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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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)

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 the 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, 2010

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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, 2009 and in “Part II. Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, 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, 2009 and September 30, 2010

(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, 2009 and 2010

(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, 2010

(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, 2009 and 2010

(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, 2009 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, 2010 are not necessarily indicative of the results that may be expected for future interim periods or the entire year ending December 31, 2010.

Description of Business

The Company conducts business in most states under the authority of a variety of enabling state statutes including cash advance, deferred presentment, check-cashing, small loan, credit service organization and other state laws whereby cash 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 generally recognized on a constant-yield basis ratably over the term of each cash advance.

Between November 2008 and February 2010, the Company offered a line of credit product in Virginia with a 25-day billing cycle. In March 2010, the Company discontinued offering new open-ended lines of credit but continued to service existing lines of credit in Virginia. The Company stopped providing new draws on existing lines of credit on September 30, 2010. 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, 2009 and 2010, total revenues within the Company’s five largest states (measured by total revenues) accounted for approximately 47% and 52%, respectively, of the Company’s total revenues. For the nine months ended September 30, 2009 and 2010, total revenues within the Company’s five largest states accounted for approximately 48% and 50%, respectively, of the Company’s total revenues. The states that represent the Company’s five largest states 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 value include cash and cash equivalents, advances, fees, interest, installment loans, lines of credit receivable, certain other assets, accounts payable,

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accrued liabilities, and certain other liabilities. For these assets and liabilities, the carrying values approximate fair value due to their short-term nature.

Center Closing Costs

Center closing costs represent management’s estimate of severance payments, costs to clean and vacate the premises, losses related to the write-off of leasehold improvements and signage, and lease cancellation expenses related to closing a center. Additionally, closing or consolidating centers could result in the impairment of receivables, long-lived assets, or goodwill. A liability for severance payments is recognized when management: (i) decides to close a center and this plan is unlikely to change; (ii) determines that an employee cannot be relocated to another center; and (iii) informs the employee of the termination and the benefits that will be paid. Costs to terminate the lease are recorded at the earlier of the date the lease is terminated or the date the leased property is no longer used. All other expenses are recorded when incurred.

Income Taxes

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

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

The allowance for doubtful accounts represents management’s estimated probable losses for advances made directly to customers and is recorded as a reduction of advances and fees receivable, net, on the Company’s balance sheet. The accrual for third-party lender losses represents management’s estimated probable losses for loans and certain related fees for loans that are processed by the Company for its current third-party lender in Texas (see Note 8) and is recorded as a current liability on the Company’s balance sheet.

The allowance for doubtful accounts and the 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, and the relative mix of new centers within a state, are also evaluated to determine whether the results from the analytical models should be revised.

The Company has 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 a customer’s check was returned, the Automated Clearing House (“ACH”) authorization was rejected by the customer’s bank, or the default date, unless the customer has paid at least 15% of the total of his or her loan plus all applicable fees, or 15% of the outstanding balance and related interest and fees for our line of credit and installment loan products. Unpaid advances, installment loans, or lines of credit of customers who file for bankruptcy are charged off upon receipt of the bankruptcy notice.

Management believes that the allowance for doubtful accounts and accrual for third-party lender losses are adequate. Management’s ongoing evaluation of the adequacy of the allowance for doubtful accounts and accrual for third-party lender losses is based on its evaluation of the advances and loans outstanding, historical experience, and such other factors that, in management’s judgment, deserve consideration in estimating probable losses.

Goodwill

The Company has approximately $127 million of goodwill as of September 30, 2010. Goodwill represents the excess cost over the fair value of assets acquired. The Company tests its goodwill for impairment annually as of September 30 or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Estimated cash

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flows and related goodwill are grouped at the reporting unit level. A reporting unit is an operating segment, or under certain circumstances, a component of an operating segment that constitutes a business. When estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any. Impairment losses, related to the carrying value of goodwill, represent the excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. In determining the estimated future cash flows, the Company considers current and projected future levels of income, as well as business trends, prospects, and market and economic conditions. Impairment tests involve the use of judgments and estimates related to the fair market value of the business operations with which goodwill is associated, taking into consideration both historical operating performances and anticipated future earnings.

