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Advance America, Cash Advance Centers 10-K 2008

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)  

ý

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

For the fiscal year ended December 31, 2007

OR

o

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

For the transition period from                                to                                 

COMMISSION FILE NUMBER 001-32363

ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.
(Exact name of registrant as specified in its charter)

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

135 North Church Street
Spartanburg, South Carolina

(Address of principal executive offices)

 


29306

(Zip Code)

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

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

Title of Each Class

  Name of Each Exchange
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 ý    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 ý

         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 ý    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, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o   Smaller reporting company 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 ý

         As of June 30, 2007, 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 $1,187,961,264.

         At February 29, 2008, there were 70,708,503 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 22, 2008.





ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.
Form 10-K
For the year ended December 31, 2007

PART I    
Item 1.   Business   4
Item 1A.   Risk Factors   18
Item 1B.   Unresolved Staff Comments   27
Item 2.   Properties   28
Item 3.   Legal Proceedings   28
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   32
Item 6.   Selected Financial Data   35
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   38
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   63
Item 8.   Financial Statements and Supplementary Data   64
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   98
Item 9A.   Controls and Procedures   98
Item 9B.   Other Information   99

PART III

 

 
Item 10.   Directors and Executive Officers of the Registrant   100
Item 11.   Executive Compensation   100
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   101
Item 13.   Certain Relationships and Related Transactions, and Director Independence   101
Item 14.   Principal Accountant Fees and Services   101

PART IV

 

 
Item 15.   Exhibits and Financial Statement Schedules   101

SIGNATURES

 

105

2



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.

3



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, 2007, we operated 2,813 centers in 35 states in the United States, 12 centers in the United Kingdom and seven centers in Canada, and had 85 limited licensees in the United Kingdom. We do not franchise any of our centers in the United States. 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.

        We previously marketed, processed and serviced installment loans made by lending banks under our former agency business model, which we discontinued in 2006. During 2006, we began offering the Advance America Choice-Line of Credit product to customers in Pennsylvania, began offering installment loans directly to customers in Illinois and introduced a prepaid debit card. As a result of a July 2007 ruling in Pennsylvania, we ceased offering the Choice-Line of Credit. In the fall of 2007, we began selling money orders and providing money transfer services. In the future we intend to expand 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)     38     36  
Median household income   $ 42,629   $ 41,994  
Percentage homeowners     49 %   66 %
Percentage with high school degrees     87 %   81 %

      (1)
      Based on a study performed for us of over 1.4 million customers served during the twelve months ended May 2007 for whom this information was available.

        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.

        Our centers, which we design to have the appearance of mainstream financial institutions, are typically located in middle-income shopping areas with high retail activity. As of December 31, 2007, we operated 2,728 centers under the "Advance America" brand and 104 centers under the "National Cash Advance" brand.

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        The following table presents key operating data for our business:

 
  Year Ended December 31,
 
  2005
  2006
  2007
Number of centers open at end of period     2,604     2,853     2,832

Number of customers served—all credit products (thousands)

 

 

1,534

 

 

1,494

 

 

1,524
Number of payday cash advances originated (thousands).      11,620     11,539     11,979
Aggregate principal amount of payday cash advances originated (thousands)   $ 3,943,815   $ 4,082,865   $ 4,317,980
Average amount of each payday cash advance originated   $ 339   $ 353   $ 361
Average charge to customers for providing and processing a payday cash advance   $ 55   $ 55   $ 55
Average duration of a payday cash advance (days)     15.8     16.2     16.5

Average number of lines of credit outstanding during the period (thousands) (1)

 

 


 

 

20

 

 

24
Average amount of aggregate principal on lines of credit outstanding during the period (thousands) (1)       $ 8,963   $ 10,377
Average principal amount on each line of credit outstanding during the period (1)       $ 448   $ 429

Number of installment loans originated (thousands)

 

 

68

 

 

29

 

 

31
Aggregate principal amount of installment loans originated (thousands)   $ 34,541   $ 13,905   $ 12,997
Average principal amount of each installment loan originated   $ 508   $ 486   $ 417
Average charge to customers for providing and processing an installment loan (2)   $ 337   $ 357   $ 530

(1)
We offered lines of credit in Pennsylvania from June 2006 through July 2007.

(2)
For the years ended December 31, 2005 and 2006, the installment loan activity reflects only loans originated by us as an agent for the lending banks in Pennsylvania and Arkansas (in 2005 and 2006) and North Carolina (in 2005). Those loans contained no discounts for early repayment, resulting in a readily determinable average fee charged to the customer. 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. For the year ended December 31, 2007, the installment loan activity reflects loans originated directly by us in Illinois. These loans have a stated term of five months but with certain rebate provisions for each repayment. The average fee for these loans is estimated based on historical averages regarding repayments.

Our Industry

        The payday cash advance services industry has grown significantly since the early 1990s in response to a shortage of available short-term consumer credit alternatives from traditional banking institutions. The high 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

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

Competitive Strengths

        Market Leader with Economies of Scale.    With 2,813 centers located in 35 states as of December 31, 2007, 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 grown successfully by identifying attractive locations for new centers, rapidly entering into new leases and establishing the necessary procedures and systems to manage center openings. We use our database of over 4.75 million customer records to analyze market opportunities and make management decisions regarding expanding our network of centers. In 2007, we opened 202 new centers in 23 states in the United States, acquired 12 centers in the United Kingdom and opened seven new centers in Canada. In 2006, we opened 302 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 2007, 2006 and 2005, payday cash advance legislation we supported was adopted in 10 states, three states and nine states, respectively. Our approach is to continue to work with policymakers and grassroots organizations to provide a predictable and favorable legislative environment for the payday cash advance services industry.

        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

6



variances from 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 35 states as of December 31, 2007, we believe we have developed a significant presence throughout the United States. We now also operate centers in Canada and the United Kingdom. This geographic diversification helps mitigate the risk and possible financial impact of unfavorable legislative changes or the economic environment of a particular region and allows us to take advantage of competitive opportunities in those markets. For the year ended December 31, 2007, California and Texas, which accounted for approximately 10.3% and 10.8%, respectively, of our total revenues, were the only states that accounted for more than 10% of our total revenues.

Business Strategy

        Continue as the Market Leader and Selectively Open New Centers.    A principal component of our strategy is being the leading provider of payday cash advance services in each market where we operate and being able to enter new markets rapidly. 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. In general, we believe that new market opportunities in the United States have decreased recently and we have adjusted our roll-out of new centers accordingly. In the United States, we opened 302 centers in 2006 and 202 centers in 2007. We will continue to selectively open new centers in markets where we believe it is economical to do so. We also may consider opportunities to acquire payday cash advance companies or businesses or license our services to independent providers, particularly when expanding into new markets or increasing our presence in existing markets.

        Drive New Center Operating Performance.    In our operating centers that opened in 2007 and 2006, 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. While our expansion overseas will continue to require incremental expenditures as we become established in those markets, over time we expect that our general and administrative expenses will decline as a percentage of our total revenues.

        Support Improvement of the Legislative and Regulatory Environment.    As of December 31, 2007, 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 grassroots 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 in select states and installment loans in Illinois. During 2007, we began selling money orders and providing money transfer services. We believe these and other new offerings will increase customer satisfaction and drive incremental revenue.

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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). Prior to 2007, we conducted business in certain states 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 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. In Texas, where we operate as a credit services organization ("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. Under the terms of our agreement with this lender, we process customer applications and are contractually obligated to reimburse the lender for the full amount of the loans and all related fees that are not collected from the customers. During 2006, we began offering the Advance America Choice-Line of Credit to customers in Pennsylvania and installment loans to customers in Illinois. As a result of a July 2007 ruling in Pennsylvania, we ceased offering the Choice-Line of Credit. In the United Kingdom, we recently started offering short-term advances, check cashing and other related financial products and providing limited licenses of our services to independent operators.

        We provide advances and charge fees and/or interest as specified by the laws of the jurisdictions where we operate. 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 jurisdiction and ranges from $50 to $1,000. The permitted fees and/or interest on an advance also vary by jurisdiction and range from 10% to 22% of the amount of a payday cash advance. Fees and interest for the line of credit product consisted of a monthly service fee for the line of credit plus interest on the average outstanding balance. Fees and interest for installment loans are larger relative to the size of the advance because of the longer term of this product.

        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, the third-party lender charges a late fee on its loan in accordance with state law. For the years ended December 31, 2007 and 2006, total collected NSF fees were approximately $3.5 million and $3.3 million, respectively, and total collected late fees were approximately $313,000 and $768,000, respectively.

        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.

        We determine whether to approve an advance to our customers in every jurisdiction other than Texas, where the third-party lender decides 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. We

8



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.

        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.

        In our CSO centers, we also assist customers by agreeing to reimburse the lender for the full amount of the loans 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 full repayment, we are obligated to return the customer's personal check. 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 in select states. The prepaid 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, a fee for loading the card and a fee for cardholder transactions. In the third and fourth quarters of 2007, we began selling money orders and providing money transfer services in our centers.

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.

        Generally, when customers return to a center to repay their advances they may: (1) pay their outstanding advances in full; (2) pay their outstanding advances in full and enter into a new advance on the same date; or (3) in some states, extend their outstanding advance by paying only the applicable charges (which is often referred to in our industry as a rollover). Our policies regarding repayment options are based on the CFSA's Best Practices and the various applicable state laws, which do not make a consistent distinction among stand-alone, rollover and other types of consecutive transactions.

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        Currently, we generally limit transactions to the lower of either four rollovers or the applicable state limit. Other than in regard to compliance with this policy, we do not systematically gather, review or analyze whether a transaction may be considered a rollover transaction because this distinction is not consistent under the various applicable statutes and we do not believe this distinction is relevant to our revenue analysis.

        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 lieu of depositing the customer's personal check, center employees typically contact the customer by telephone or in person to obtain a payment or a promise to pay and attempt to exchange the customer's check for a cashier's check, if funds are available.

        If a customer is unable to meet his or her current repayment for an advance, they may qualify for an extended payment plan ("Payment Plan"). In most states, the terms of our Payment Plan conform to the CFSA's Best Practices and guidelines. Certain states have specified their own terms and eligibility requirements for Payment Plans. Generally, a customer may enter into a Payment Plan for no additional fee once every twelve months and the Payment Plan will call for scheduled payments that coincide with the customer's next four paydays. In some states, a customer may enter into a Payment Plan more frequently. We will not engage in collection efforts while a customer is enrolled in a Payment Plan. If a customer misses a scheduled payment under a Payment Plan, center personnel may resume our normal collection procedures. We do not offer a Payment Plan for installment loans, nor does the third-party lender in Texas offer a Payment Plan for advances to its customers.

        If, at the end of this past-due collection period or Payment Plan, 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 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, which are automatically distributed from a central location based on a set of pre-determined criteria.

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Center Operations

        We operate the largest network of payday cash advance centers in the United States. The following table illustrates the composition of our center network by geographic area as of the specified dates:

 
  As of December 31,
State

  2005
  2006
  2007
Alabama   140   140   145
Arizona   53   60   56
Arkansas   30   30   30
California   298   302   286
Colorado   62   67   72
Delaware   13   14   15
Florida   211   248   261
Idaho   13   15   11
Illinois   60   72   81
Indiana   116   123   117
Iowa   35   37   36
Kansas   42   56   59
Kentucky   39   43   42
Louisiana   75   76   85
Michigan   111   137   150
Mississippi   53   53   61
Missouri   70   84   90
Montana   9   8   7
Nebraska   25   24   24
Nevada   10   11   14
New Hampshire   16   20   24
New Mexico   12   12   10
North Dakota   7   8   8
Ohio   210   231   244
Oklahoma   67   67   65
Oregon (1)   56   53  
Pennsylvania (1)   101   99  
Rhode Island   3   15   18
South Carolina   112   129   136
South Dakota   11   12   12
Tennessee   62   65   63
Texas   207   231   256
Utah       6
Virginia   120   142   150
Washington   105   110   103
Wisconsin   45   52   66
Wyoming   5   7   10
   
 
 
Total United States   2,604   2,853   2,813
Canada       7
United Kingdom       12
   
 
 
Total   2,604   2,853   2,832
   
 
 

      (1)
      We closed all of our centers in Oregon and Pennsylvania during 2007.

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        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 internal 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 with the lending banks under our 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% and 15.9% of our total revenues in the years ended December 31, 2006 and 2005, respectively, were derived from the agency business model. None of our revenues during the year ended December 31, 2007 were generated from the agency business model.

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 2007, Stephens, Inc. estimated that there were approximately 24,200 outlets (including our own centers) in the United States. Our network of 2,813 centers in the United States as of December 31, 2007 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 1,300 and 1,250 payday cash advance centers, respectively. Another competitor is QC Holdings, Inc., which we believe has nearly 600 locations in the United States. The remaining competitors are primarily 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 during the last decade.

