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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

COMMISSION FILE NUMBER 001-32363

ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.

(Exact name of registrant as specified in its charter)

135 North Church Street

Spartanburg, South Carolina 29306

(Address of principal executive offices) (Zip Code)

864-342-5600

(Registrant’s telephone number, including area code)

None

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

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

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

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

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

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ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.

Form 10-Q

For the three months and nine months ended September 30, 2009

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FORWARD-LOOKING STATEMENTS

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

The matters described in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, in “Part II. Item 1A. Risk Factors” of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, and in “Part II. Item 1A. Risk Factors” in this Quarterly Report, as well as any cautionary language in this Quarterly Report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, the examples we provided.

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

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PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Advance America, Cash Advance Centers, Inc.

Unaudited Consolidated Balance Sheets

December 31, 2008 and September 30, 2009

(in thousands, except per share data)

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

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Advance America, Cash Advance Centers, Inc.

Interim Unaudited Consolidated Statements of Income

Three Months and Nine Months Ended September 30, 2008 and 2009

(in thousands, except per share data)

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

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Advance America, Cash Advance Centers, Inc.

Interim Unaudited Consolidated Statement of Stockholders’ Equity

Nine Months Ended September 30, 2009

(in thousands, except per share data)

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

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Advance America, Cash Advance Centers, Inc.

Interim Unaudited Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2008 and 2009

(in thousands)

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

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Advance America, Cash Advance Centers, Inc.

Notes to Interim Unaudited Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim unaudited consolidated financial statements of Advance America, Cash Advance Centers, Inc.  (“AACACI”) and its wholly owned subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).  They do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC.  In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of the Company’s financial condition, have been included.  The results of operations for the nine months ended September 30, 2009, are not necessarily indicative of the results that may be expected for future interim periods or the entire year ending December 31, 2009.

Description of Business

The Company conducts business under the authority of a variety of enabling state statutes including payday advance, deferred presentment, check-cashing, small loan, credit service organization and other state laws whereby advances are made directly to customers.  The Company’s operations in the United Kingdom are conducted in accordance with applicable English law.  The Company’s operations in Canada are conducted in accordance with applicable Canadian federal and provincial law.

Revenue Recognition

Revenues can be characterized as fees and/or interest depending on the Company’s business operations and product offerings under enabling regulations.  Revenue is recognized on a constant-yield basis ratably over the term of each advance.

In Virginia, we offer a line of credit product with a 25-day billing cycle.  Customers are not charged interest on any outstanding borrowings during a billing cycle if they have a zero balance at the close of business on their billing cycle end date.  Revenue for this product is recorded when fees and interest are charged to the customer’s account and therefore revenue is not recognized on a ratable basis.

The Company has entered into a long-term services contract for which the Company receives advance payments.  These advance payments are recorded as deferred revenue and recognized as revenue over the life of the contract, subject to certain terms and conditions.

Concentration of Risk

For the three months ended September 30, 2008 and 2009, total revenues within the Company’s five largest states (measured by total revenues) accounted for approximately 47% of the Company’s total revenues.  For the nine months ended September 30, 2008 and 2009, total revenues within the Company’s five largest states (measured by total revenues) accounted for approximately 48% of the Company’s total revenues.  The states that represent the Company’s five largest states (measured by total revenues) change from time to time.

Financial Instrument Assets and Liabilities for Which Carrying Values Equal or Approximate Fair Value

Financial assets and liabilities for which carrying values equal or approximate fair values include cash and cash equivalents, advances, fees, interest, installment loans, lines of credit receivable, certain other assets, accounts payable, accrued liabilities, and certain other liabilities.  For these assets and liabilities, the carrying values approximate fair value due to their short-term nature.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value of existing assets and liabilities and

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their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.  Deferred tax assets and liabilities are adjusted on an annual basis.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period excluding unvested restricted stock.  Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period, after adjusting for the dilutive effect of unvested restricted stock and outstanding stock options.  For the three months and nine months ended September 30, 2008 and 2009, 278,947 and 209,851 restricted shares, respectively, were not included in the computation of diluted earnings per share because the effect of including them would be anti-dilutive.   For the three and nine months ended September 30, 2008, options to purchase 1,612,500 shares of common stock were not included in the computation of diluted earnings per share because the effect of including them would be anti-dilutive.  For the three and nine months ended September 30, 2009, options to purchase 1,555,000 shares of common stock were not included in the computation of diluted earnings per share because the effect of including them would be anti-dilutive.