The Company has approximately $4.4 million of goodwill in its United Kingdom operations. As of September 30, 2010, these operations have cumulatively generated negative cash flow and have not reached break-even at the center gross profit level for the trailing twelve months. The Company’s expansion efforts in the United Kingdom began during the third quarter of 2007. The goodwill impairment assessment model projects future positive cash flows sufficient to support the goodwill and long-lived asset base. If the United Kingdom operations continue to generate negative cash flow and do not break-even, an impairment charge related to its goodwill is possible.

Litigation Accrual

In view of the inherent difficulty of predicting the outcome of litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company cannot state with confidence what the eventual outcome of pending matters will be, what the timing of the ultimate resolution of these matters will be, what the eventual loss, fines, or penalties related to each pending matter may be, or the extent to which such amounts may be recoverable under the Company’s insurance policies.

In accordance with applicable accounting guidance, the Company establishes reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, the Company does not establish reserves. In most of the matters described in Note 6, loss contingencies are not both probable and estimable in the view of management and, accordingly, reserves have not been established for those matters. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending litigation and regulatory matters, including the litigation and regulatory matters described in Note 6, will have a material adverse effect on the consolidated financial position or liquidity of the Company, but may be material to the Company’s results of operations for any particular reporting period.

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 ended September 30, 2009 and 2010, 209,851 and 727,402, respectively, unvested shares of restricted stock were not included in the computation of diluted earnings per share because the effect of including them would be anti-dilutive. For the nine months ended September 30, 2009 and 2010, 209,851 and 161,402, respectively, unvested shares of restricted 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 and 2010, options to purchase 1,555,000 and 1,537,500 shares of common stock, respectively, that were outstanding at those dates 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, 2009 and 2010 (in thousands):

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Recently Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) Standard ASC 810-30, “Variable Interest Entities” (“ASC 810-30”). ASC 810-30 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. ASC 810-30 is effective for a reporting entity’s first fiscal year beginning after November 15, 2009. The adoption of ASC 810-30 during the quarter ended March 31, 2010 did not have a material impact on the Company’s financial position or results of operations.

In July 2010, FASB issued Accounting Standard Update (“ASU”) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”). The ASU amends FASB Accounting Standards Codification™ Topic 310, Receivables, to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  As this ASU amends only the disclosure requirements for loans and the allowance for credit losses, the adoption of ASU No. 2010-20 is not expected to have a significant impact on the Company’s financial statements.

2. Advances and Fees Receivable, Net

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

Included in advances, fees and interest receivables are amounts that may be past due that do not have bank presentment authorizations.

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, 2009 and 2010 were as follows (in thousands):

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Changes in the accrual for third-party lender losses for the three and nine months ended September 30, 2009 and 2010 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, 2009 and 2010 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 matters arising out of actions taken by state regulatory authorities. The Company is also 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 certain of its current and former officers and directors in responding to inquiries, or defending against claims or proceedings that have arisen 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 parties against whom 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, 2010.

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

On July 16, 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. Defendants removed the case to the United States District Court for the Southern District of California. The amended complaint alleges violations of the California Deferred Deposit Transaction Law and the California Unfair Competition Law and seeks an order requiring defendants to disgorge and/or make restitution of all revenue and loan principal, pay three times the amount of damages the class members actually incurred, reasonable attorneys’ fees and costs of suit, and punitive damages.  The complaint also seeks certain injunctive relief. The parties are engaged in discovery and the Company anticipates that the case will proceed to trial during 2011.

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 Company has appealed this decision.

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 case is currently stayed, pending a decision from the Florida Supreme Court in Pendergast v. Sprint Nextel Corp., which is a separate case, to which the Company is not a party, involving arbitration issues.

