an S corporation in 2004. Proforma income tax expense for the year ended December 31, 2004 includes actual income tax expense of $3.8 million for subsidiaries that continued to be taxed as C corporations and $8.4 million due to our conversion to a C Corporation on December 21, 2004. The effective tax rates used are based on the statutory federal income tax rate plus applicable state income taxes (net of federal benefit) plus the non-deductibility of certain expenses (principally lobbying and meals and entertainment) less income from our special purpose entity not included in our tax returns.

(3)          This calculation for 2006 excludes the Illinois installment loan product which was rolled out in October 2006 because that product was not available long enough for an average charge in Illinois to be determined.

38




ITEM 7.                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 8. Financial Statements and Supplementary Data.” 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 “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 December 31, 2006, we operated 2,853 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 a 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 an agent under the agency business model as lending banks. We currently operate all of our centers under the standard business model. During 2006, we began offering the Advance America Choice-Line of Credit to customers in Pennsylvania and installment loans to customers in Illinois.

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 a payday cash advance. Fees and interest for installment loans are larger relative to the size of the advance because of the longer term of this product. Fees and interest for the line of credit product consist of a monthly service fee for the line of credit plus interest on the average outstanding balance.

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 three states, we are also permitted to charge a late fee, the amount of which varies by state. In Texas, where we provide credit services as a Credit Services Organization (“CSO”), the third-party lender charges a late fee on its loan in accordance with state law. In two other states, a late fee was charged by the lending bank on the installment loan, the amount of which was determined by the lending bank. For the years ended December 31, 2006 and 2005, total NSF fees collected by us, the third-party lender in Texas and the lending banks were approximately $3.3 million and $2.8 million, respectively, and total late fees collected by us, the third-party lender in Texas and the lending banks were approximately $768,000 and $254,000, respectively.

The growth of the payday cash advance industry has been and continues to be significantly affected by increasing acceptance of payday cash advances by state legislatures. However, to the extent that states enact legislation that negatively impacts payday cash advances and similar services, whether through preclusions, interest rate ceilings, fee reductions, mandatory extensions of term length, limits on the amount or term of payday cash advances or limits on consumers’ use of the service, our business could be materially adversely affected. We are very active in monitoring and evaluating regulatory initiatives in all of the states and are closely involved with the efforts of the Community Financial Services Association of America (“CFSA”).

39




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.

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.

40




 

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.

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 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.

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

41




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. We may also permit a customer to enter into an extended payment plan if the customer is unable to meet his or her current repayment obligation.

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, 2006, approximately 5.7% 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, 2006, approximately 22% 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  and attempting to exchange the customer’s check for a cashier’s check, if funds become available. We also send out a series of collection letters centrally which are automatically triggered based on a set of pre-determined criteria.

Selected Operating Data

The following table presents key operating data for our business:

 

 

Year Ended December 31,

 

 

 

2004

 

2005

 

2006

 

Number of centers open at end of period

 

2,408

 

2,604

 

2,853

 

Number of customers served—all credit products (thousands)

 

1,412

 

1,534

 

1,494

 

Number of payday cash advances originated (thousands)

 

11,586

 

11,620

 

11,539

 

Aggregate principal amount of payday cash advances originated (thousands)

 

$

3,804,096

 

$

3,943,815

 

$

4,082,865

 

Average amount of payday cash advance originated

 

$

328

 

$

339

 

$

353

 

Average charge to customers for providing and processing a payday cash advance

 

$

52

 

$

55

 

$

55

 

Average duration of a payday cash advance (days)

 

15.4

 

15.8

 

16.2

 

Average number of lines of credit outstanding during the period (thousands)

 

 

 

20

 

Average amount of aggregate principal on lines of credit outstanding during the period (thousands)

 

 

 

$

8,963

 

Average principal amount on lines of credit outstanding during the period

 

 

 

$

448

 

Number of installment loans originated (thousands)

 

 

68

 

29

 

Aggregate principal amount of installment loans originated (thousands)

 

 

$

34,541

 

$

13,905

 

Average amount of installment loan originated.