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Marketing and Advertising

        We design our marketing efforts to increase our revenues by introducing new customers to our services. 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 and civic 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.

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 back-up 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.

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        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 $2.4 million (0.34% of total revenues) in 2007, $2.0 million (0.29% of total revenues) in 2006 and $1.6 million (0.25% of total revenues) in 2005.

Human Resources

        Our North American operations are divided into zones, regions and divisions, which we believe allows for a more effective management process. A zone has approximately 500 to 700 centers and includes centers in more than one state. As of December 31, 2007, we had five North American 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 seven to 150 centers organized into one to 11 divisions and are supervised by regional directors who report to a zone director. Divisions include seven to 26 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, 2007, our five zones in North America included 28 regions and 200 divisions. Our 12 centers in the United Kingdom represent a separate zone with its own zone director.

        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, 2008, we had approximately 7,000 employees, including approximately 6,500 center employees, 191 divisional directors, 33 regional directors, six 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 http://www.advanceamerica.net. We make available free of charge on our website our

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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, federal and foreign 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 foreign, 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 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 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, 2007, 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, 2007, 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.

        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 payday cash advance and similar services. Many similar bills have also been introduced in state legislatures. In 2007, bills that would severely restrict or effectively prohibit payday cash advances if

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adopted as law were introduced in 20 states plus the District of Columbia. In addition, two states have sunset provisions in their payday cash advance laws that require renewal of the laws by these state legislatures at periodic intervals. As a result of legislation in Oregon that became effective in July 2007, we concluded that operating in that state was no longer economically viable and closed all of our Oregon centers. 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.

        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.

        In some cases, we rely on the interpretations of the staff of state regulatory bodies with respect to the laws and regulations of their respective jurisdictions. These staff interpretations generally are not binding legal authority and may be subject to challenge in administrative or judicial proceedings. Additionally, as the staff of state regulatory bodies change, it is possible that their interpretations of applicable laws and regulations also may change and negatively affect our business.

        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. For example, in December 2005, the Commissioner of Banks for North Carolina ordered our North Carolina subsidiary to immediately cease all business operations. Similarly, as a result of an adverse ruling in July 2007 in a case brought by the Pennsylvania Department of Banking, we have closed all of our centers in 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"), the Bank Secrecy Act, the Money Laundering Act, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the "PATRIOT Act") 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").

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        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 2005 and 2006, the FDIC issued guidance and instructions to the lending banks for which we previously acted as marketing, processing and servicing agent that ultimately resulted in those lending banks discontinuing their advances and installment loans and the termination of our agency business. 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.

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.

Foreign Regulation

        In the United Kingdom, consumer lending is governed by the Consumer Credit Act of 1974, which was recently amended by the Consumer Credit Act of 2006, and related rules and regulations. Our subsidiaries in the United Kingdom must maintain licenses from the Office of Fair Trading, which is responsible for regulating consumer credit and competition, for policy and for consumer protection. The United Kingdom also has rules regarding the presentation, form and content of loan agreements, including statutory warnings and the layout of financial information. In Canada, the Canadian Parliament recently amended the federal usury law to transfer jurisdiction and the development of laws and regulation of our industry to the respective provinces. To date, four provinces have proposed substantive regulation of our industry. In general, the proposed regulations require lenders to be licensed, set maximum fees and regulate collection practices. However, the proposed regulations may undergo significant additional revisions.

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.

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ITEM 1A.    RISK FACTORS.

Risks Related to Our Business and Industry

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

        Our 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, 2007, 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, 2007, 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.

        During the last few years, legislation has been adopted in some states that prohibits or severely restricts payday cash advance and similar services. Many similar bills have also been introduced in state legislatures. In 2007, bills that would severely restrict or effectively prohibit payday cash advances if adopted as law were introduced in 20 states plus the District of Columbia. In addition, two states have sunset provisions in their payday cash advance laws that require renewal of the laws by these state legislatures at periodic intervals. Such new or modified legislation could have a material adverse impact on our results of operations. For example, as a result of legislation in Oregon that became effective in July 2007, we concluded that operating in that state was no longer economically viable and closed all of our Oregon centers. 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

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regarding business operations and undergo comprehensive state examinations to ensure that we comply with applicable laws. Under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that impact the way we do business and may force us to terminate or modify our operations in particular states. They may also impose rules that are generally adverse to our industry. Any new licensing requirements or rules could have a material adverse effect on our business, results of operations and financial condition.

        In some cases, we rely on the interpretations of the staff of state regulatory bodies with respect to the laws and regulations of their respective jurisdictions. These staff interpretations generally are not binding legal authority and may be subject to challenge in administrative or judicial proceedings. Additionally, as the staff of state regulatory bodies change, it is possible that their interpretations of applicable laws and regulations also may change and negatively affect our business. As a result, our reliance on staff interpretations could 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. For example, in December 2005, the Commissioner of Banks for North Carolina ordered our North Carolina subsidiary to immediately cease all business operations. Similarly, as a result of an adverse ruling in July 2007 in a case brought by the Pennsylvania Department of Banking, we suspended our operations and subsequently closed all of our centers in Pennsylvania. See "Item 3. Legal Proceedings." These closures have had a material adverse effect on our 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. We are also subject to the Bank Secrecy Act, the Money Laundering Act, and the PATRIOT 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, 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. On October 17, 2006, the John Warner National Defense Authorization Act for Fiscal Year 2007 (the "Act") was signed into law. This Act places, among other restrictions, a limit of 36% on the effective annual percentage rate 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. In 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 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.

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        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. Any actions taken in the future by local zoning boards or other local governing bodies to require special use permits for, or impose other restrictions on providers of payday cash advance 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. For example, regulatory changes in Indiana and Illinois have 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.

        In the United Kingdom, consumer lending is governed by the Consumer Credit Act of 1974, which was recently amended by the Consumer Credit Act of 2006, and related rules and regulations. Our subsidiaries in the United Kingdom must maintain licenses from the Office of Fair Trading, which is responsible for regulating consumer credit and competition, for policy and for consumer protection. The United Kingdom also has strict rules regarding the presentation, form and content of loan agreements, including statutory warnings and the layout of financial information. Our non-compliance with these rules could render a loan agreement unenforceable. Our inability to obtain and maintain the required licenses or to comply with the applicable rules or regulations in the United Kingdom would limit our expansion opportunities and could result in a material adverse effect on our results of operations and financial condition.

        In Canada, the Canadian Parliament recently amended the federal usury law to transfer jurisdiction and the development of laws and regulation of our industry to the respective provinces. To date, four provinces have proposed substantive regulation of our industry. In general, the proposed regulations require lenders to be licensed, set maximum fees and regulate collection practices. However, the proposed regulations may undergo significant additional revisions. Our expansion in Canada may be limited due to this uncertain regulatory landscape. Further, our inability to comply with new regulations may 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.

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        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. 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.

        We operated centers in 37 states during the year ended December 31, 2007, 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 be generated by certain states, largely due to the currently prevailing economic, demographic, regulatory, competitive and other conditions in those states. For example, during 2007, 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.

        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 CFSA, to promote policies that cause our business to be less profitable. These trends could materially adversely affect our business, results of operations and financial condition.

        For the years ended December 31, 2007 and 2006, we deposited approximately 6.2% and 5.7%, respectively, of all the customer checks we received and approximately 76% and 78%, 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, 2007 and 2006 were approximately $131.9 million and $110.4 million, respectively. If the number of customer checks that we deposit increases or the

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percentage of the customers' returned checks that we charge-off increases, our provision for doubtful accounts will increase and our net income will decrease.

        We maintain an allowance for doubtful accounts for estimated losses for advances we make directly to consumers and check-cashing, deferred-presentment and other credit services. We also maintain an accrual for third-party lender losses for loans and certain related fees that are not paid by the customers for all loans that are processed by us for the third-party lender in Texas. To estimate the appropriate allowance for doubtful accounts and accrual for third-party lender losses, we consider the amount of outstanding advances, historical charge-offs, our current collection patterns and the current economic trends in the markets we serve.

        At December 31, 2007, the total of our allowance for doubtful accounts and accrual for third-party lender losses increased to $65.9 million from $57.4 million at December 31, 2006. This amount, however, is an estimate. If our actual losses are greater than our allowance for doubtful accounts and accrual for third-party lender losses, 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.

        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.

        In October 2006, we began offering installment loans in Illinois and selling a prepaid debit card in select states. In 2007, we began selling money orders and providing money transfer services. 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, including additional marketing expenses, legal costs and other incremental start-up costs. Due to our lack of experience in offering these alternative services and products, we cannot assure you that we will be able to successfully introduce any new services or products or do so in a timely manner. Furthermore, we cannot predict the demand for 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.

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        In July 2007, we expanded the number of states where we allow customers who could not timely repay their advances to qualify for extended payment plans to include every state where we offer advances. We previously offered extended payment plans in only certain states as required under applicable state law. The ability of a customer to defer payment will likely increase the average duration of a payday cash advance, which may in turn affect our revenues, loss experience and provision for doubtful accounts.

        We have devoted significant management time and financial resources to expanding our operations outside of the United States. Our international operations have increased the complexity of our organization and the administrative, operating and legal cost of operating our business. Penetrating new markets will likely require additional marketing expenses and incremental start-up costs. We may decide to reduce fees, or even temporarily operate centers at a loss, in order to build brand recognition and establish a foothold in these new markets. For example, in Manitoba, Canada, we have opened seven centers that are currently not profitable in anticipation of more favorable provincial legislation. Additionally, as a foreign business we are subject to local regulations, tariffs and labor controls to which other domestic businesses are not subject. Our financial results also may be negatively affected by tax rates in the United Kingdom and Canada or as a result of withholding requirements and tax treaties with those countries. Moreover, if political, regulatory or economic conditions deteriorate in the United Kingdom and Canada, our ability to expand and maintain our international operations could be impaired and the costs of doing so could increase, which could further erode our business, results of operations and financial condition.

        We cannot assure you that we will be able to maintain or further 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 grow depends on a number of factors, some of which are 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;

    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.

23


        We cannot assure you that our systems, procedures, controls and existing personnel will be adequate to support our further growth. Our new international operations 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 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 future quarterly cash dividends on our common stock and repurchases of our common stock, will be funded primarily from borrowings under our revolving credit facility. As of December 31, 2007, we had approximately $120.5 million available for future borrowings under this facility. On October 17, 2007, we amended this credit facility to exclude from certain financial covenants the charges and losses incurred in connection with our announced closing of 103 centers in Pennsylvania, Oregon and elsewhere. Without this amendment, we would not have been able to pay our full regular quarterly dividend during the fourth quarter of 2007. 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. If we are unable to do so, our ability to pay future dividends, repurchase shares of our common stock, or finance our current operations or future growth may be impaired.

        We may incur substantial additional debt in the future. As of December 31, 2007, our total debt was approximately $148.0 million and our stockholders' equity was approximately $250.3 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:

    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;

    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;

24


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

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

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

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

        We depend on 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 have 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.

        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.

25


        Because our business requires us to maintain a significant supply of cash in each of our centers, we are subject to the risk of cash shortages resulting from employee and third-party theft and errors. Although we have implemented various programs to reduce these risks, maintain insurance coverage for theft and provide security for our employees and facilities, we cannot assure you that employee and third-party theft and errors will not occur. Cash shortages from employee and third-party theft and errors were approximately $2.4 million (0.34% of total revenues) in 2007, $2.0 million (0.29% of total revenues) in 2006 and $1.6 million (0.25% of total revenues) in 2005. The extent of these cash shortages could increase as we expand the nature and scope of our products and services. 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.

        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 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.

        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;

26


    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. If we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate, either of which could have a material adverse effect on our business, results of operations and financial condition.

        As of December 31, 2007, the annual turnover among our center managers was approximately 58% and among our other center employees was approximately 120%. 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.

Risks Related to Our Common Stock

        As of February 29, 2008, our executive officers and directors, together with certain family members and trusts for their benefit, controlled approximately 27% 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.

        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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

        None.

27



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 quick service restaurants. 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 various jurisdictions as of December 31, 2007.

        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 $5.4 million at December 31, 2007. 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 $5.2 million and $4.9 million at December 31, 2006 and 2007, 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 a number of 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. We are vigorously defending against all these actions. The amount of losses and/or the probability of an unfavorable outcome, if any, cannot be reasonably estimated for these legal proceedings. Accordingly, no accrual has been recorded for any of these matters as of December 31, 2007.