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 the Company’s Missouri subsidiary, Advance America, Cash Advance Centers of Missouri, Inc. The action alleged that the arbitration clause and class action waiver in the Company’s subsidiary’s customer loan agreements were unconscionable, that the Company’s subsidiary’s practices violated 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 sought certification as a class action, unspecified monetary damages, and a declaratory judgment that the arbitration clause and class action waiver was unconscionable and injunctive relief. On May 27, 2010, the Company and the class representatives entered into a settlement agreement. The settlement agreement does not

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involve an admission of wrongdoing or liability. Pursuant to the terms of the settlement agreement, the case will be dismissed, the Company and all other defendants will be released from any and all claims and liability, the Company will establish a settlement pool of approximately $2 million for payments and/or credits to settle the claims of certain customers of the Company’s Missouri subsidiary and payment of all attorney fees, class action administration fees, and other fees and expenses related to the litigation, and the Company’s subsidiary will offer discounts on the repayment of certain defaulted loans and on fees to certain class members for future loans. The Company took a charge against earnings in the second quarter of 2010 of approximately $2 million to cover the estimated costs of settlement. On November 4, 2010, the court entered an order granting final approval of the settlement. The Company does not expect any additional charges related to this case.

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 the Company’s former Chief Executive Officer, alleging, among other things, that the relationship between the Company’s North Carolina subsidiary and Republic constituted an alleged “rent a charter” relationship and therefore Republic was not the “true lender” of the cash advances it offered. The lawsuit also claimed that the cash advances were made, administered, and collected in violation of numerous North Carolina consumer protection laws. The lawsuit sought 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, along with three times the interest and/or fees associated with those advances, which could have, under certain circumstances, totaled approximately $220 million, plus attorneys’ fees and other unspecified costs.

On September 17, 2010, the Company and the class representatives entered into a settlement agreement. The settlement agreement does not involve any 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 and all other defendants will be released from any and all claims and liability, the Company will establish a settlement pool of approximately $18.75 million for payments and/or credits to settle the claims of certain customers of the Company’s North Carolina subsidiary and payment of all attorney fees, class action administration fees, and any and all other fees and expenses related to the litigation. The Company has taken a charge against earnings in the third quarter of 2010 of approximately $16.3 million to cover the estimated net costs of settlement less insurance proceeds.

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 appealed the Commissioner’s order to the Superior Court of North Carolina, which denied the appeal. The Company has appealed this decision to the North Carolina Court of Appeals. This appeal has been stayed pending final approval of the settlement in Kucan et al. v. Advance America, Cash Advance Centers of North Carolina, Inc. et al., at which time the Company will dismiss its appeal and the litigation will end.

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 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, to name the Company as a defendant, and to seek damages, fines, and penalties under Pennsylvania’s CDCA, usury laws, and consumer protection laws. In April 2010, the Pennsylvania Commonwealth Court dismissed the alleged CDCA and usury allegations and partially dismissed the alleged consumer

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protection law violations. The remaining alleged consumer protection law claims will proceed before the trial court. These remaining claims could, under certain circumstances, total approximately $45 million in damages, 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 parties are engaged in discovery and the Company will continue to vigorously defend against these claims.

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 payment 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 parties now await a ruling on the appeals.

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 was stayed pending a decision from the United States Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.  In April 2010, the United States Supreme Court issued its opinion in Stolt-Nielsen. The parties now await a ruling on the appeals.

Clerk  v. NCAS of Delaware, LLC, d/b/a Advance America, Cash Advance Centers, Inc., of Pennsylvania, 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., whose defense the Company is handling pursuant to an indemnification agreement, and other unrelated lenders and banks. The complaint alleges 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 seeks 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 repeats 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. The case against the Company’s Pennsylvania subsidiaries was subsequently dismissed by consent of the parties on November 11, 2009. Motions to stay and to compel individual arbitration have been filed in the other cases. Those cases were stayed pending a decision from the United States Supreme Court in Stolt-Nielsen S.A. v. Animal Feeds International Corp.  In April 2010, the United States Supreme Court issued its opinion in Stolt-Nielsen. The cases against NCAS of Delaware and Bankwest, Inc. are now proceeding before the trial court.