 

 

$

508

 

$

486

 

Average charge to customers for providing and processing an installment loan(1)

 

 

$

337

 

$

357

 


(1)          This calculation for 2006 excludes the Illinois installment loan product which was rolled out in October 2006 because that product was not available long enough for an average charge in Illinois to be determined.

42




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 years ended December 31, 2004, 2005 and 2006 consisted of (dollars in millions):

 

 

2004

 

2005

 

2006

 

 

 

Dollars

 

%

 

Dollars

 

%

 

Dollars

 

%

 

Fees and interest charged to customers

 

$

430.9

 

75.6

 

$

530.0

 

84.1

 

$

659.9

 

98.2

 

Marketing, processing and servicing fees

 

139.3

 

24.4

 

100.1

 

15.9

 

12.4

 

1.8

 

Total revenues

 

$

570.2

 

100.0

 

$

630.1

 

100.0

 

$

672.3

 

100.0

 

 

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

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 a 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 during 2005. 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 of our centers in North Carolina in December 2005.

In February 2006, the FDIC instructed the lending banks, including those for which we still acted as a marketing, processing and servicing agent 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 completely eroded 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.

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 a portion of the losses on uncollectible accounts. 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

43




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 a portion of the losses on uncollectible accounts, 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.

The following is a summary of financial information for our operations in Pennsylvania for the years ended December 31, 2004, 2005 and 2006 (in thousands):

 

 

2004

 

2005

 

2006

 

Net revenues

 

$

39,421

 

$

35,083

 

$

24,531

 

Total center expenses

 

15,481

 

16,038

 

14,502

 

Center gross profit

 

$

23,940

 

$

19,045

 

$

10,029

 

 

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.

The following is a summary of financial information for our operations in Arkansas for the years ended December 31, 2004, 2005 and 2006 (in thousands):

 

 

2004

 

2005

 

2006

 

Net revenues

 

$

6,638

 

$

6,073

 

$

4,427

 

Total center expenses

 

3,741

 

4,134

 

3,742

 

Center gross profit

 

$

2,897

 

$

1,939

 

$

685

 

 

44




Closings

Closing of Operations in North Carolina.   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 North Carolina 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 years ended December 31, 2004, 2005 and 2006 (in thousands):

 

 

2004

 

2005

 

2006

 

Net revenues

 

$

26,450

 

$

17,856

 

$

(35

)

Total center expenses

 

15,889

 

16,118

 

985

 

Center gross profit/(loss)

 

$

10,561

 

$

1,738

 

$

(1,020

)

 

New centers

We opened 469, 361 and 302 new centers in the years ended December 31, 2004, 2005 and 2006, respectively. The capital cost of opening a new center varies depending on the size and type of center, but typically averages approximately $40,000. This capital cost includes leasehold improvements, signage, fixtures, furniture, computer equipment and a security system. In addition, the typical center that has been operating for at least 24 months under the standard business model requires average working capital of approximately $87,000 to fund the center’s advance portfolio.

For the 1,160 centers opened in 2003, 2004 and 2005, 1,083 centers remain open as of December 31, 2006. Of these, 909 have reached the point where, for at least one month, the center generated sufficient revenues to cover the center’s expenses exclusive of corporate overhead (the “Breakeven Point”). The amount of time that it takes for a center to reach this Breakeven Point is affected by a number of factors including, but not limited to, the time of the year the center opens, the seasonal nature of the business and the regulatory environment of the state in which the center is opened. It is not uncommon for a center that has reached the Breakeven Point to temporarily drop below that point and then again exceed the Breakeven Point. Given the relatively fixed nature of most center expenses, the main determinant of the Breakeven Point for a given center is the number of advances outstanding.

On average, the 909 centers reached the Breakeven Point between their ninth and fourteenth month of operations and had, on average, approximately 115 advances outstanding at that time. Cumulative operating losses to breakeven for these centers averaged approximately $63,000. We have experienced a general trend of an increase in the time it takes a center to reach the Breakeven Point and, consequently, an increase in the cumulative operating losses to breakeven.