The following table presents the reconciliation of the denominator used in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2008 and 2009 (in thousands):

Recently Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 105-10-05, “Generally Accepted Accounting Principles” (“ASC 105-10-05”), which establishes the Accounting Standards Codification (“Codification” or “ASC”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards.

The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates which will serve to update the Codification, provide background information about the guidance, and provide the basis for conclusions on changes to the Codification.

The ASC is not intended to change GAAP but does change the way the guidance is organized and presented. As a result, these changes have a significant effect on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has included the references to the Codification, as appropriate, in these consolidated financial statements.   The adoption of ASC 105-10-05 had no impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued ASC 805-10-65, “Transition Related to FASB No. 141 (Revised 2007), Business Combinations” (“ASC 805-10-65”). ASC 805-10-65 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, ASC 805-10-65 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.  ASC 805-10-65 also modifies the accounting for certain acquired income tax assets and liabilities.  ASC 805-10-65 is effective for acquisitions consummated on or after January 1, 2009.  The adoption of ASC 805-10-65 did not have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued ASC 810-10-65 (“ASC 810-10-65”), “Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment to ARB No. 51”, which establishes accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  ASC 810-10-65 clarifies

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that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements.  Among other requirements, ASC 810-10-65 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.  ASC 810-10-65 is effective for fiscal years beginning after December 15, 2008.  The adoption of ASC 810-10-65 did not have a material impact on the Company’s financial position or results of operations.

In April 2009, the FASB issued ASC 825-10-65, “Transition Related to FSP FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825-10-65”).  ASC 825-10-65 amends the disclosure requirements in SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, and APB Opinion No. 28, “Interim Financial Reporting”, to require disclosures about the fair value of financial instruments, including disclosure of the method and significant assumptions used to estimate the fair value of financial instruments, in interim financial statements as well as in annual financial statements.  The Company has adopted the disclosure requirements of ASC 825-10-65, with no material impact on the Company’s financial position or results of operations.

In May 2009, the FASB issued ASC 855-10-05 through ASC 855-10-55, “Subsequent Events” (collectively, ASC “855-10”), which establishes general standards of accounting for disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.  ASC 855-10-25, “Recognition,” requires an entity to recognize, in the financial statements, subsequent events that provide additional information regarding conditions that existed at the balance sheet date.  Subsequent events that provide information about conditions that did not exist at the balance sheet date shall not be recognized in the financial statements under ASC 855-10.  ASC 855-10 was effective for interim and annual reporting periods on or after June 15, 2009.  The Company adopted ASC 855-10 during the second quarter of 2009, and its application had no material impact on the Company’s financial position or results of operations.  The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was November 9, 2009.

In June 2009, the FASB issued SFAS 166, “New Guidance for Transfers of Financial Assets, a revision to SFAS Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 166”).  SFAS 166 will require more information about the transfer of financial assets, including securitization transactions, where entities have continuing exposure to the risks related to transferred financial assets.  SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.  SFAS 166 will be effective for a reporting entity’s first fiscal year beginning after November 15, 2009.  Management does not presently believe SFAS 166 will have a material impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued SFAS 167, “New Consolidation Guidance for Variable Interest Entities, a revision to SFAS Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities” (“SFAS 167”).  SFAS 167 changes how a reporting entity determines whether an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s performance.  SFAS 167 will be effective for a reporting entity’s first fiscal year beginning after November 15, 2009.  Management has not yet evaluated the impact of SFAS 167 on the Company’s financial position or results of operations.

2. Advances and Fees Receivable, Net

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

Included in the advances, and fees and interest receivable balances are amounts that may be past due but cannot be deposited because they do not have bank presentment authorizations.