Class Actions Against South Carolina Subsidiary

Eight separate putative class actions were 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

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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; 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 in the Richland County Court of Common Pleas (collectively the “South Carolina Claimants”). 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 has 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. In December 2009, a group of industry defendants, including the Company, reached an agreement in principle, subject to reaching a definitive agreement and obtaining court approval, for the settlement and release of all claims brought by the South Carolina Claimants. On June 2, 2010, the Company, several other unaffiliated defendants, and the class representatives entered into a settlement agreement. The settlement agreement does not involve an admission of wrongdoing or liability on the part of the Company or its South Carolina subsidiary. Pursuant to the terms of the settlement agreement, the Company and its South Carolina subsidiary were released from any and all claims associated with this lawsuit. The Court entered an order granting final approval of the settlement on September 20, 2010, and the order became final on October 21, 2010. This litigation has concluded and the Company does not expect to incur any charges in connection with the settlement beyond the charge of $0.9 million the Company recorded for the fourth quarter of 2009.

Other Matters

The Company is also involved in other litigation, arbitrations 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 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 during 2007. The Company did not receive a Wells Notice and does not believe it is a subject of this investigation; however, the Company is obligated to advance expenses incurred by its current and former officers and directors in connection with this matter.

Changes in Legislation

Ohio Legislation

In November 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 stopped offering small loans and began offering cash advances pursuant to the Ohio Second Mortgage Act as a registered Second Mortgage Lender.

In the first quarter of 2010, the Ohio Division of Financial Institutions issued a rule restricting certain activities by licensed check cashers which would have a negative impact on the Company’s operations in Ohio. This rule was scheduled to become effective by May 1, 2010, but has been temporarily stayed by the Court of Common Pleas of Franklin County, Ohio pending the outcome of certain litigation involving the state and unrelated third parties.

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Virginia Legislation

A Virginia law that went into effect in January 2009 substantially changed the terms for cash advance services in Virginia and severely restricted viable operations for short-term lenders. The Company continues to offer cash advances in Virginia in conformance with the new regulations, and between November 2008 and February 2010 also offered an open-ended line of credit product. However, a subsequent Virginia Corporation Commission ruling limited the Company’s ability to offer the open-ended lines of credit effective March 1, 2010.  As a result, the Company ceased offering new open-ended lines of credit in February 2010 and stopped providing new draws on existing lines of credit on September 30, 2010.

During the nine months ended September 30, 2010, the Company closed 55 centers in Virginia. For the nine months ended September 30, 2010, closing costs of approximately $1.3 million are included in the income statement as an increase in other center expenses of $0.9 million, a loss on disposal of property and equipment of $0.1 million, and center salaries and related payroll costs of $0.3 million.

Although the Company intends to seek new revenue opportunities in Virginia (in addition to cash advances), the elimination of the open-ended line of credit product may cause the Company to close or consolidate some or all of its centers in Virginia. If we close all of our remaining centers in Virginia, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $2.2 million to $6.4 million, and the collectability of advances and fees receivable in Virginia may be impaired.  As of September 30, 2010, advances and fees receivable, net of allowance for doubtful accounts, in Virginia was approximately $11 million.  At this time, we are not able to determine the amount of goodwill impairment, if any, that could result from the cessation of our operations in Virginia.

Washington Legislation

 A law became effective on January 1, 2010, in the State of Washington that limits the number of cash advances a customer may take in any one year, limits the cash advance amount that can be taken out at any one time, and implements a statewide database to monitor the number of cash advances. This law has negatively affected the Company’s revenue and profitability. The Company may close or consolidate some or all of its centers in Washington if management determines that it is no longer economically viable to operate all of its Washington centers.