        On February 27, 2007, Brenda McGinnis filed a putative class action in the Circuit Court of Clark County, Arkansas alleging violations of the Arkansas usury law, the Arkansas Deceptive Trade Practices Act and a 2001 class action settlement agreement entered into by our prior subsidiary in Arkansas. The complaint alleges that our current subsidiary made usurious loans under the Arkansas Check Cashers Act and seeks compensatory damages in amount equal to twice the interest paid on the loans, a declaration that the contracts are void, enforcement of the 2001 class action settlement agreement, attorneys' fees and costs. Ms. McGinnis' claims are subject to an arbitration agreement. The trial court has denied our motion to compel arbitration and we will appeal that decision.

        On July 3, 2007, Phyliss Garrett filed a motion for contempt in the Circuit Court of Clark County, Arkansas alleging a violation of the 2001 class action settlement agreement entered into by our prior subsidiary in Arkansas and incorporated into a court order. The relief sought by the plaintiff and our defenses are substantially similar to those at issue in the Brenda McGinnis lawsuit described above.

        On May 31, 2007, Kelvin White and two other individuals filed a lawsuit in the Circuit Court of Ouachita County, Arkansas making substantially similar allegations and seeking substantially similar relief to the Brenda McGinnis lawsuit described above. Our defenses are also substantially similar.

28


        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 on January 11, 2001, and a third named class representative, Tiffany Kelly, in the Circuit Court of Palm Beach County, Florida. This putative class action 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. Ms. Reuter's claim has been held to be subject to binding arbitration, which we expect to proceed in parallel with this case. The trial court has denied our motion to compel arbitration of Ms. Kelly's claims and we have appealed that decision.

        A second Florida lawsuit was filed on August 24, 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, relief sought and our defenses are nearly identical to those alleged in the first Betts and Reuter lawsuit.

        On August 6, 2004, Tahisha King and James E. Strong, who were customers of BankWest, the lending bank for which we previously 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" 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 have denied the plaintiffs' claims and intend to continue to resist plaintiffs' efforts to conduct class arbitration.

        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. On March 10, 2003, Angela Glasscock, a customer of BankWest, filed an adversary proceeding in the U.S. Bankruptcy Court for the Southern District of Georgia alleging that our 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 our 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." In April 2007, on appeal, the United States District Court overturned the U.S. Bankruptcy Court's grant of summary judgment to us. Accordingly, this case will proceed to trial before the U.S. Bankruptcy Court. Although the amount in controversy in the case is only $350, the underlying claims of Ms. Glasscock could serve as a basis for future claims against us.

        On August 6, 2007, Cynthia Williams filed a class action lawsuit against our Missouri subsidiary in the Circuit Court of St. Louis County, Missouri alleging violations of certain Missouri loan laws and the

29


Missouri Merchandising Practices Act. The complaint alleges our subsidiary in Missouri exceeded the maximum lawful interest rate, illegally limited the number of loan renewals, and failed to adequately reduce the principal amount of the loan when a customer obtained a loan renewal. The complaint seeks compensatory and punitive damages, attorneys' fees, interest, costs and a constructive trust and equitable lien on all money paid by the class. We have removed the case to the United States District Court for the Western District of Missouri and filed a motion to transfer the case to the United States District Court for the Eastern District of Missouri. Our motion was granted and, in response, the Plaintiff dismissed the case voluntarily.

        On July 27, 2004, John Kucan, Welsie Torrence and Terry Coates, each of whom was a customer of Republic Bank & Trust Company ("Republic"), the lending bank for whom we previously 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 our 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. Plaintiffs have appealed the trial court's decision to compel arbitration.

        On February 1, 2005, the Commissioner of Banks of North Carolina initiated a contested case against our North Carolina subsidiary for alleged violations of the North Carolina Consumer Finance Act. In December 2005, 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. We have appealed this order.

        On September 27, 2006, the Pennsylvania Department of Banking filed a lawsuit in the Commonwealth Court of Pennsylvania alleging that our Delaware subsidiary was 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. In July 2007, the court determined that certain aspects of our Choice Line of Credit required us to be licensed under Pennsylvania's Consumer Discount Company Act ("CDCA") and enjoined us from continuing our lending activities in Pennsylvania for so long as the CDCA violations continued and from collecting monthly participation fees. We have appealed to the Pennsylvania Supreme Court.

        On August 1, 2007, Sharlene Johnson, Helena Love and Bonny Bleacher filed a putative class action lawsuit in the United States District Court, Eastern District of Pennsylvania against us and two of our subsidiaries alleging that we provided 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 complaint seeks, among other things, a declaratory judgment that the monthly participation fee charged to customers with a line of credit is illegal, an injunction prohibiting the collection of the monthly participation fee and damages equal to three times the monthly participation

30


fees paid by customers since June 2006. In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless deemed otherwise by the arbiter.

        On January 18, 2007, Raymond King and Sandra Coates, who were customers of BankWest, the lending bank for which we previously 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 alleging various causes of action, including that our 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" and that we were the "lender in fact." The complaint seeks compensatory damages, attorneys' fees, punitive damages and the trebling of any compensatory damages. In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless deemed otherwise by the arbiter.

        Seven separate putative class actions have been filed in South Carolina against our subsidiary, Advance America, Cash Advance Centers of South Carolina, Inc., and several other unaffiliated defendants. John and Rebecca Morgan filed a complaint on August 27, 2007 in the Horry County Court of Common Pleas; Margaret Horne filed a complaint on September 6, 2007 in the Spartanburg County Court of Common Pleas; Tawan Smalls filed a complaint on September 10, 2007 in the Charleston County Court of Commons Pleas; Chadric and Lisa Wiley filed a complaint on September 27, 2007 in the Richland County Court of Common Pleas; Mildred Weaver filed a complaint on September 27, 2007 in the Darlington County Court of Common Pleas; Lisa Johnson and Gilbert Herbert filed a complaint on October 2, 2007 in the Georgetown County Court of Common Pleas; and Kimberly Kinney filed a complaint on October 12, 2007 in the Marion County Court of Common Pleas. The allegations and relief sought are similar in each case. Plaintiffs allege that our South Carolina subsidiary violated the South Carolina Deferred Presentment Services Act and the Consumer Protection Code by failing to perform a credit check and evaluate a customer's ability to repay the advance. Each complaint seeks an injunction to prohibit us from continuing our operations, the return of fees and interest, actual damages, punitive damages and attorneys' fees and costs. Each of the lawsuits has been removed to the United States District Court for the District of South Carolina.

        On September 12, 2007, Franciso Gonzalez filed a collective action lawsuit against our subsidiary, Advance America, Cash Advance Centers of Texas, Inc., in the United States District Court for the Southern District of Texas alleging violations of the Fair Labor Standards Act and Texas Pay Day Act. The complaint alleges our subsidiary in Texas failed to pay overtime wages to its employees. The complaint seeks compensatory and liquidated damages, attorneys' fees, interest and costs.

        We are also involved in other litigation and administrative proceedings that are incidental to our business, including 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 protection laws.

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

        None.


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 2006 and 2007:

 
  Sales Prices
   
 
  Cash
Dividend

 
  High
  Low
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

2007:

 

 

 

 

 

 

 

 

 
Quarter ended March 31, 2007   $ 16.16   $ 12.92   $ 0.125
Quarter ended June 30, 2007     18.30     14.67     0.125
Quarter ended September 30, 2007     19.05     10.06     0.125
Quarter ended December 31, 2007     10.89     7.96     0.125

        At February 22, 2008, there were approximately 121 holders of record of our common stock, and there were approximately 5,900 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 February 13, 2008, our Board of Directors declared a quarterly cash dividend of $0.125 per common share, payable on March 7, 2008, to stockholders of record on February 26, 2008.

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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 31, 2007, 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 an annual basis.


Comparison of Cumulative Return vs.
S&P 500, NASDAQ Other Financial, and NYSE Financial Sector Indices

         CHART

 
  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
12/30/05   $ 62.16   $ 103.75   $ 115.50   $ 109.17
12/29/06   $ 75.60   $ 117.88   $ 135.64   $ 130.40
12/31/07   $ 54.51   $ 122.04   $ 136.29   $ 113.31

33


        The following table sets forth information about our stock repurchases for the three months ended December 31, 2007:

Period (1)

  Total
Number of
Shares
Purchased (2)

  Average
Price Paid
per Share

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

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

October 1 to October 31   301,468   $ 9.53   301,468   $ 50,617,739
November 1 to November 30   2,773,100   $ 8.80   2,773,100   $ 26,210,399
December 1 to December 31   1,604,368   $ 9.37   1,604,368   $ 11,171,594
   
 
 
 
Total   4,678,936   $ 9.04   4,678,936   $ 11,171,594
   
 
 
 

(1)
Based on trade date.

(2)
Includes 7,836 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. Additionally, on February 13, 2008, we announced an extension of our stock repurchase program pursuant to which we were authorized to repurchase up to $75.0 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.

34


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, 2007, 2006 and 2005, and as of December 31, 2007 and 2006, has been derived from our audited financial statements included elsewhere in this report. The financial information for the years ended December 31, 2004 and 2003, and as of December 31, 2005, 2004 and 2003 has been derived from our audited financial statements not included in this report. Certain amounts below in 2005, 2006 and 2007 include the consolidation of a variable interest entity—see "Item 8. Financial Statements and Supplementary Data—Note 16. Transactions with Variable Interest Entities." 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

 
  2003
  2004
  2005
  2006
  2007
 
 
  (Dollars in thousands, except per share data
and other financial data)

 
Statement of Operations Data:                                
Revenues:                                
  Fees and interest charged to customers   $ 362,262   $ 430,859   $ 529,953   $ 659,876   $ 709,557  
  Marketing, processing and servicing fees     127,272     139,329     100,113     12,418      
   
 
 
 
 
 
Total revenues     489,534     570,188     630,066     672,294     709,557  
   
 
 
 
 
 
Center expenses:                                
  Salaries and related payroll costs     131,369     160,047     171,092     185,938     199,416  
  Provision for doubtful accounts     64,681     89,236     115,060     120,855     140,245  
  Occupancy costs     51,798     67,305     80,540     87,276     96,847  
  Center depreciation expense     11,603     13,719     14,902     16,233     17,200  
  Advertising expense     23,857     26,082     24,137     20,375     26,770  
  Other center expenses     41,300     47,087     52,712     54,986     59,340  
   
 
 
 
 
 
Total center expenses     324,608     403,476     458,443     485,663     539,818  
   
 
 
 
 
 
Center gross profit     164,926     166,712     171,623     186,631     169,739  
Corporate and other expenses (income):                                
  General and administrative expenses     36,434     44,102     51,758     53,363     59,410  
  Corporate depreciation expense     3,433     3,942     4,483     3,661     3,162  
  Options purchase expense     3,547                  
  Lending bank contract termination expense     6,525                  
  Interest expense     15,983     17,165     4,331     7,129     11,059  
  Interest income     (86 )   (161 )   (351 )   (538 )   (317 )
  Loss on disposal of property and equipment     990     814     715     960     3,189  
  Loss on impairment of assets         1,288     2,918         314  
  Transaction related expense         2,466              
   
 
 
 
 
 
Income before income taxes     98,100     97,096     107,769     122,056     92,922  
Income tax expense (1)     1,925     14,041     43,776     48,858     37,831  
   
 
 
 
 
 
Income before income of consolidated variable interest entity     96,175     83,055     63,993     73,198     55,091  
Income of consolidated variable interest entity             (1,003 )   (3,047 )   (706 )
   
 
 
 
 
 
Net income   $ 96,175   $ 83,055   $ 62,990   $ 70,151   $ 54,385  
   
 
 
 
 
 

35


 
  Year ended December 31,
 
Consolidated Financial Information (Continued)

 
  2003
  2004
  2005
  2006
  2007
 
 
  (Dollars in thousands, except per share data
and other financial data)

 
Per Share Data:                                
Net income per common share:                                
  Basic   $ 1.40   $ 1.20   $ 0.76   $ 0.87   $ 0.70  
  Diluted   $ 1.40   $ 1.20   $ 0.76   $ 0.87   $ 0.70  

Cash dividends paid per common share

 

$

1.48

 

$

1.15

 

$

0.38

 

$

0.44

 

$

0.50

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic     68,667     69,126     83,124     80,889     77,923  
  Effect of dilutive options and unvested restricted stock     120             28     12  
   
 
 
 
 
 
  Diluted     68,787     69,126     83,124     80,917     77,935  
   
 
 
 
 
 
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   $ 10,484   $ 18,224   $ 27,259   $ 67,245   $ 28,251  
Advances and fees receivable, net     138,204     155,009     193,468     237,725     221,480  
Goodwill     122,324     122,324     122,586     122,627     127,286  
Total assets     348,043     397,539     436,388     525,092     471,698  
Total debt     219,259     46,637     44,621     111,050     147,980  
Total stockholders' equity     91,039     296,290     303,025     299,897     250,291  

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash flows provided by operating activities   $ 153,670   $ 163,910   $ 189,382   $ 186,125   $ 184,496  
Cash flows used in investing activities     (83,544 )   (97,055 )   (139,880 )   (156,216 )   (113,216 )
Cash flows (used in) provided by financing activities     (66,317 )   (59,115 )   (40,467 )   10,077     (110,310 )

(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.