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3. Allowance for Doubtful Accounts and Accrual for Third-Party Lender Losses

Changes in the allowance for doubtful accounts for the three and nine months ended September 30, 2008 and 2009 were as follows (in thousands):

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

The total changes in the allowance for doubtful accounts and the accrual for third-party lender losses for the three and nine months ended September 30, 2008 and 2009 were as follows (in thousands):

4. Other Current Assets

Other current assets consisted of the following (in thousands):

5. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

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6. Commitments and Contingencies

The Company is involved in a number of active lawsuits, including lawsuits filed by private litigants and those arising out of actions taken by state regulatory authorities, and is involved in various other legal proceedings with state and federal regulators.  In addition, the Company is obligated to advance expenses, and, in certain circumstances, indemnify for damages, incurred by each of its current or former officers and directors responding to inquiries, or defending against claims or proceedings, arising by reason of the fact that such person is or was an officer or director of the Company.  Under certain circumstances, the Company may also be obligated to defend and indemnify other entities against which claims have been asserted.  Unless otherwise stated below, the Company is vigorously defending against these actions and will, when management believes appropriate in consideration of ongoing litigation expenses and other factors, evaluate reasonable settlement opportunities.  The amount of losses and/or the probability of an unfavorable outcome, if any, cannot be reasonably estimated for these legal proceedings unless otherwise stated below.  Accordingly, except as otherwise specified below, no accrual has been recorded for any of these matters as of September 30, 2009.

Legal Proceedings

Brenda McGinnis v. Advance America Servicing of Arkansas, Inc. et al.

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 the Company’s prior subsidiary in Arkansas.  The complaint alleges that the Company’s current subsidiary made usurious loans under the Arkansas Check Cashers Act and seeks compensatory damages in an amount equal to twice the interest paid on the deferred presentment transactions made from 2001 to present (which would total approximately $21.4 million for deferred presentment transactions made during that time or approximately $87 million in damages for all transactions originated, processed, and serviced during that time) as well as a declaration that the contracts are void, enforcement of the 2001 class action settlement agreement, attorneys’ fees, and costs.

On September 23, 2009, the Company and the class representatives entered into a settlement agreement in connection with the litigation.  The settlement agreement does not involve an admission of wrongdoing or liability and is subject to court approval and certain other conditions before it becomes final and the lawsuit is concluded.

Pursuant to the terms of the settlement agreement, the case will be dismissed, the Company will be released from any and all claims and liability in connection with deferred presentment transactions entered into in Arkansas pursuant to the Arkansas Check Casher’s Act, and the Company will pay the lesser of (1) $10.95 million, or (2) actual claims made plus plaintiff’s attorney fees, administrative costs, and other costs associated with the litigation.  If claims made plus covered fees and costs exceed $10.95 million, then individual claim amounts will be reduced on a prorated basis. The Company has taken a charge against earnings in the third quarter of 2009 of approximately $6.0 million to cover the estimated costs of settlement.

Magee and Johnson v. Advance America Servicing of Arkansas, Inc.

On October 13, 2008, Gary Neil Magee and Charlotte Johnson filed a putative class action in the Circuit Court of Clark County, Arkansas alleging that the Company’s Arkansas subsidiary violated the Arkansas usury law and the Arkansas Deceptive Trade Practices Act.  The complaint alleged that the fees charged by the Company’s subsidiary to cash checks were interest on consumer loans and usurious under state law.  The plaintiffs sought compensatory damages in an amount equal to twice the combined interest plus unrelated check cashing fees on the loans from April 2008 to October 2008, and a declaration that the transactions are void, plus attorneys’ fees and costs.  The Company removed the case to the United States District Court for the Western District of Arkansas, where the court granted the Company’s motion to compel individual arbitration.  As of August 18, 2009, the case was settled for an immaterial amount and the Company was released from all claims.

Kerri Stone v. Advance America, Cash Advance Centers, Inc. et al.