During the nine months ended September 30, 2010, the Company closed 45 centers in Washington. For the three months ended September 30, 2010, closing costs of approximately $0.8 million are included in the income statement as an increase in other center expenses of $0.7 million and center salaries and related payroll costs of $0.1 million. For the nine months ended September 30, 2010, closing costs of approximately $1.1 million are included in the income statement as an increase in other center expenses of $1 million and center salaries and related payroll costs of $0.1 million.

 If the Company closes all of its remaining centers in Washington, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $1 million to $3.7 million, and the collectability of advances and fees receivable in Washington may be impaired. As of September 30, 2010, advances and fees receivable, net of allowance for doubtful accounts, in Washington was approximately $3.9 million. At this time the Company is not able to determine the amount of goodwill impairment, if any, that could result from the cessation of operations in Washington.

Arizona Legislation

An existing law permitting cash advances in Arizona expired on June 30, 2010, and the Company ceased operations in its remaining 47 centers in Arizona during the quarter ended September 30, 2010. For the nine months ended September 30, 2010, closing costs of approximately $1.1 million are included in the income statement as an increase in other center expenses of $0.6 million, center salaries and related payroll costs of $0.3 million, and a loss on impairment of assets of approximately $0.2 million. The cessation of the Company’s Arizona operations did not result in any impairment of goodwill.

South Carolina Legislation

A new law in South Carolina became effective January 1, 2010 that, among other things, implements a statewide database to monitor the number of cash advances made to customers within that state. Although this law has had a negative effect on revenue and profitability in South Carolina, the Company currently believes operations will remain economically viable in this state.

Kentucky Legislation

A new law in Kentucky became effective on April 30, 2010 that, among other things, implements a statewide database to monitor the number of cash advances made to customers within that state. Although this law has had a negative effect on revenue and profitability in Kentucky, the Company currently believes operations will remain economically viable in this state.

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Rhode Island Legislation

A new law became effective in Rhode Island on July 1, 2010, that reduced the maximum allowable fees to be charged on a cash advance from $15 per $100 to $10 per $100. Although the Company expects this law to have a negative effect on its revenue and profitability in Rhode Island, management currently believes operations will remain economically viable in this state.

Colorado Legislation

A new law became effective in Colorado on August 11, 2010, that expands the minimum term of cash advances to six months, allows repayment in multiple installments, and creates a new regime of permitted finance, interest, and other charges. This law has negatively impacted the Company’s revenue and profitability in Colorado. If management determines that it is no longer economically viable to operate these centers, the Company may close or consolidate some or all of its centers.

During the nine months ended September 30, 2010, the Company closed 31 centers in Colorado. For the three months ended September 30, 2010, closing costs of approximately $0.5 million are included in the income statement as an increase in other center expense of $0.4 million and center salaries and related payroll cost of $0.1 million. For the nine months ended September 30, 2010, closing costs of approximately $0.9 million are included in the income statement as an increase in other center expenses of $0.6 million, center salaries and related payroll cost of $0.1 million, and a loss on impairment of assets of $0.2 million.

 If the Company closes all of its remaining centers in Colorado, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $0.7 million to $2.2 million, and the collectability of advances and fees receivable in Colorado most likely would be impaired. As of September 30, 2010, advances and fees receivable, net of allowance for doubtful accounts, in Colorado was approximately $5 million. At this time the Company has not determined the amount of goodwill impairment, if any, that could result from the cessation of operations in Colorado.

Montana Legislation

Due to a recent law change in Montana that becomes effective on January 1, 2011, the Company may close its two centers in that state. The estimated cost of closing the centers is approximately $75,000. For the nine months ended September 30, 2010, the operations in Montana generated approximately $100,000 of center gross profit.

Wisconsin Legislation

A new law becomes effective in Wisconsin on January 1, 2011 that limits the total amount of cash advances a customer may have outstanding, allows an extended payment plan on each cash advance, and implements a statewide database to monitor the number of cash advances. Although the Company expects this law to have a negative effect on its revenue and profitability in Wisconsin, management currently believes operations will remain economically viable in this state.