36


 
  Year ended December 31,
Consolidated Financial Information (Continued)

  2003
  2004
  2005
  2006
  2007
Other Financial and Statistical Data:                              
Number of centers open at end of period     2,039     2,408     2,604     2,853     2,832
Number of customers served—all credit products (thousands)     1,174     1,412     1,534     1,494     1,524
Number of payday cash advances originated (thousands)     10,179     11,586     11,620     11,539     11,979
Aggregate principal amount of payday cash advances originated (thousands)   $ 3,271,235   $ 3,804,096   $ 3,943,815   $ 4,082,865   $ 4,317,980
Average amount of each payday cash advance originated   $ 321   $ 328   $ 339   $ 353   $ 361
Average charge to customers for providing and processing a payday cash advance   $ 52   $ 52   $ 55   $ 55   $ 55
Average duration of a payday cash advance (days)     15.1     15.4     15.8     16.2     16.5
Average number of lines of credit outstanding during the period (thousands) (3)                 20     24
Average amount of aggregate principal on lines of credit outstanding during the period (thousands) (3)               $ 8,963   $ 10,377
Average principal amount on each line of credit outstanding during the period (3)               $ 448   $ 429
Number of installment loans originated (thousands)             68     29     31
Aggregate principal amount of installment loans originated (thousands)           $ 34,541   $ 13,905   $ 12,997
Average principal amount of each installment loan originated           $ 508   $ 486   $ 417
Average charge to customers for providing and processing an installment loan (4)           $ 337   $ 357   $ 530

(3)
We offered lines of credit in Pennsylvania from June 2006 through July 2007.

(4)
For the years ended December 31, 2005 and 2006, the installment loan activity reflects only loans originated by us as an agent for the lending banks in Pennsylvania and Arkansas (in 2005 and 2006) and North Carolina (in 2005). Those loans contained no discounts for early repayment, resulting in a readily determinable average fee charged to the customer. 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. For the year ended December 31, 2007, the installment loan activity reflects loans originated directly by us in Illinois. These loans have a stated term of five months but with certain rebate provisions for each repayment. The average fee for these loans is estimated based on historical averages regarding repayments.

37


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, 2007, we operated 2,813 centers in 35 states in the United States, 12 centers in the United Kingdom and seven centers in Canada.

        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). Prior to 2007, we conducted business in certain states 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. In Texas, where we operate as a credit services organization ("CSO"), 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 to reimburse the lender for the full amount of the loans and all related fees that are not collected from the customers. During 2006, we began offering the Advance America Choice-Line of Credit to customers in Pennsylvania and installment loans to customers in Illinois. As a result of a July 2007 ruling in Pennsylvania, we ceased offering the Choice-Line of Credit. In the United Kingdom, we have recently started offering short term advances, check cashing and other related financial products and providing limited licenses of our services to independent contractors.

        We provide advances and charge fees and/or interest as specified by the laws of the jurisdictions where we operate. 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 jurisdiction and ranges from $50 to $1,000. The permitted fees and/or interest on an advance also vary by jurisdiction and range from 10% to 22% of the amount of a payday cash advance. Fees and interest for the line of credit product consisted of a monthly service fee for the line of credit plus interest on the average outstanding balance. Fees and interest for installment loans are larger relative to the size of the advance because of the longer term of this product.

        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, the third-party lender charges a late fee on its loan in accordance with state law. For the years ended

38


December 31, 2007 and 2006, total collected NSF fees were approximately $3.5 million and $3.3 million, respectively, and total collected late fees were approximately $313,000 and $768,000, respectively.

        The growth of the payday cash advance industry over the last decade has been 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").

        Although there are 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 of our principal products and services generally are substantially similar in most jurisdictions.

        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.

        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.

        Generally, when customers return to a center to repay their advances they may: (1) pay their outstanding advances in full; (2) pay their outstanding advances in full and enter into a new advance on the same date; or (3) in some states, extend their outstanding advance by paying only the applicable charges (which is often referred to in our industry a rollover). Our policies regarding repayment options are based on the CFSA's Best Practices and the various applicable state laws, which do not make a consistent distinction among stand-alone, rollover and other types of consecutive transactions.

        Currently, we generally limit transactions to the lower of either four rollovers or the applicable state limit. Other than in regard to compliance with this policy, we do not systematically gather, review

39



or analyze whether a transaction may be considered a rollover transaction because this distinction is not consistent under the various applicable statutes and we do not believe this distinction is relevant to our revenue analysis.

        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 lieu of depositing the customer's personal check, center employees typically contact the customer by telephone or in person to obtain a payment or a promise to pay and attempt to exchange the customer's check for a cashier's check, if funds are available.

        If a customer is unable to meet his or her current repayment for an advance, they may qualify for an extended payment plan ("Payment Plan"). In most states, the terms of our Payment Plan conform to the CFSA's Best Practices and guidelines. Certain states have specified their own terms and eligibility requirements for Payment Plans. Generally, a customer may enter into a Payment Plan for no additional fee once every twelve months and the Payment Plan will call for scheduled payments that coincide with the customer's next four paydays. In some states, a customer may enter into a Payment Plan more frequently. We will not engage in collection efforts while a customer is enrolled in a Payment Plan. If a customer misses a scheduled payment under a Payment Plan, center personnel may resume our normal collection procedures. We do not offer a Payment Plan for installment loans, nor does the third-party lender in Texas offer a Payment Plan for advances to its customers.

        If, at the end of this past-due collection period or Payment Plan, the center has been unable to collect the amount due, the customer's check is then deposited. For the year ended December 31, 2007, approximately 6.2% 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, 2007, approximately 24% 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, which are automatically distributed from a central location based on a set of pre-determined criteria.

40


        The following table presents key operating data for our business:

 
  Year Ended December 31,
 
  2005
  2006
  2007
Number of centers open at end of period     2,604     2,853     2,832
Number of customers served—all credit products (thousands)     1,534     1,494     1,524
Number of payday cash advances originated (thousands)     11,620     11,539     11,979
Aggregate principal amount of payday cash advances originated (thousands)   $ 3,943,815   $ 4,082,865   $ 4,317,980
Average amount of each payday cash advance originated   $ 339   $ 353   $ 361
Average charge to customers for providing and processing a payday cash advance   $ 55   $ 55   $ 55
Average duration of a payday cash advance (days)     15.8     16.2     16.5
Average number of lines of credit outstanding during the period (thousands) (1)         20     24
Average amount of aggregate principal on lines of credit outstanding during the period (thousands) (1)       $ 8,963   $ 10,377
Average principal amount on each line of credit outstanding during the period (1)       $ 448   $ 429
Number of installment loans originated (thousands)     68     29     31
Aggregate principal amount of installment loans originated (thousands)   $ 34,541   $ 13,905   $ 12,997
Average principal amount of each installment loan originated   $ 508   $ 486   $ 417
Average charge to customers for providing and processing an installment loan (2)   $ 337   $ 357   $ 530

(1)
We offered lines of credit in Pennsylvania from June 2006 through July 2007.

(2)
For the years ended December 31, 2005 and 2006, the installment loan activity reflects only loans originated by us as an agent for the lending banks in Pennsylvania and Arkansas (in 2005 and 2006) and North Carolina (in 2005). Those loans contained no discounts for early repayment, resulting in a readily determinable average fee charged to the customer. 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. For the year ended December 31, 2007, the installment loan activity reflects loans originated directly by us in Illinois. These loans have a stated term of five months but with certain rebate provisions for each repayment. The average fee for these loans is estimated based on historical averages regarding repayments.

41


        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, 2005, 2006 and 2007 consisted of (dollars in millions):

 
  2005
  2006
  2007
 
  Dollars
  %
  Dollars
  %
  Dollars
  %
Fees and interest charged to customers   $ 530.0   84.1   $ 659.9   98.2   $ 709.6   100.0
Marketing, processing and servicing fees     100.1   15.9     12.4   1.8      
   
 
 
 
 
 
Total revenues   $ 630.1   100.0   $ 672.3   100.0   $ 709.6   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.

        In 2005, the FDIC issued revised guidance to lending institutions that offered payday cash advances, including the lending banks for which we then acted as a marketing, processing and servicing agent. In response, we modified our marketing, processing and servicing agreements with the lending banks in Arkansas, North Carolina and Pennsylvania and started operating in Texas and Michigan under existing state-based legislation. In early 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 advances and installment loans. In response, the lending banks stopped originating payday cash advances and installment loans and we abandoned our agency business model. In 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.    In 2005, we terminated our agreement with the lending bank for Michigan and began offering check-cashing and deferred-presentment services directly to customers in Michigan. After Michigan adopted a new affirmative payday lending law in June 2006, we began offering payday cash advances.

        In 2005, we also terminated our 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 refer customers to an unaffiliated third-party lender. Pursuant to the credit services organization agreement ("CSO Agreement") with that lender, 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 Arkansas.    In 2006, as a result of the lending bank for Arkansas ceasing to originate advances and loans, we began directly providing check-cashing services to customers in Arkansas under existing state-based legislation.

42


        The following is a summary of financial information for our operations in Arkansas for the years ended December 31, 2005, 2006 and 2007 (in thousands):

 
  2005
  2006
  2007
Total revenues   $ 6,827   $ 5,289   $ 6,207
Total center expenses     4,888     4,604     4,635
   
 
 
Center gross profit   $ 1,939   $ 685   $ 1,572
   
 
 

        Closing of Operations in North Carolina.    At the end of 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, 2005, 2006 and 2007 (in thousands):

 
  2005
  2006
  2007
 
Total revenues   $ 22,167   $ (35 ) $  
Total center expenses     20,429     985     111  
   
 
 
 
Center gross profit/(loss)   $ 1,738   $ (1,020 ) $ (111 )
   
 
 
 

        Closing of Operations in Pennsylvania.    As a result of the lending bank for Pennsylvania ceasing to originate advances and loans, we began offering the Advance America Choice-Line of Credit ("Choice-Line") in Pennsylvania in 2006. The Choice-Line product allowed customers access to up to $500 in credit for a monthly participation fee plus interest on outstanding loan balances. On July 31, 2007, we announced that an unfavorable ruling was issued by the Commonwealth Court of Pennsylvania directing our subsidiary operating in Pennsylvania to immediately suspend its operations. See "Item 3. Legal Proceedings." During the third and fourth quarters of 2007, we closed all of our remaining centers in Pennsylvania. The severance, lease termination and write-off of the undepreciated costs of fixed assets and other closing costs in these centers totaled approximately $2.2 million. Additionally, we recorded a charge of approximately $6.3 million for the write down of receivables. The cessation of our Pennsylvania operations did not result in any impairment in goodwill.

        The following is a summary of financial information for our operations in Pennsylvania for the years ended December 31, 2005, 2006 and 2007 (in thousands):

 
  2005
  2006
  2007
Total revenues   $ 42,403   $ 29,541   $ 25,760
Total center expenses     23,358     19,512     25,028
   
 
 
Center gross profit   $ 19,045   $ 10,029   $ 732
   
 
 

        Closing of Operations in Oregon.    Legislation in Oregon became effective in 2007 that limits fees and interest on all consumer loans. As a result of this legislation, we determined that it was no longer economically viable to continue to operate in Oregon and we closed all of our remaining Oregon centers in the fourth quarter of 2007. During the third and fourth quarters of 2007, we recorded closing costs for severance, lease termination and write-off of the undepreciated costs of fixed assets and other closing costs in these centers which totaled approximately $1.4 million. Additionally, we recorded a charge of approximately $0.5 million for the write down of receivables. The cessation of our Oregon operations did not result in any impairment in goodwill.

43


        The following is a summary of financial information for our operations in Oregon for the years ended December 31, 2005, 2006 and 2007 (in thousands):

 
  2005
  2006
  2007
 
Total revenues   $ 5,205   $ 7,898   $ 4,836  
Total center expenses     8,108     9,061     7,291  
   
 
 
 
Center gross profit/(loss)   $ (2,903 ) $ (1,163 ) $ (2,455 )
   
 
 
 

        During the year ended December 31, 2007, we completed four acquisitions in the United Kingdom consisting of a total of 12 centers and 85 limited licensees for an aggregate purchase price, including transaction-related costs, of approximately $5.5 million in cash and an increase in goodwill of approximately $4.7 million.