The remaining 174 centers opened in 2003, 2004 and 2005 have yet to reach the Breakeven Point. These 174 centers are, on average, approximately 20 months old at December 31, 2006. At December 31, 2006, a seasonally high point in advances outstanding, these centers had, on average, approximately 87 advances outstanding. Cumulative operating losses to date for these centers averaged approximately $118,000.

Approximately 70% of the 302 centers we opened in 2006 were opened in the last half of the year. As a result, we do not have sufficient data to determine average Breakeven Points for those centers.

45




We will need to generate adequate capital internally or have adequate availability under our revolving credit facility to fund our growth, primarily the capital cost of the new centers, the working capital required to fund the loan portfolio and the funding of losses prior to the Breakeven Point. In addition, depending upon when and how many new centers we open during any period, the losses incurred before a new center breaks even may significantly impact our results of operations.

Closed centers

We suspended operations in Georgia during 2004 and in North Carolina during 2005. We closed 14 (including 3 in Georgia), 251 (including 86 in Georgia and 118 in North Carolina) and 53 centers in 2004, 2005 and 2006, respectively. The expenses related to closing 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 of approximately $0.1 million, $5.1 million and $1.3 million in 2004, 2005 and 2006, respectively.

Principles of consolidation

Our consolidated financial statements include the accounts of Advance America, Cash Advance Centers, Inc., all of our wholly owned subsidiaries and, prior to its acquisition on December 21, 2004, our one consolidated special purpose entity related to our corporate headquarters. At December 31, 2005 and 2006, our consolidated financial statements also include the accounts of a variable interest entity (the third-party lender’s subsidiary related to our CSO operations in Texas) for which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated.

Seasonality

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 agency bank losses, allowance for doubtful accounts and accrual for excess bank losses are historically lowest as a percentage of revenues in the first quarter of each year, corresponding to customers’ receipt of income tax refunds, and increase as a percentage of revenues for the remainder of each year.

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 under the former agency business model).

46




The allowance for doubtful accounts is (and the accrual for excess bank losses was) 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 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 and fees deemed to be uncollectible against the allowance for doubtful accounts (or the accrual for excess bank losses) and credited any subsequent recoveries to the allowance for doubtful accounts (or the accrual for excess bank losses).

Under the standard business model, unpaid advances and the related fees and/or interest are generally charged off 60 days after the date the check was returned by the customer’s bank for non-sufficient funds or other reasons, unless the customer has paid at least 15% of the total of his or her loan plus original fee. 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 and unpaid installment loans and the related fees and/or interest generally were charged off 60 days from the deposit date if the check was 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 year 2005 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). The year 2006 began on a Sunday (a relative low point in weekly receivable balances) and ended on a Sunday (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 December 31, 2006, if average default rates were 5% higher or lower, the allowance for doubtful accounts would change by approximately $2.9 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

47




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 2006 financial statements include accruals of approximately $3.4 million and $3.5 million, respectively, for the self-insured portion of our health and dental insurance and approximately $4.1 million and $3.8 million, respectively, for workers’ compensation. We recognize our obligations associated with those benefits in the period the claim is incurred. The costs 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 estimates 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. As a result, we have consolidated the lender as of December 31, 2005 and 2006. See “Item 8. Financial Statements and Supplementary Data—Note 16. 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 December 31, 2006, the total compensation cost not yet recognized related to nonvested stock awards under our stock-based employee compensation plans is approximately $10.3 million. The weighted average period over which this expense is expected to be recognized is approximately 5.7 years. See “Item 8. Financial Statements and Supplementary Data—Note 11. 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.

48




Results of Operations

Year Ended December 31, 2005 Compared to the Year Ended December 31, 2006

The following tables set forth our results of operations for the year ended December 31, 2005 compared to the year ended December 31, 2006:

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2005

 

2006

 

Variance

 

 

 


Dollars