Illinois Legislation

A new law becomes effective in Illinois on March 21, 2011 that will change the terms of the installment loan product currently offered in Illinois and negatively affect the profitability of this product. However, the new law creates a longer term product with multiple installments and applicable fees. The Company intends to offer products in conformance with the new legislation. Although the Company expects this law to have a negative effect on its revenue and profitability in Illinois, management currently believes operations will remain economically viable in this state.

Federal Financial Reform

On July 21, 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This new federal legislation creates the Bureau of Consumer Financial Protection (the “BCFP”), which will have authority to regulate consumer finance companies. It is unknown what effect this legislation will have on the Company until such time as the BCFP promulgates regulations.

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7. Capital Stock and Stock-Based Compensation Plans

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. Under these plans, 5,200,000 shares of authorized common stock have been reserved for issuance pursuant to grants approved by the Compensation Committee of the Board of Directors. As of September 30, 2010, 1,659,942 shares were available for grant under the plans. 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.

 All stock options were granted with an exercise price equal to the fair market value of the Company’s common stock on the dates of grant as determined pursuant to the Company’s 2004 Omnibus Stock Plan. 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 nine months of 2009, the Company assumed that the options would be exercised on their 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 assumes its dividend yield is 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, 2009: an expected term of two years; an expected volatility of 66%; an expected dividend yield of 21.9%; and a risk-free rate of 1.03%. There were no stock options granted during the nine months ended September 30, 2010.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2009 is $0.12 per option, which is 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, 2010 under the Company’s stock-based compensation plans:

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A summary of the Company’s restricted stock activity for the nine months ended September 30, 2010 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, 2009 and 2010 was approximately $0.3 million and $0.2 million, respectively. The total fair market value of these shares on the dates vested was approximately $0.1 million and $0.7 million, for the nine months ended September 30, 2009 and 2010, 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, 2009 and 2010 follows (in thousands):

As of September 30, 2010, the total compensation cost not yet recognized related to nonvested stock awards under the Company’s plans is approximately $5.7 million. The weighted average period over which this expense is expected to be recognized is approximately 2.6 years.

8. Transactions with Variable Interest Entities

The Company conducts business in Texas through a wholly owned subsidiary registered as a Credit Services Organization (“CSO”) under Texas law. In connection with operating as a CSO, the Company entered into a credit services organization agreement (“CSO Agreement”) with an unaffiliated third-party lender in 2007. The agreement governs the terms by which the Company refers customers in Texas to that lender, on a non-exclusive basis, for a possible extension of credit. The Company processes loan applications and commits to reimburse the lender for any loans or related fees that are not collected from those customers.

The Company has determined that the lender is a variable interest entity (“VIE”) but that the Company is not the primary beneficiary of this VIE. Therefore, the Company has not consolidated the lender as of and for the three and nine months ended September 30, 2009 and 2010.

Under the terms of the Company’s agreement with its third-party lender, the Company is contractually obligated to reimburse the lender for the full amount of the cash advances and certain related fees that are not collected from the customers. As of September 30, 2009 and 2010, the third-party lender’s outstanding cash advances and interest receivable, which were not recorded on the Company’s balance sheet, totaled approximately $19.1 million and $19 million, respectively, which is the amount the Company would be obligated to pay the third-party lender if these amounts were to become uncollectible. Additionally, if these cash advances were to become uncollectible, the Company would also be required to pay the third-party lender all related non-sufficient funds (“NSF”) fees and late fees on these advances.

Because of the Company’s economic exposure for losses related to the third-party lender’s advances and interest receivable, the Company has established an accrual for third-party lender losses to reflect the Company’s estimated probable

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losses related to uncollectible third-party lender cash advances. The accrual for third-party lender losses that was reported in the Company’s balance sheet at September 30, 2009 and 2010 was approximately $4.3 million and $4.4 million, respectively, and was established on a basis similar to the allowance for doubtful accounts.