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

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

The Company and the Company’s subsidiary, McKenzie Check Advance of Florida, LLC (“McKenzie”), 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 the named defendants could be required to refund fees and/or interest collected, refund the principal amount of cash advances, pay multiple damages, and pay other monetary penalties.  Ms. Reuter’s claim has been held to be subject to binding arbitration, which the Company expects to proceed in parallel with this case.  However, the trial court has denied the defendants’ motion to compel arbitration of Ms. Kelly’s claims, the substituted named plaintiff, and the resulting appeal has been dismissed by the Florida court of appeals.  The Company has sought review of the arbitration issue by the Florida Supreme Court.

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

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 the Company, the Company’s Florida subsidiary, Advance America, Cash Advance Centers of Florida, Inc., and certain officers and directors.  The allegations, relief sought, and the Company’s defenses in this lawsuit are nearly identical to those alleged in the first Betts and Reuter lawsuit described above.  The Company and individual defendants appealed the trial court’s denial of certain defendants’ motion to dismiss for lack of personal jurisdiction.  The appellate court affirmed the trial court’s ruling.  A petition for certiorari has been filed in the Florida Supreme Court on behalf of the individual Advance America defendants, but the case will proceed against the Company.

Trejo v. Advance America, Cash Advance Centers of Illinois, Inc.

On March 4, 2009, Martha Trejo filed a putative class action lawsuit in the Circuit Court of Cook County against the Company’s Illinois subsidiary, Advance America, Cash Advance Centers of Illinois, Inc.  The complaint alleged that the Illinois subsidiary’s practices violate the Illinois Payday Reform Act, the Illinois Interest Act, the Illinois Consumer Installment Loan Act, and the Illinois Wage Assignment Act.  The complaint sought certification of a class of individuals for the alleged violations as well as a declaration that all loans made to class members are unenforceable, injunctive relief, and monetary damages in an unspecified amount. The Company removed the case to United States District Court for the Northern District of Illinois and filed a motion to dismiss or, in the alternative, to compel arbitration.  The Company’s motion to stay the action and compel arbitration was granted on June 23, 2009.  The order was vacated in part on September 4, 2009, and the case was remanded to the Circuit Court of Cook County, where it is proceeding as an individual action, rather than a putative class action.

Hooper and Vaughn v. Advance America, Cash Advance Centers of Missouri, Inc.

On March 10, 2008, Trishia Hooper and Josephine Vaughn filed a putative class action lawsuit in the United States District Court for the Western District of Missouri against our Missouri subsidiary, Advance America, Cash Advance Centers of Missouri, Inc.  The action alleges that the arbitration clause and class action waiver in the Company’s subsidiary’s loan agreement is unconscionable, that the Company’s subsidiary’s practices violate the Missouri statutes governing unfair and deceptive trade practices, interest rates, loan renewals, debt reduction, and consideration of borrower’s ability to repay.  The lawsuit seeks certification as a class action, unspecified monetary damages, a declaratory judgment that the arbitration clause and class action waiver is unconscionable, and injunctive relief.  The trial court denied the Company’s motion to compel arbitration and the Company has appealed the denial of that motion.

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

On July 27, 2004, John Kucan, Welsie Torrence, and Terry Coates, each of whom was a customer of Republic Bank & Trust Company (“Republic”), the lending bank for whom the Company previously marketed, processed and serviced cash advances in North Carolina, filed a putative class action lawsuit in the General Court of Justice for the Superior Court Division for New Hanover County, North Carolina against the Company and Mr. William M. Webster IV, Chairman of the Company’s Board of Directors and prior Chief Executive Officer, alleging, among other things, that the relationship between the Company’s North Carolina subsidiary and Republic was a “rent a charter” relationship and therefore Republic was not the “true lender” of the cash advances it offered.  The lawsuit also claims that the cash advances were made, administered, and collected in violation of numerous North Carolina consumer protection laws.  The lawsuit seeks an injunction barring the subsidiary from continuing to do business in North Carolina, the return of the principal amount of the 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.  The Company sought to enforce the arbitration provisions in the customer agreements and in June 2009, the trial court ruled that the arbitration clause is unenforceable.  The Company is appealing this ruling.