        We opened 361, 302 and 209 centers in the years ended December 31, 2005, 2006 and 2007, respectively. The capital cost of opening a new center varies depending on the size and type of center, but typically averages approximately $46,000. 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 $89,000 to fund the center's advance portfolio.

        Of the 1,132 centers opened in 2004, 2005 and 2006, 962 centers remain open as of December 31, 2007. Of these, 791 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 791 centers reached the Breakeven Point between their ninth and fourteenth month of operations and had, on average, approximately 113 advances outstanding at that time. Cumulative operating losses to breakeven for these centers averaged approximately $59,000 per center. 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 171 centers opened in 2004, 2005 and 2006 have yet to reach the Breakeven Point. These 171 centers are, on average, approximately 21 months old at December 31, 2007. At December 31, 2007, a seasonally high point in advances outstanding, these centers had, on average, approximately 93 advances outstanding. Cumulative operating losses to date for these centers averaged approximately $113,000 per center.

        Approximately 50% of the 209 centers we opened in 2007 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.

        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

44



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.

        We closed 251 centers during 2005 (including 86 in Georgia and 118 in North Carolina), 53 centers during 2006 and 242 centers during 2007 (including 99 in Pennsylvania and 53 in Oregon). 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 $5.1 million, $1.3 million and $6.7 million in 2005, 2006 and 2007, respectively. Additionally, during the year ended December 31, 2007, we recorded approximately $6.8 million in charges related to the write-down of receivables in Pennsylvania and Oregon.

        Our consolidated financial statements include the accounts of Advance America, Cash Advance Centers, Inc. and all of our wholly owned subsidiaries. At December 31, 2006 and for the years ended December 31, 2005, 2006 and 2007, our consolidated financial statements also include the accounts of a variable interest entity (the subsidiary of our previous third-party lender in Texas related to our CSO operations in that state) for which we were the primary beneficiary—see "Item 8. Financial Statements and Supplementary Data—Note 16. Transactions with Variable Interest Entities." All significant intercompany balances and transactions have been eliminated.

        Our business is seasonal due to the impact of fluctuating demand for advances and fluctuating collection rates throughout the year. Demand has historically been highest in the third and fourth quarters of each year, corresponding to the back-to-school and holiday seasons, and lowest in the first quarter of each year, corresponding to our customers' receipt of income tax refunds. Our provision for doubtful accounts and allowance for doubtful accounts are historically lowest as a percentage of revenues in the first quarter of each year, corresponding to 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:

        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 on advances we make directly to customers and an accrual for third-party lender losses for estimated probable losses on loans and certain related fees for loans that we process for our new third-party lender in Texas (see "Consolidation of Variable Interest Entity" in this section).

45


Our advances and fees receivables, net on our balance sheet do not include the advances and interest receivable for loans processed by us for our new third-party lender in Texas since these loans are owned by the third-party lender.

        The allowance for doubtful accounts and accrual for third-party lender losses are primarily based upon models that analyze specific portfolio statistics and also reflect, to a lesser extent, management's judgment regarding overall accuracy. The analytical models take into account several factors including the number of transactions customers complete and charge-off and recovery rates. Additional factors such as changes in state laws, center closings, length of time centers have been open in a state, relative mix of new centers within a state and other relevant factors are also evaluated to determine whether the results from the analytical models should be revised.

        We record the allowance for doubtful accounts as a reduction of advances and fees receivables, net on our balance sheet. We record the accrual for third-party lender losses as 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 and credited any subsequent recoveries (including sales of debt) to the allowance for doubtful accounts.

        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. 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 and accrual for third-party lender losses 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, accrual for third-party lender losses and provision for doubtful accounts.

        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 2006 began and ended on a Sunday (a relative low point in weekly receivable balances). The year 2007 began and ended on a Monday (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, 2007, if average default rates were 5% higher or lower, the allowance for doubtful accounts and accrual for third-party lender losses would change by approximately $3.3 million.

        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. Additionally, during the year ended December 31, 2007, we completed four acquisitions, which resulted in an increase in goodwill of approximately $4.7 million. Due to the significance of goodwill and the reduction of net income that would occur if goodwill were impaired, we assess the impairment of our long-lived and intangible assets annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include significant

46


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 liabilities in our December 31, 2006 and 2007 financial statements include accruals of approximately $3.5 million and $0.9 million, respectively, for the self-insured portion of our health and dental insurance and approximately $3.8 million and $4.6 million, respectively, for workers' compensation. Beginning in the fourth quarter of 2007, we are no longer self-insured for our health insurance. We recognize our obligations associated with our self-insured 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.

        In connection with our CSO operations in Texas, we entered into an agreement with an unaffiliated third-party lender in 2005. We determined that the third-party lender was a variable interest entity ("VIE") under Financial Accounting Standards Board Interpretation No. 46 (Revised) ("FIN 46(R)") and that we were the primary beneficiary of this VIE. As a result, we consolidated the lender as of December 31, 2006 and for the years ended December 31, 2005, 2006 and 2007. During the fourth quarter of 2007, we terminated our CSO agreement with this lender and entered into an agreement with another unaffiliated third-party lender with substantially similar terms and conditions as the agreement with our former lender. This new lender is also a VIE but we have determined that we are not the primary beneficiary of this VIE. Therefore, we have not consolidated our new lender as of December 31, 2007 and for the year ended December 31, 2007. See "Item 8. Financial Statements and Supplementary Data—Note 16. Transactions with Variable Interest Entities" for the impact of consolidating our former lender on our results of operations and financial condition.

        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, 2007, the total compensation cost not yet recognized related to nonvested stock awards under our stock-based employee compensation plans is approximately $7.7 million. The weighted average period over which this expense is expected to be recognized is approximately 4.7 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.

47


Results of Operations

    Year Ended December 31, 2006 Compared to the Year Ended December 31, 2007

        The following tables set forth our results of operations for the year ended December 31, 2006 compared to the year ended December 31, 2007:

 
  Year Ended December 31,
 
 
  2006
  2007
  Variance
Favorable/(Unfavorable)

 
 
  Dollars
  % Total Revenues
  Dollars
  % Total Revenues
  Dollars
  %
 
 
  (Dollars in thousands, except center information)

 
Revenues:                                
Fees and interest charged to customers   $ 659,876   98.2 % $ 709,557   100.0 % $ 49,681   7.5 %
Marketing, processing and servicing fees     12,418   1.8 %         (12,418 ) (100.0 )%
   
 
 
 
 
     
      Total revenues     672,294   100.0 %   709,557   100.0 %   37,263   5.5 %
   
 
 
 
 
     
Center Expenses:                                
  Salaries and related payroll costs     185,938   27.6 %   199,416   28.1 %   (13,478 ) (7.2 )%
  Provision for doubtful accounts     120,855   18.0 %   140,245   19.8 %   (19,390 ) (16.0 )%
  Occupancy costs     87,276   13.0 %   96,847   13.6 %   (9,571 ) (11.0 )%
  Center depreciation expense     16,233   2.4 %   17,200   2.4 %   (967 ) (6.0 )%
  Advertising expense     20,375   3.0 %   26,770   3.8 %   (6,395 ) (31.4 )%
  Other center expenses     54,986   8.2 %   59,340   8.4 %   (4,354 ) (7.9 )%
   
 
 
 
 
     
    Total center expenses     485,663   72.2 %   539,818   76.1 %   (54,155 ) (11.2 )%
   
 
 
 
 
     
      Center gross profit     186,631   27.8 %   169,739   23.9 %   (16,892 ) (9.1 )%

Corporate and Other Expenses (Income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
General and administrative expenses     53,363   7.9 %   59,410   8.4 %   (6,047 ) (11.3 )%
Corporate depreciation expense     3,661   0.6 %   3,162   0.5 %   499   13.6 %
Interest expense     7,129   1.1 %   11,059   1.6 %   (3,930 ) (55.1 )%
Interest income     (538 ) (0.1 )%   (317 )     (221 ) (41.1 )%
Loss on disposal of property and equipment     960   0.1 %   3,189   0.4 %   (2,229 ) (232.2 )%
Loss on impairment of assets.            314       (314 ) (100.0 )%
   
 
 
 
 
     
  Total corporate and other expenses     64,575   9.6 %   76,817   10.9 %   (12,242 ) (19.0 )%
   
 
 
 
 
     
Income before income taxes     122,056   18.2 %   92,922   13.0 %   (29,134 ) (23.9 )%
Income tax expense     48,858   7.3 %   37,831   5.3 %   11,027   22.6 %
   
 
 
 
 
     
Income before income of consolidated variable interest entity     73,198   10.9 %   55,091   7.7 %   (18,107 ) (24.7 )%
Income of consolidated variable interest entity     (3,047 ) (0.5 )%   (706 ) (0.1 )%   2,341   76.8 %
   
 
 
 
 
     
  Net income   $ 70,151   10.4 % $ 54,385   7.6 % $ (15,766 ) (22.5 )%
   
 
 
 
 
     

48


 
  Year Ended
December 31,

 
 
  2006
  2007
 
Center Information:              
Number of centers open at beginning of period     2,604     2,853  
  Opened     302     209  
  Acquired         12  
  Closed     (53 )   (242 )
   
 
 
Number of centers open at end of period     2,853     2,832  
   
 
 
Weighted average number of centers open during the period     2,663     2,884  

Number of customers served—all credit products (thousands)

 

 

1,494

 

 

1,524

 

Number of payday cash advances originated (thousands)

 

 

11,539

 

 

11,979

 
Aggregate principal amount of payday cash advances originated (thousands)   $ 4,082,865   $ 4,317,980  
Average amount of each payday cash advance originated   $ 353   $ 361  
Average charge to customers for providing and processing a payday cash advance   $ 55   $ 55  
Average duration of a payday cash advance (days)     16.2     16.5  

Average number of lines of credit outstanding during the period (thousands) (1)

 

 

20

 

 

24

 
Average amount of aggregate principal on lines of credit outstanding during the period (thousands) (1)   $ 8,963   $ 10,377  
Average principal amount on each line of credit outstanding during the period (1)   $ 448   $ 429  

Number of installment loans originated (thousands)

 

 

29

 

 

31

 
Aggregate principal amount of installment loans originated (thousands)   $ 13,905   $ 12,997  
Average principal amount of each installment loan originated   $ 486   $ 417  
Average charge to customers for providing and processing an installment loan (2)   $ 357   $ 530  

(1)
We offered lines of credit in Pennsylvania from June 2006 through July 2007.

(2)
For the years ended December 31, 2005 and 2006, the installment loan activity reflects only loans originated by us as an agent for the lending banks in Pennsylvania and Arkansas (in 2005 and 2006) and North Carolina (in 2005). Those loans contained no discounts for early repayment, resulting in a readily determinable average fee charged to the customer. 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. For the year ended December 31, 2007, the installment loan activity reflects loans originated directly by us in Illinois. These loans have a stated term of five months but with certain rebate provisions for each repayment. The average fee for these loans is estimated based on historical averages regarding repayments.

 
  Year Ended December 31,
 
 
  2006
  2007
  Variance
Favorable/(Unfavorable)

 
 
  Dollars
  % Total Revenues
  Dollars
  % Total Revenues
  Dollars
  %
 
 
  (Dollars in thousands)

 
Per Center (based on weighted average number of centers open during the period):                                
Center revenues   $ 252.5   100.0 % $ 246.0   100.0 % $ (6.5 ) (2.6 )%
Center expenses:                                
  Salaries and related payroll costs     69.8   27.6 %   69.1   28.1 %   0.7   1.0 %
  Provision for doubtful accounts     45.4   18.0 %   48.6   19.8 %   (3.2 ) (7.0 )%
  Occupancy costs     32.8   13.0 %   33.6   13.6 %   (0.8 ) (2.4 )%
  Center depreciation expense     6.1   2.4 %   6.0   2.4 %   0.1   1.6 %
  Advertising expense     7.7   3.0 %   9.3   3.8 %   (1.6 ) (20.8 )%
  Other center expenses     20.6   8.2 %   20.6   8.4 %      
   
 
 
 
 
     
    Total center expenses     182.4   72.2 %   187.2   76.1 %   (4.8 ) (2.6 )%
   
 
 
 
 
     
Center gross profit   $ 70.1   27.8 % $ 58.8   23.9 % $ (11.3 ) (16.1 )%
   
 
 
 
 
     

49


        Total revenues increased approximately $37.3 million in 2007. The increase was primarily due to the opening of new centers and revenue growth in existing centers. Total revenues for the 2,310 centers opened prior to January 1, 2006 and still open as of December 31, 2007 increased $17.1 million from $613.3 million in 2006 to $630.4 million in 2007. Total revenues for the 522 centers opened after January 1, 2006 and still open as of December 31, 2007 increased $36.6 million from $6.7 million in 2006 to $43.3 million in 2007. Total revenues for the remaining 295 centers that closed represented a decrease of approximately $16.4 million for 2007 compared to 2006. Of this decrease, approximately $3.1 million and $3.7 million was due to the suspension and subsequent closure of operations in Oregon and Pennsylvania, respectively, during the third and fourth quarters of 2007.