9. Related Party Transactions

In January 2009, the Company entered into a one-year consulting arrangement with Mr. Tony S. Colletti, a member of its Board of Directors, for his support of government relations initiatives on the Company’s behalf in Illinois and Washington, D.C. The consulting arrangement ended on December 31, 2009.  Included in general and administrative expenses, for the three and nine months ended September 30, 2009, are expenses of approximately $58,000 and $179,000, respectively, related to this consulting arrangement.

Effective July 31, 2010, Mr. Colletti entered into an agreement with the Community Financial Services Association of America (“CFSA”), an industry trade group composed of the Company and more than 100 other companies engaged in the cash advance services industry, to provide consulting and advisory services on regulatory initiatives. Under the consulting agreement, the CFSA will pay Mr. Colletti approximately $525,000 between July 31, 2010 and December 31, 2011. As of September 30, 2010, the Company has paid approximately $0.8 million of membership dues and other funds to the CFSA, all of which are included in general and administrative expenses. In addition, Kenneth E. Compton, the Company’s President and Chief Executive Officer, serves as a member of the CFSA’s Board of Directors.

Included in general and administrative expenses are expenses with related parties, relating primarily to aircraft operating expenses, legal expenses, and operating leases for office space, of approximately $69,000 and $51,000 for the three months ended September 30, 2009 and 2010, respectively, and approximately $193,000 and $179,000 for the nine months ended September 30, 2009 and 2010, respectively.

Under a time-share arrangement, the Company’s former Chairman has used the Company’s aircraft for private purposes in exchange for the Company’s use of an identical aircraft owned by the Company’s former Chairman. Included in accounts receivable at September 30, 2010 is a $4,000 net receivable related to this arrangement. Pursuant to this time-share arrangement, the Company entered into a Time Sharing Agreement on August 5, 2010, with Johnson Management, LLC, a limited liability company that is owned by the Company’s former Chairman, who is also the beneficial owner of more than five percent of the Company’s common stock. This agreement provides the Company with the right to lease an aircraft from Johnson Management, LLC for a period of one year, subject to automatic renewal on a month-to month basis, at a lease rate equal to the cost of operating the aircraft, plus an additional charge equal to 100% of the cost of fuel, oil and lubricants used on the flight. The Company intends to use the aircraft for business purposes when the Company-owned aircraft is unavailable.

The Company pays rent of $350 per month for office space used by the Company’s current Chairman at an office building owned by the Company’s former Chairman.

The Company’s former Chairman’s brother is a partner of a law firm that provides the Company with certain routine legal services. During the three and nine months ended September 30, 2010, the Company incurred costs and expenses of approximately $8,000 and $35,000, respectively, for those services.

The Company incurred costs and expenses of approximately $641,000 and $342,000 for the nine months ended September 30, 2009 and 2010, respectively, for the advancement of expenses incurred by certain of the Company’s current and former officers and directors in connection with their responses to requests for information and subpoenas as part of an investigation by the U.S. Securities and Exchange Commission (“SEC”) into alleged insider trading by third parties in the Company’s securities. These costs were incurred by the Company pursuant to indemnification agreements that require the Company to advance expenses to, and may require the Company to indemnify its current and former officers and directors for, damages incurred by them in responding to the pending SEC investigation or defending against any related enforcement proceedings, including the “Wells Notice” issued by the SEC to the Company’s Chief Executive Officer on July 22, 2009.

10. Revolving Credit Facility and Long-Term Debt

In March 2008, the Company amended and restated its prior revolving credit facility with a syndicate of banks. This credit facility now provides the Company with a $270 million revolving line of credit, which includes the ability to issue up to $25 million in letters of credit. This revolving credit facility matures on March 24, 2013. The Company has the option to increase the revolving credit facility by an additional $95 million, subject to compliance with the credit agreement’s covenants and conditions and upon receipt of sufficient commitments from lenders in the lending syndicate.