North Carolina Commissioner of Banks Order

On February 1, 2005, the Commissioner of Banks of North Carolina initiated a contested case against the Company’s North Carolina subsidiary for alleged violations of the North Carolina Consumer Finance Act.  In December 2005, the Commissioner of Banks ordered that the Company’s North Carolina subsidiary immediately cease and desist operating. In accordance with the Commissioner of Banks’ order, the Company’s North Carolina subsidiary ceased all business operations on December 22, 2005.  The Company has appealed the Commissioner’s order to the North Carolina Court of Appeals.

Pennsylvania Department of Banking v. NCAS of Delaware, LLC

On September 27, 2006, the Pennsylvania Department of Banking filed a lawsuit in the Commonwealth Court of Pennsylvania alleging that the Company’s Delaware subsidiary, NCAS of Delaware, LLC, was providing lines of credit to borrowers in Pennsylvania without a license required under Pennsylvania’s financial licensing law and charging interest and fees in excess of the amounts permitted by Pennsylvania’s usury law.  In July 2007, the court determined that certain aspects of the Company’s Choice

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Line of Credit required the Company to be licensed under Pennsylvania’s Consumer Discount Company Act (“CDCA”) and enjoined the Company from continuing its lending activities in Pennsylvania for so long as the CDCA violations continued and from collecting monthly participation fees.  The Company appealed to the Pennsylvania Supreme Court and, in May 2008, the Pennsylvania Supreme Court upheld the lower court’s ruling.  The Pennsylvania Department of Banking subsequently amended its complaint to add the Pennsylvania Attorney General as a plaintiff and the Company as a defendant.  The amended complaint also seeks to perfect a claim for alleged violations of the state’s usury law by seeking unspecified damages, including disgorgement of profits earned in Pennsylvania, treble actual damages, and restitution, which could total approximately $135 million, plus civil penalties of $1,000 for each violation of the Pennsylvania Consumer Protection Law and an additional $2,000 for violations against customers over the age of 60, and attorneys’ fees and costs.  The matter is proceeding before the trial court.  The Company has filed preliminary objections in response to the amended complaint and will continue to vigorously defend against the lawsuit.

Sharlene Johnson, Helena Love and Bonny Bleacher v. Advance America, Cash Advance Centers, Inc. et al.

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 the Company and two of its subsidiaries alleging that they 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 the payment by the Company of damages equal to three times the monthly participation fees paid by customers since June 2006, which could total approximately $135 million in damages, plus attorneys’ fees and costs.  In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless determined otherwise by the arbiter.  All parties appealed that order and the appeal has been stayed, pending a decision from the United States Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., a case involving enforceability of arbitration clauses.

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

On January 18, 2007, Raymond King and Sandra Coates, who were customers of BankWest Inc., the lending bank for which the Company previously marketed, processed and serviced 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 the Company’s Pennsylvania subsidiary made illegal cash advance 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 Inc. was not the “true lender” and that the Company’s Pennsylvania subsidiary was the “lender in fact.”  The complaint seeks compensatory damages, attorneys’ fees, punitive damages and the trebling of any compensatory damages.  In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless determined otherwise by the arbiter.  All parties appealed that order and the appeal has been stayed, pending a decision from the United States Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.

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

On April 21, 2009, Yulon Clerk filed a putative class action lawsuit in the Court of Common Pleas of Philadelphia County, Pennsylvania, against the Company’s subsidiaries, Advance America, Cash Advance Centers of Pennsylvania, Inc., and NCAS of Delaware, LLC, as well as BankWest, Inc. and other non-related lenders and banks.   The complaint alleged that the practices of the Company’s subsidiaries and BankWest, Inc. violated the Pennsylvania Consumer Discount Protection Act, the Pennsylvania Loan Interest Protection Law, and Pennsylvania Consumer Protection Laws.  The complaint sought certification of a class of individuals for the alleged violations, a declaration that all loans made to class members are unenforceable, injunctive relief, and monetary damages.  The complaint repeated allegations asserted in other putative class actions filed in Pennsylvania that have been stayed in favor of mandatory individual arbitrations.  The Company removed the case to the United States District Court for the Eastern District of Pennsylvania and filed a motion to compel arbitration and stay the underlying action’s proceedings.  In August 2009, the District Court issued an order severing the claims against the individual defendants.  On September 21, 2009, plaintiffs filed three separate complaints seeking the same relief as the April 21, 2009 complaint against Advance America, Cash Advance Centers of Pennsylvania, Inc., NCAS of Delaware, LLC, and BankWest, Inc., whose defense the Company is handling pursuant to an indemnification agreement, in the Court of Common Pleas of Philadelphia County, Pennsylvania.