        Salaries and related payroll costs.    The increase in salaries and related payroll costs in 2007 was due primarily to: (1) the new centers opened in 2006 and 2007; (2) higher severance costs of approximately $0.8 million in 2007 primarily related to center closures; and (3) higher health and dental insurance costs of approximately $3.7 million in 2007 due primarily to higher claims costs during the period our health insurance was self-insured. We averaged approximately 2.18 and 2.06 full-time equivalent field employees, including district directors, per center during 2006 and 2007, respectively.

        Provision for doubtful accounts.    As a percentage of total revenues, the provision for doubtful accounts increased to 19.8% in 2007 from 18.0% in 2006. In both periods, the provision was reduced by the sales of certain customer debt, the proceeds of which were approximately $7.0 million in 2007 compared to $4.7 million in 2006. Excluding the sales of debt in both periods, the provision as a percentage of total revenues increased to 20.8% in 2007 from 18.7% in 2006. In 2007, the provision increased primarily due to approximately $6.8 million in charges related to the suspension and subsequent closure of operations in Pennsylvania and Oregon and a continued increase in loss rates.

        Occupancy costs and center depreciation expense.    The increases in occupancy costs and center depreciation expense in 2007 were due primarily to the new centers opened in 2006 and 2007.

        Advertising expense.    Advertising expense increased in 2007 compared to 2006 due primarily to higher marketing expenditures in 2007 tied to the introduction of new products and a more aggressive overall marketing strategy.

        Other center expenses.    The increase in other center expenses in 2007 was due to the new centers opened in 2006 and 2007 as well as higher center closure costs of approximately $2.9 million in 2007.

        General and administrative expenses.    The increase in general and administrative expenses in 2007 was due primarily to:

    an increase in legal fees of approximately $2.5 million, primarily due to new product development, the expansion of our operations to the United Kingdom and Canada and the defense of several class action lawsuits;

    approximately $1.3 million of expenses related to personnel, accounting and other costs (excluding legal fees) associated with the expansion of our operations to the United Kingdom;

    approximately $0.8 million of additional expenses related to personnel, consulting and other costs (excluding legal fees and severance) associated with new product development and management;

50


    increases in our human resources department expenses of approximately $0.6 million related to additional department headcount and consulting costs;

    higher expenses of approximately $0.6 million in our public and government relations department primarily for consultants, contributions and trade association dues;

    an increase in health and dental insurance costs of approximately $0.6 million;

    approximately $1.1 million of severance costs related to the termination of certain executives and other corporate employees, partially offset by a reduction in stock-based compensation expense of approximately $0.6 million primarily due to these executives' forfeitures of restricted stock and stock option awards; and

    a decrease in payroll expense of approximately $1.0 million for the South Carolina Job Development Credit related to employees in our corporate headquarters (of which approximately $0.7 million represents a catch-up credit for the years 2003 - 2006).

        Loss on disposal of property and equipment.    The increase in loss on disposal of property and equipment in 2007 is primarily due to the write-off of the undepreciated costs of fixed assets in centers closed.

        Loss on impairment of assets.    Loss on impairment of assets in 2007 represents the write-down of the undepreciated costs of certain fixed assets in our centers identified for closure.

51


    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
Favorable/(Unfavorable)

 
 
  Dollars
  % Total
Revenues

  Dollars
  % Total
Revenues

  Dollars
  %
 
 
  (Dollars in thousands, except center information)

 
Revenues:                                
Fees and interest charged to customers   $ 529,953   84.1 % $ 659,876   98.2 % $ 129,923   24.5 %
Marketing, processing and servicing fees     100,113   15.9 %   12,418   1.8 %   (87,695 ) (87.6 )%
   
 
 
 
 
     
    Total revenues     630,066   100.0 %   672,294   100.0 %   42,228   6.7 %
   
 
 
 
 
     
Center Expenses:                                
  Salaries and related payroll costs     171,092   27.1 %   185,938   27.6 %   (14,846 ) (8.7 )%
  Provision for doubtful accounts     115,060   18.3 %   120,855   18.0 %   (5,795 ) (5.0 )%
  Occupancy costs     80,540   12.8 %   87,276   13.0 %   (6,736 ) (8.4 )%
  Center depreciation expense     14,902   2.4 %   16,233   2.4 %   (1,331 ) (8.9 )%
  Advertising expense     24,137   3.8 %   20,375   3.0 %   3,762   15.6 %
  Other center expenses     52,712   8.4 %   54,986   8.2 %   (2,274 ) (4.3 )%
   
 
 
 
 
     
    Total center expenses     458,443   72.8 %   485,663   72.2 %   (27,220 ) (5.9 )%
   
 
 
 
 
     
      Center gross profit     171,623   27.2 %   186,631   27.8 %   15,008   8.7 %

Corporate and Other Expenses (Income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
General and administrative expenses     51,758   8.2 %   53,363   7.9 %   (1,605 ) (3.1 )%
Corporate depreciation expense     4,483   0.7 %   3,661   0.6 %   822   18.3 %
Interest expense     4,331   0.7 %   7,129   1.1 %   (2,798 ) (64.6 )%
Interest income     (351 ) (0.1 )%   (538 ) (0.1 )%   187   53.3 %
Loss on disposal of property and equipment     715   0.1 %   960   0.1 %   (245 ) (34.3 )%
Loss on impairment of assets.      2,918   0.5 %         2,918   100.0 %
   
 
 
 
 
     
  Total corporate and other expenses     63,854   10.1 %   64,575   9.6 %   (721 ) (1.1 )%
   
 
 
 
 
     
Income before income taxes     107,769   17.1 %   122,056   18.2 %   14,287   13.3 %
Income tax expense     43,776   6.9 %   48,858   7.3 %   (5,082 ) (11.6 )%
   
 
 
 
 
     
Income before income of consolidated variable interest entity     63,993   10.2 %   73,198   10.9 %   9,205   14.4 %
Income of consolidated variable interest entity     (1,003 ) (0.2 )%   (3,047 ) (0.5 )%   (2,044 ) (203.8 )%
   
 
 
 
 
     
  Net income   $ 62,990   10.0 % $ 70,151   10.4 % $ 7,161   11.4 %
   
 
 
 
 
     

52


 
 
  Year Ended
December 31,

 
 
  2005
  2006
 
Center Information:              
Number of centers open at beginning of period     2,408     2,604  
  Opened     358     302  
  Acquired     3      
  Closed (excluding Georgia centers which were suspended in 2004)     (165 )   (53 )
   
 
 
Number of centers open at end of period     2,604     2,853  
   
 
 
Weighted average number of centers open during the period     2,487     2,663  

Number of customers served—all credit products (thousands)

 

 

1,534

 

 

1,494

 

Number of payday cash advances originated (thousands)

 

 

11,620

 

 

11,539

 
Aggregate principal amount of payday cash advances originated (thousands)   $ 3,943,815   $ 4,082,865  
Average amount of payday cash advance originated   $ 339   $ 353  
Average charge to customers for providing and processing a payday cash advance   $ 55   $ 55  
Average duration of a payday cash advance (days)     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 each line 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 principal amount of each 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.

 
  Year Ended December 31,
 
 
  2005
  2006
  Variance
Favorable/(Unfavorable)

 
 
  Dollars
  % Total
Revenues

  Dollars
  % Total
Revenues

  Dollars
  %
 
 
  (Dollars in thousands)

 
Per Center (based on weighted average number of centers open during the period):                                
Center revenues   $ 253.3   100.0 % $ 252.5   100.0 % $ (0.8 ) (0.3 )%
Center expenses:                                
  Salaries and related payroll costs     68.8   27.1 %   69.8   27.6 %   (1.0 ) (1.5 )%
  Provision for doubtful accounts     46.2   18.3 %   45.4   18.0 %   0.8   1.7 %
  Occupancy costs     32.4   12.8 %   32.8   13.0 %   (0.4 ) (1.2 )%
  Center depreciation expense     6.0   2.4 %   6.1   2.4 %   (0.1 ) (1.7 )%
  Advertising expense     9.7   3.8 %   7.7   3.0 %   2.0   20.6 %
  Other center expenses     21.2   8.4 %   20.6   8.2 %   0.6   2.8 %
   
 
 
 
 
     
    Total center expenses     184.3   72.8 %   182.4   72.2 %   1.9   1.0 %
   
 
 
 
 
     
Center gross profit   $ 69.0   27.2 % $ 70.1   27.8 % $ 1.1   1.6 %
   
 
 
 
 
     

53


        Total revenues increased approximately $42.2 million in 2006. The increase was primarily due to the opening of new centers and revenue growth in existing centers. Total revenues for the 2,195 centers opened prior to January 1, 2005 and still open as of December 31, 2006 increased $35.5 million from $586.4 million in 2005 to $621.9 million in 2006. Total revenues for the 658 centers opened after January 1, 2005 and still open as of December 31, 2006 increased $39.7 million from $7.7 million in 2005 to $47.4 million in 2006. Total revenues for the remaining 304 centers that closed represented a decrease of approximately $33.0 million for 2006 compared to 2005. This decrease is primarily due to the suspension and subsequent closure of operations in North Carolina during the fourth quarter of 2005.

        In addition to the closed centers mentioned in the preceding paragraph, the increase in total revenues in 2006 was partially offset by:

    the implementation of the FDIC Revised Guidance in Pennsylvania and Arkansas beginning during the third quarter of 2005 and the lending banks' suspension of originations in the first half of 2006. Total revenues in 2006 in Pennsylvania and Arkansas were approximately $14.7 million less than 2005;

    the implementation of material changes in enabling legislation in Illinois and Indiana. Total revenues in 2006 in Illinois and Indiana were approximately $14.3 million less than 2005; and

    the continued impact of Hurricanes Katrina and Rita in Louisiana and Mississippi. Total revenues in 2006 in Louisiana and Mississippi were approximately $2.1 million less than 2005.

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

        Provision for doubtful accounts.    As a percentage of total revenues, the provision for doubtful accounts decreased to 18.0% in 2006 from 18.3% in 2005. During 2006 and 2005, we sold certain customer accounts receivable to a collection agency, which generated proceeds of approximately $4.7 million and $3.7 million, respectively, which were recorded as a reduction in the provision in both years.

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

        Advertising expense.    Advertising expense decreased in 2006 compared to 2005 due primarily to a decision to conduct less advertising during the first three quarters of 2006.

        General and administrative expenses.    The increase in general and administrative expenses in 2006 was due primarily to:

    approximately $2.5 million of additional expense related to personnel, consulting and other costs associated with new product development;

    an increase in stock-based compensation expense of approximately $1.2 million;

    increases in costs in our human resources department of approximately $0.6 million related to additional department headcount and approximately $0.7 million for recruiting and employee relocation costs;

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    an increase of approximately $0.7 million related to additional headcount in our real estate and construction departments; partially offset by

    a decrease in airplane operating expenses of approximately $1.6 million;

    a decrease in legal fees of approximately $1.5 million; and

    a decrease in accounting fees and other expenses of approximately $0.7 million related to SEC reporting and compliance.

        Loss on impairment of assets.    The loss on impairment of assets in 2005 represents a write-down of approximately $1.5 million to market value of an aircraft we sold in October 2005, a write-down of approximately $0.4 million of the undepreciated costs of certain fixed assets in our centers identified for closure, as well as the write-down of approximately $1.0 million of the undepreciated costs of our 117 centers in North Carolina, which we closed at the end of 2005.