Class Actions Against South Carolina Subsidiary

Eight separate putative class actions have been filed in South Carolina against the Company’s subsidiary, Advance America, Cash Advance Centers of South Carolina, Inc., and several other unaffiliated defendants.  John and Rebecca Morgan filed a complaint

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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; Kimberly Kinney filed a complaint on October 12, 2007 in the Marion County Court of Common Pleas; and Carl G. Ferrell filed a complaint on October 30, 2008.  The allegations and relief sought are similar in each case.  Plaintiffs allege that the Company’s 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 the Company from continuing its operations, the return of fees and interest, unspecified actual damages, punitive damages, and attorneys’ fees and costs.  Each of the lawsuits have been joined to ongoing litigation in the South Carolina state court system pursuant to an order of the South Carolina Supreme Court consolidating all cases brought against the industry.

Other Matters

The Company is also involved in other litigation and administrative proceedings that are incidental to its business, including, without limitation, regulatory enforcement matters, individual consumer claims, 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.

SEC Investigation

On July 22, 2009, the Company was informed that Kenneth E. Compton, its President and Chief Executive Officer, received a “Wells Notice” from the staff of the United States Securities and Exchange Commission (the “SEC”).  The Company understands that the staff intends to recommend that the SEC file a civil injunctive action against Mr. Compton alleging that he violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with alleged insider trading involving less than a material amount of losses avoided by third parties selling Company stock in 2007.  The Company did not receive a Wells Notice and believes that it is not a subject of this investigation; however, the Company is obligated to advance expenses incurred by Mr. Compton in connection with this matter.

Changes in Legislation

Ohio Legislation

On November 24, 2008, the State of Ohio capped interest rates on cash advance loans and limited the number of cash advances a customer may take in any one year.  As a result of this legislation, the Company began offering small loans pursuant to the Ohio Small Loan Act and check-cashing services.  The small loan product and check cashing services generate less revenue than the Company’s former cash advance product and, as a result, the Company has closed some of its centers in Ohio. In the third quarter of 2009, the Company began offering cash advances pursuant to the Ohio Second Mortgage Act.

During the nine months ended September 30, 2009, the Company closed 63 centers in Ohio.  The estimated cost to close these centers, including an impairment charge of approximately $0.9 million, is approximately $2.2 million, of which $0.1 million and $2.2 million was recognized in the three and nine months ended September 30, 2009, respectively.  For the three months ended September 30, 2009, these amounts are included in the income statement as an increase in other center expenses. For the nine months ended September 30, 2009, these amounts are included in the income statement as an increase in other center expenses of $1.2 million, a loss on impairment of fixed assets of $0.9 million, and an increase in center salaries and related payroll costs of $0.1 million.

If it is not economically viable to continue operating in Ohio and the Company closes its remaining Ohio centers, the estimated range of closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would be approximately $5.0 million to $13.5 million, and the collectability of advances and fees receivable in Ohio most likely would be impaired.  As of September 30, 2009, the net advances and fees receivable balance in Ohio was approximately $20.6 million.  At this time the Company is not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Ohio.

South Carolina and Kentucky Legislation

New laws in South Carolina and Kentucky will become effective during the first half of 2010 that will, among other things, implement in each state a statewide database to monitor the number of loans made to customers within that state.  The Company believes these laws will negatively impact its revenue and profitability in South Carolina and Kentucky.  The Company intends to comply with the new laws

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when they become effective.  Although we expect these laws to have a negative impact on our operations in those states, we expect our South Carolina and Kentucky operations to remain economically viable.