Liquidity and Capital Resources

        The following table presents a summary of cash flows for the years ended December 31, 2005, 2006 and 2007:

 
   
   
   
  2006 vs 2005
Variance

  2007 vs 2006
Variance

 
 
  2005
  2006
  2007
  Dollars
  %
  Dollars
  %
 
Cash flows provided by (used in):                                        
  Operating activities   $ 189,382   $ 186,125   $ 184,496   $ (3,257 ) (1.7 )% $ (1,629 ) (0.9 )%
  Investing activities     (139,880 )   (156,216 )   (113,216 )   (16,336 ) (11.7 )%   43,000   27.5 %
  Financing activities     (40,467 )   10,077     (110,310 )   50,544   124.9 %   (120,387 ) (1,194.7 )%
  Effect of exchange rate changes on cash and cash equivalents             36           36   100.0 %
   
 
 
 
     
     
Net increase (decrease) in cash and cash equivalents     9,035     39,986     (38,994 )   30,951   342.6 %   (78,980 ) (197.5 )%
Cash and cash equivalents, beginning of period     18,224     27,259     67,245     9,035   49.6 %   39,986   146.7 %
   
 
 
 
     
     
Cash and cash equivalents, end of period   $ 27,259   $ 67,245   $ 28,251   $ 39,986   146.7 % $ (38,994 ) (58.0 )%
   
 
 
 
     
     

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

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

        On May 4, 2005, we announced that our Board of Directors had approved a program authorizing the repurchase of up to $50.0 million of our outstanding common stock. On August 16, 2006, we

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announced that our Board of Directors had approved an extension of our stock repurchase program authorizing us to repurchase up to $100.0 million of our outstanding common stock on and after that date. Our Board of Directors determined that the continuation and increase of the stock repurchase program serves the best interest of us and our stockholders by returning capital to our stockholders.

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

        During the years ended December 31, 2006 and 2007, we repurchased 2,820,782 and 6,512,462 shares, respectively, of our common stock at a cost of approximately $40.1 million and $67.0 million, respectively. During the years ended December 31, 2006 and 2007, 5,482 and 10,662 shares of our common stock, respectively, were surrendered by employees to satisfy their tax obligations with respect to the vesting of restricted stock awarded pursuant to our 2004 Omnibus Stock Plan. Based on the average of the high and low stock price on the dates of surrender, the shares surrendered in 2006 and 2007 had an aggregate value of approximately $80,000 and $116,000, respectively.

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

        The decrease in net cash provided by operating activities in 2007 compared to 2006 was due primarily to a net decrease in changes in operating assets and liabilities of $20.9 million (primarily due to a decrease in the change in income taxes payable) and a decrease in net income of $15.8 million, offset by an increase in non-cash adjustments of $35.0 million.

        The decrease in net cash provided by operating activities in 2006 compared to 2005 was due primarily to a net decrease in changes in operating assets and liabilities of $24.8 million, partially offset by an increase in net income of $7.2 million and a net increase in non-cash adjustments of $14.3 million. The $24.8 million net decrease in changes in operating assets and liabilities is due primarily to a decrease in the change in fees receivable, net, of $9.1 million, a decrease in the change in income taxes payable of $5.5 million and a decrease in the change in other current assets of $11.5 million (due primarily to the timing of insurance and center rent payments as well as the refund in 2005 of funds deposited with the IRS relating to the period we were an S Corporation).

        The decrease in net cash used in investing activities in 2007 compared to 2006 was primarily due to a $52.1 million decrease in the change in cash invested in advances receivable (of which $33.7 million relates to the consolidation of a variable interest entity in 2006) and a $1.0 million decrease in purchases of property and equipment, partially offset by approximately $5.1 million for the acquisitions in the United Kingdom, net of cash acquired and a decrease in the changes in restricted cash of $4.8 million.

        The increase in net cash used in investing activities in 2006 compared to 2005 was primarily due to a $16.8 million increase in the change in cash invested in advances receivable and a $6.6 million reduction in proceeds from the sale of property and equipment (related principally to the sale of one

56



of our aircraft in 2005), partially offset by a $5.5 million decrease in restricted cash and a $1.2 million decrease in purchases of property and equipment.

        The increase in net cash used in financing activities in 2007 compared to 2006 was primarily due to a $29.4 million decrease in borrowings on our revolving credit facility, a $41.7 million decrease in the change in the non-controlling interest of the variable interest entity, an $18.8 million decrease in the change in book overdrafts, a $3.3 million increase in dividend payments, and a $26.9 million increase in repurchases of our common stock.

        The increase in net cash from financing activities in 2006 compared to 2005 was primarily due to a $68.5 million increase in borrowings under our revolving credit facility and an $11.8 million increase in the change in book overdrafts. These changes are partially offset by a $14.4 million increase in repurchases of our common stock, an $11.5 million decrease in the change in the non-controlling interest of the variable interest entity and a $4.0 million increase in dividends paid to stockholders.

Capital Expenditures

        For the years ended December 31, 2005, 2006 and 2007, we spent $18.9 million, $17.7 million and $16.7 million, respectively, on capital expenditures. Capital expenditures included expenditures for: (1) new centers opened; (2) center remodels; and (3) computer equipment replacements in our centers and at our corporate headquarters.

Prior Off-Balance Sheet Arrangements with the Lending Banks

        We previously operated as an agent for lending banks in Arkansas, Michigan, North Carolina, Pennsylvania and Texas. 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.

        The lending banks were contractually obligated for all or a specified percentage of the losses on their advances and loans. Therefore, our fee increased by the lending banks' contractual obligation for losses. If actual losses by a lending bank exceeded a specified percentage, 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.

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

        As a result of the conversion of our Texas and Michigan operations to our standard business model in July 2005, the discontinuation of our North Carolina operations in September 2005 and the conversion of our Pennsylvania and Arkansas operations to our standard business model in June 2006, the accrual for excess bank losses and gross profit derived from the agency business model declined to zero in 2006. Approximately 15.8% and 0.4% of our total center gross profit, in the years ended December 31, 2005 and 2006, respectively, was derived from the agency business model.

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Off-Balance Sheet Arrangement with New Third-Party Lender

        In Texas, where we operate 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. Under the terms of our agreement with this lender, we process customer applications and are contractually obligated to reimburse the lender for the full amount of the loans and certain related fees that are not collected from the customers. As of December 31, 2007, the third-party lender's outstanding advances and interest receivable (which were not recorded on our balance sheet) totaled approximately $20.5 million, which is the amount we would be obligated to pay the third-party lender if these amounts were to become uncollectible. Additionally, if these advances were to become uncollectible, we would also be required to pay the third-party lender all related NSF fees and late fees on these advances.

        Because of our economic exposure for losses related to the third-party lender's advances and interest receivable, we have established an accrual for third-party lender losses to reflect our estimated probable losses related to uncollectible third-party lender advances. The accrual for third-party lender losses that was reported in our balance sheet at December 31, 2007 was approximately $4.6 million and was established on a basis similar to the allowance for doubtful accounts. If actual losses on the third-party lender's advances are materially greater than our accrual for third-party lender losses, our business, results of operations and financial condition could be adversely affected. See "Item 8. Financial Statements and Supplementary Data—Note 16. Transactions with Variable Interest Entities."

Certain Contractual Cash Commitments

        Our principal future contractual obligations and commitments as of December 31, 2007, including periodic interest payments, included the following (dollars in thousands):

 
   
  Payment due by period
Contractual Cash Obligations

  Total
  2008
  2009 and
2010

  2011 and
2012

  2013 and
thereafter

Long-term debt obligations:                              
  Revolving credit facility   $ 142,302   $   $ 142,302   $   $
  Mortgage payable     7,568     797     1,593     1,593     3,585
  Note payable     242     138     104        
Operating lease obligations (1)     154,511     62,742     73,351     16,715     1,703
Purchase obligations     963     963            
Other     3,890     2,810     1,080        
   
 
 
 
 
  Total   $ 309,476   $ 67,450   $ 218,430   $ 18,308   $ 5,288
   
 
 
 
 

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

        Revolving Credit Facility.    On July 16, 2004, we entered into an amendment and restatement of our prior credit facility with a syndicate of banks. As amended and restated, our revolving credit facility provides us with a $265.0 million revolving line of credit, which amount includes the ability to issue up to $20.0 million in letters of credit. Our revolving credit facility matures on July 16, 2009. We have the option to: (i) increase our revolving credit facility by an additional $10.0 million and (ii) extend its maturity date to July 16, 2010, in each case upon our satisfaction of certain covenants and conditions. Any portion of our revolving credit facility that is repaid may be borrowed again. In May 2005, we amended our revolving credit facility to allow the repurchase of up to $50.0 million of our outstanding common stock. In June 2005, we further amended our revolving credit facility to permit us to operate

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as a CSO in Texas. In August 2006, we amended our revolving credit facility to allow the repurchase of up to $100.0 million of our outstanding common stock on and after the date of that amendment. In January 2007, we amended this credit facility to permit foreign subsidiaries. In October 2007, we further amended this credit facility to permit deferred purchase price obligations (including, without limitation, earn-out payment obligations) for acquisitions that are otherwise allowed under the credit facility and to exclude from certain financial covenants the charges and losses incurred in connection with our previously announced closing of 103 centers in Pennsylvania, Oregon and elsewhere.

        As of December 31, 2007, we had $142.3 million outstanding on the revolving portion of our credit facility and approximately $2.2 million of letters of credit outstanding, leaving approximately $120.5 million available for future borrowings under this credit facility.

        In general, our borrowings under our revolving credit facility bear interest, at our option, at either a base rate plus an applicable margin or a LIBOR-based rate plus an applicable margin. The base rate equals the greater of: (i) the prime rate announced by Bank of America, the administrative agent under the revolving credit facility and (ii) the sum of the federal funds rate plus 0.50%. The applicable margin is determined each quarter by a pricing grid based on our senior leverage ratio of our consolidated senior debt to consolidated EBITDA. The base rate applicable margin ranges from 0.75% to 1.50% based upon our senior leverage ratio. The LIBOR-based applicable margin ranges from 2.50% to 3.25% based upon our senior leverage ratio. As of December 31, 2007, the applicable margin for the prime-based rate was 1.0% and the applicable margin for the LIBOR-based rate was 2.75%.

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

        Our obligations under the revolving credit facility are guaranteed by each of our domestic subsidiaries. Our borrowings under the revolving credit facility are secured by substantially all of our assets and the assets of our subsidiaries. In addition, our borrowings under the revolving credit facility are secured by a pledge of all of the capital stock, or similar equity interests, of our domestic subsidiaries and 65% of the voting capital stock, or similar equity interest, of our foreign subsidiaries. Our revolving credit facility contains various financial covenants that require, among other things, the maintenance of a minimum net worth and leverage and fixed charge coverage ratios. The revolving credit facility contains customary covenants and events of default, including covenants that restrict our ability to encumber assets, to create indebtedness and to declare and pay dividends. The revolving credit facility also includes cross default provisions where an event of default with respect to any other indebtedness in excess of $1.0 million in the aggregate could cause all amounts outstanding under the revolving credit facility to become due and payable. We were in compliance with all covenants at December 31, 2007.

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

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such as the back-to-school and holiday seasons. Conversely, our borrowings typically decrease during the tax refund season when cash receipts from customers peak or the customer demand for new advances decreases.

        Mortgage Payable.    Our corporate headquarters building and related land are subject to a mortgage, the principal amount of which was approximately $5.8 million and $5.4 million at December 31, 2006 and 2007, respectively. The mortgage is payable to an insurance company and is collateralized by our corporate headquarters building and related land. The mortgage is payable in 180 monthly installments of approximately $66,400, including principal and interest, and bears interest at a fixed rate of 7.30% over its term. The mortgage matures on June 10, 2017. The carrying amount of our corporate headquarters (land, land improvements and building) was approximately $5.2 million and $4.9 million at December 31, 2006 and 2007, respectively.

        We lease all but three of our centers from third-party lessors under operating leases. These leases typically have initial terms of three to five years and may contain provisions for renewal options, additional rental charges based on revenue and payment of real estate taxes and common area charges. In addition, we lease aircraft hangar space and certain security and office equipment. The lessors under three center leases, the aircraft hanger space lease and other office and warehouse space leases are companies controlled by or affiliated with our Chairman. See "Item 8. Financial Statements and Supplementary Data—Note 13. Related Party Transactions."

        We enter into agreements with vendors to purchase furniture, fixtures and other items used to open new centers. These purchase commitments typically extend for a period of two to three months after the opening of a new center. As of December 31, 2007, our purchase obligations totaled approximately $1.0 million.

        We have entered into a consulting arrangement for which the retainer will be recognized over the anticipated term of the engagement. We have also entered into a contract with a service provider that specifies certain minimum payments over the term of the contract.

Critical Estimates, Uncertainties or Assessments in the Financial Statements

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

        Actual results related to the estimates and assumptions made in preparing our consolidated financial statements will emerge over periods of time, such as estimates and assumptions underlying the determination of allowance for doubtful accounts and accrual for third-party lender losses. These estimates and assumptions are monitored and periodically adjusted as circumstances warrant. These amounts may be adjusted based on higher or lower actual loss experience. Although there is greater

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risk with respect to the accuracy of these estimates and assumptions because of the period over which actual results may emerge, such risk is mitigated by the ability to make changes to these estimates and assumptions over the same period.

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

Impact of Inflation

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

Impact of New Accounting Pronouncements

        In June 2006, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Effective January 1, 2007, we adopted FIN 48. As a result of the adoption of FIN 48, we recognized no adjustments in the liability for unrecognized income tax benefits. At the adoption date, we did not have any unrecognized tax benefits and did not have any interest or penalties accrued. We are subject to U.S. income taxes as well as various other foreign, state and local jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before the tax year ended September 30, 2004.

        In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We have not completed our evaluation of the adoption of this standard on our financial position, results of operations and cash flows but do not expect SFAS 157 to have a significant impact on our consolidated financial statements.

        In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) modifies the accounting for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired, liabilities assumed and any non-controlling interest in the acquiree at the acquisition-date fair value. In addition, SFAS 141(R) requires the expensing of acquisition-related transaction and restructuring costs and requires that certain contingent assets and liabilities acquired, as well as contingent consideration, be recognized at fair value. SFAS 141(R) also modifies the accounting for certain acquired income tax assets and liabilities. SFAS 141(R) is effective for new acquisitions consummated on or after January 1, 2009. We do not expect SFAS 141(R) to have a material impact on our financial condition or results of operations.

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FORWARD-LOOKING STATEMENTS

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

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

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

    current and future litigation and regulatory proceedings against us;

    our ability to continue to generate sufficient cash flow to satisfy our liquidity needs, including future cash dividends and common stock repurchases;

    our ability to identify and enter new markets;

    the accuracy of our determination of the allowance for doubtful accounts, accrual for third-party lender losses and of our estimates of losses;

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

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

    the effect of extended payment plans on our revenues, loss experience, provision for doubtful accounts and results of operations;

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

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

    theft and employee errors; and

    the other matters set forth under "Item 1A. Risk Factors" above.

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

        You are cautioned not to rely unduly on any forward-looking statements. These risks and uncertainties are discussed in more detail elsewhere in this Annual Report, including under "Item 1A. Risk Factors," "Item 1. Business" and this Item 7.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

        We are exposed to interest rate risk on our revolving credit facility. Our variable interest expense is sensitive to changes in the general level of interest rates. We may from time to time enter into interest rate swaps, collars or similar instruments with the objective of reducing our volatility in borrowing costs. We do not use derivative financial instruments for speculative or trading purposes. We had no derivative financial instruments outstanding as of December 31, 2006 and 2007. The weighted average interest rate on our $104.8 million of variable interest debt as of December 31, 2006 was approximately 8.15%. The weighted average interest rate on our $142.3 million of variable interest debt as of December 31, 2007 was approximately 7.76%.

        We had total interest expense of $4.3 million, $7.1 million and $11.1 million for the years ended December 31, 2005, 2006 and 2007, respectively. The estimated change in interest expense from a hypothetical 200 basis-point change in applicable variable interest rates would have been approximately $0.4 million in 2005, $0.8 million in 2006 and $1.4 million in 2007.

        The expansion of our operations to the United Kingdom and Canada in 2007 has exposed us to shifts in currency valuations. We may from time to time elect to purchase financial instruments as hedges against foreign exchange rate risks with the objective of protecting our results of operations in the United Kingdom and Canada against foreign currency fluctuations. We had no such financial instruments outstanding as of December 31, 2007.

        As currency exchange rates change, translation of the financial results of our United Kingdom and Canadian operations into United States dollars will be impacted. Changes in exchange rates have resulted in cumulative translation adjustments decreasing our net assets by approximately $75,000. These cumulative translation adjustments are included in accumulated other comprehensive loss as a separate component of stockholders' equity. Due to the immateriality of our operations in the United Kingdom and Canada, a change in foreign currency exchange rates is not expected to have a significant impact on our consolidated financial position, results of operations or cash flows.

63


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm   65
Consolidated Balance Sheets as of December 31, 2006 and 2007   66
Consolidated Statements of Income for the Years Ended December 31, 2005, 2006 and 2007   67
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005, 2006 and 2007   68
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and 2007   69
Notes to Consolidated Financial Statements   71

64



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Advance America, Cash Advance Centers, Inc.:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Advance America, Cash Advance Centers, Inc. and its subsidiaries at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 26, 2008

65



Advance America, Cash Advance Centers, Inc.

Consolidated Balance Sheets

December 31, 2006 and December 31, 2007

(in thousands, except per share data)

 
  2006
  2007
 
Assets              
Current assets              
  Cash and cash equivalents   $ 67,245   $ 28,251  
  Advances and fees receivable, net     237,725     221,480  
  Deferred income taxes     11,798     13,737  
  Other current assets     11,664     13,578  
   
 
 
    Total current assets     328,432     277,046  
Restricted cash     5,446     5,701  
Property and equipment, net     63,198     57,616  
Goodwill     122,627     127,286  
Other assets     5,389     4,049  
   
 
 
    Total assets   $ 525,092   $ 471,698  
   
 
 
Liabilities and Stockholders' Equity              
Current liabilities              
  Accounts payable   $ 21,164   $ 16,204  
  Accrued liabilities     31,737     31,823  
  Income taxes payable     14,983      
  Accrual for third-party lender losses         4,587  
  Current portion of long-term debt     537     542  
   
 
 
    Total current liabilities     68,421     53,156  
Revolving credit facility     104,835     142,302  
Long-term debt     5,678     5,136  
Deferred income taxes     13,564     20,629  
Other liabilities     157     184  
   
 
 
    Total liabilities     192,655     221,407  
   
 
 
Non-controlling interest in variable interest entity     32,540      

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 
Stockholders' equity              
  Preferred stock, par value $.01 per share, 25,000 shares authorized; no shares issued and outstanding          
  Common stock, par value $.01 per share, 250,000 shares authorized; 96,821 shares issued and 79,534 and 72,947 outstanding as of December 31, 2006 and 2007, respectively     968     968  
Paid in capital     285,382     286,999  
Retained earnings     118,258     133,789  
Accumulated other comprehensive loss         (75 )
Common stock in treasury (17,287 and 23,874 shares at cost at December 31, 2006 and 2007, respectively)     (104,711 )   (171,390 )
   
 
 
    Total stockholders' equity     299,897     250,291  
   
 
 
    Total liabilities and stockholders' equity   $ 525,092   $ 471,698  
   
 
 

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

66



Advance America, Cash Advance Centers, Inc.

Consolidated Statements of Income

Years Ended December 31, 2005, 2006 and 2007

(in thousands, except per share data)

 
  2005
  2006
  2007
 
Revenues:                    
Fees and interest charged to customers   $ 529,953   $ 659,876   $ 709,557  
Marketing, processing and servicing fees     100,113     12,418      
   
 
 
 
    Total revenues     630,066     672,294     709,557  
   
 
 
 
Center Expenses:                    
  Salaries and related payroll costs     171,092     185,938     199,416  
  Provision for doubtful accounts     115,060     120,855     140,245  
  Occupancy costs     80,540     87,276     96,847  
  Center depreciation expense     14,902     16,233     17,200  
  Advertising expense     24,137     20,375     26,770  
  Other center expenses     52,712     54,986     59,340  
   
 
 
 
    Total center expenses     458,443     485,663     539,818  
   
 
 
 
      Center gross profit     171,623     186,631     169,739  
Corporate and Other Expenses (Income):                    
General and administrative expenses     51,151     52,816     59,125  
General and administrative expenses with related parties     607     547     285  
Corporate depreciation expense     4,483     3,661     3,162  
Interest expense     4,331     7,129     11,059  
Interest income     (351 )   (538 )   (317 )
Loss on disposal of property and equipment     715     960     3,189  
Loss on impairment of assets     2,918         314  
   
 
 
 
    Income before income taxes     107,769     122,056     92,922  
Income tax expense     43,776     48,858     37,831  
   
 
 
 
    Income before income of consolidated variable interest entity     63,993     73,198     55,091  
Income of consolidated variable interest entity     (1,003 )   (3,047 )   (706 )
   
 
 
 
    Net income   $ 62,990   $ 70,151   $ 54,385  
   
 
 
 
Net income per common share:                    
    Basic   $ 0.76   $ 0.87   $ 0.70  
    Diluted   $ 0.76   $ 0.87   $ 0.70  

Dividends declared per common share

 

$

0.38

 

$

0.44

 

$

0.50

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 
    Basic     83,124     80,889     77,923  
    Diluted     83,124     80,917     77,935  

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

67



Advance America, Cash Advance Centers, Inc.

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2005, 2006 and 2007

(in thousands, except per share data)

 
   
   
   
   
   
  Common Stock
In Treasury

   
 
 
  Common Stock
   
   
   
   
 
 
   
  Retained Earnings
  Accumulated Other
Comprehensive Loss

   
 
 
  Shares
  Par Value
  Paid-In Capital
  Shares
  Amount
  Total
 
Balances, December 31, 2004   96,821   $ 968   $ 280,553   $ 52,492   $   (12,863 ) $ (37,723 ) $ 296,290  
Net income               62,990               62,990  
Dividends paid ($0.38 per share)               (31,575 )             (31,575 )
Dividends payable               (65 )             (65 )
Purchases of treasury stock                     (1,963 )   (25,685 )   (25,685 )
Issuance of restricted stock                     305          
Forfeitures of restricted stock           1,217           (81 )   (1,217 )    
Amortization of restricted stock           1,053                   1,053  
Stock option expense           186                   186  
Common stock issuance costs           (169 )                 (169 )
   
 
 
 
 
 
 
 
 
Balances, December 31, 2005   96,821     968     282,840     83,842       (14,602 )   (64,625 )   303,025  
Net income               70,151               70,151  
Dividends paid ($0.44 per share)               (35,573 )             (35,573 )
Dividends payable               (162 )             (162 )
Purchases of treasury stock                     (2,821 )   (40,087 )   (40,087 )
Issuance of restricted stock                     143          
Forfeitures of restricted stock           20           (11 )   (20 )    
Amortization of restricted stock           1,529                   1,529  
Stock option expense           951                   951  
Issuance of common stock to director in lieu of cash           42           4     21     63  
   
 
 
 
 
 
 
 
 
Balances, December 31, 2006   96,821     968     285,382     118,258       (17,287 )   (104,711 )   299,897  
Comprehensive income:                                              
  Net income               54,385               54,385  
  Foreign currency translation                   (75 )         (75 )
                                         
 
Total comprehensive income                                           54,310  
Dividends paid ($0.50 per share)               (38,839 )             (38,839 )
Dividends payable               (15 )             (15 )
Purchases of treasury stock                     (6,513 )   (67,016 )   (67,016 )
Issuance of restricted stock                     40          
Forfeitures of restricted stock           383           (121 )   (383 )    
Vesting of restricted stock issued from treasury stock           (676 )             676      
Amortization of restricted stock           948                   948  
Stock option expense           907                   907  
Issuance of common stock to director in lieu of cash           55           7     44     99  
   
 
 
 
 
 
 
 
 
Balances, December 31, 2007   96,821   $ 968   $ 286,999   $ 133,789   $ (75 ) (23,874 ) $ (171,390 ) $ 250,291  
   
 
 
 
 
 
 
 
 

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

68



Advance America, Cash Advance Centers, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2005, 2006 and 2007

(in thousands)

 
  2005
  2006
  2007
 
Cash flows from operating activities                    
Net income   $ 62,990   $ 70,151   $ 54,385  
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions                    
  Income of consolidated variable interest entity     1,003     3,047     706  
  Depreciation     19,385     19,894     20,362  
  Non-cash interest expense     981     987     1,009  
  Provisions for doubtful accounts     115,060     120,855     140,245  
  Agency bank charge-offs, net of recoveries     (17,445 )   (2,803 )    
  Deferred income taxes     194     (7,573 )   5,126  
  Loss on disposal of property and equipment     715     960     3,189  
  Loss on impairment of assets     2,437         314  
  Amortization of restricted stock     1,053     1,529     948  
  Stock option expense     186     951     907  
  Common stock issued to director in lieu of cash         63     99  
  Changes in operating assets and liabilities                    
    Fees receivable, net     (11,361 )   (20,418 )   (27,821 )
    Other current assets     4,881     (6,632 )   (1,583 )
    Other assets     (13 )   284     511  
    Accounts payable     (3,633 )   995     2,039  
    Accrued liabilities     3,768     201     (957 )
    Income taxes payable     9,181     3,634     (14,983 )
   
 
 
 
      Net cash provided by operating activities     189,382     186,125     184,496  
   
 
 
 
Cash flows from investing activities                    
Changes in advances receivable     (126,447 )   (143,264 )   (91,178 )
Changes in restricted cash     (925 )   4,588     (255 )
Acquisitions of business, net of cash acquired     (352 )   (41 )   (5,128