Washington Legislation

In the State of Washington, a law will become effective on January 1, 2010 that will limit the number of cash advances a customer may take in any one year, limit the advance amount that can be taken out at any one time, and implement a statewide database to monitor the number of loans.  The Company believes this law will negatively impact its revenue and profitability.  The Company intends to comply with the new law when it becomes effective on January 1, 2010.  The Company may close or consolidate some or all of its centers in Washington if it does not continue to be economically viable to operate all of its centers.

If the Company closes all of its centers in Washington, the estimated range of closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would be approximately $2.7 million to $9.5 million, and the collectibility of advances and fees receivable in Washington most likely would be impaired.  As of September 30, 2009, the net advances and fees receivable balance in Washington was approximately $9.2 million.  At this time the Company is not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Washington.

Other Commitments and Contingencies

At September 30, 2009, the Company had approximately $2.2 million in unfunded commitments to lend to customers in Virginia under the line of credit product.

7. Capital Stock and Stock-Based Compensation Plans

In July 2008, the Company completed the repurchase of its common stock under its stock repurchase program that the Company’s Board of Directors approved on May 4, 2005, and twice extended, once on August 16, 2006, and again on February 13, 2008, for a total of $225.0 million in authorized repurchases.  The following table provides certain information with respect to the stock purchased under the Company’s approved stock repurchase program and stock surrendered by employees to satisfy their tax obligations with respect to the vesting of shares of restricted stock awarded pursuant to the Company’s 2004 Omnibus Stock Plan (in thousands).

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The Company measures the cost of its stock-based employee compensation at fair value on the grant date and recognizes such cost in the financial statements on a straight-line basis over the requisite service period of the awards, which is generally the vesting period.

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

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

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

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

·                  Expected term—The expected term represents the period during which the Company’s stock options are expected to be outstanding.  The Company based its determination of the expected term by giving consideration to the contractual terms of the stock option awards, vesting schedules, expectations of future employee behavior, and published academic research regarding exercise behavior.  For the options granted in the first quarter of 2009, the Company assumed that the options would be exercised on their first available exercise date because the high dividend rate on the grant date relative to the strike price would make immediate exercise the likely behavior.

·                  Expected volatility—The expected volatility represents the amount by which the price of the underlying shares has fluctuated or is expected to fluctuate during the expected term.  The Company based its estimated volatility on its historical stock price volatility and the stock price volatility of other public companies in its industry, which the Company believes is representative of its expected future volatility over the expected term of its options.

·                  Expected dividends—The Company used its historic dividend yield as an estimate for its expected dividend yield as of the 2008 stock option grant date.  The Company assumed this dividend yield was continuous over the life of the option in its Black-Scholes option pricing model.  For the 2009 stock option grants, the Company used its current dividend rate of $0.0625 per share per quarter and assumed discreet quarterly dividend dates consistent with past practices over the life of the options.

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

To estimate each stock option’s weighted average fair value on the grant dates, the following weighted average assumptions were used in the Black-Scholes option pricing model for all stock options granted during the nine months ended September 30, 2008 and 2009:

The weighted average grant date fair values of options granted during the nine months ended September 30, 2008 and 2009 were $2.70 per option and $0.12 per option, respectively, and are being expensed ratably over each award’s respective vesting period.

The following table provides certain information with respect to stock options outstanding and exercisable at September 30, 2009 under the Company’s stock-based compensation plans:

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A summary of the Company’s authorized and available shares, activity for the nine months ended September 30, 2009, and the weighted average stock option exercise prices under its stock-based compensation plans follows:

A summary of the Company’s restricted stock activity for the nine months ended September 30, 2009 and the weighted average grant date fair values follows:

The total grant date fair value of restricted shares vested during the nine months ended September 30, 2008 and 2009 was approximately $0.2 million and $0.3 million, respectively, and the total market value of these shares on the dates vested was approximately $0.1 million and $0.1 million, respectively.

A summary of the stock-based compensation cost included in general and administrative expenses in the accompanying consolidated statements of income for the three and nine months ended September 30, 2008 and 2009 follows (in thousands):