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The credit facility is collateralized by substantially all of the Company’s assets and contains various financial covenants that require, among other things, the maintenance of a minimum net worth and certain leverage and fixed charge coverage ratios and also restricts the encumbrance of assets and the creation of indebtedness. A breach of a covenant or an event of default could prohibit the Company from accessing otherwise available borrowings, or could cause all amounts outstanding under the revolving credit facility to become due and payable. The Company was in compliance with all financial covenants at September 30, 2010.

In general, the Company’s borrowings under the revolving credit facility bear interest, at the Company’s option, at 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 set by Bank of America; 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 the Company’s total leverage ratio of consolidated debt to consolidated EBITDA. The base rate applicable margin ranges from 1.50% to 2.25% based upon the Company’s total leverage ratio. The LIBOR-based applicable margin ranges from 2.50% to 3.25% based upon the Company’s total leverage ratio. As of September 30, 2010, the applicable margin for the prime-based rate was 1.75% and the applicable margin for the LIBOR-based rate was 2.75%.

As of September 30, 2010, the Company had $111 million outstanding on the revolving portion of the credit facility and $6.2 million of standby letters of credit outstanding. Borrowings under the revolving credit facility are subject to compliance with certain covenants and conditions.

The carrying value of the credit facility approximated its fair value at December 31, 2009 and September 30, 2010.

The Company owns its headquarters building and related land subject to a mortgage loan, the principal amount of which was approximately $4.6 million and $4.2 million at December 31, 2009 and September 30, 2010, respectively. The mortgage loan is payable to an insurance company and is collateralized by our corporate headquarters building and related land. The mortgage loan 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 loan matures on June 10, 2017. The carrying amount of the Company’s corporate headquarters (land, land improvements and building) was approximately $4.6 million and $4.4 million at December 31, 2009 and September 30, 2010, respectively.

The fair market value of the Company’s long-term debt is estimated using a discounted cash flow analysis and was approximately $5.9 million at December 31, 2009 and $5.2 million at September 30, 2010.

11.  Income Taxes

The effective income tax rate as a percentage of income before income taxes was 39.3% and 64.3% for the three months ended September 30, 2009 and 2010, respectively. The effective income tax rate as a percentage of income before income taxes was 37.7% and 46.7% for the nine months ended September 30, 2009 and 2010, respectively.

The Company adopted FASB ASC 740-10 on January 1, 2007. As a result of the implementation of FASB ASC 740-10, the Company recognized no adjustments to the January 1, 2007 balance of retained earnings. At the adoption date, the Company did not have any unrecognized tax benefits and did not have any interest or penalties accrued. As of December 31, 2009 and September 30, 2010, the Company had $0.7 million and $0.9 million of total gross unrecognized tax benefits including interest, respectively. Of this total approximately $0.7 million and $0.9 million, respectively, represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The increase in the total gross unrecognized tax benefit including interest during the three months ended September 30, 2010, is primarily attributable to the accrual of another three months of interest.

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2010, the Company had approximately $0.1 million accrued for gross interest, of which approximately $13,000 was a current period expense. The Company has determined that it is possible that the total amount of unrecognized tax benefits that relate to various state examinations may increase or decrease within twelve months of the reporting date. However, at this time, a reasonable estimate of the range of possible change cannot be made until further correspondence has been conducted with the state taxing authorities.

The Company is subject to U.S. income taxes, as well as various other foreign, state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before the tax year ended September 30, 2005, although carry forward attributes that were generated prior to 2005 may still be adjusted upon examination by the taxing authorities if they either have been used or will be used in a future period. The income tax returns for the years 2005 through 2008 are under examination by a state taxing authority that

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has completed its examinations and issued a proposed assessment for tax years 2005 through 2008. In consideration of the proposed assessment, the total gross unrecognized tax benefit was increased by $0.9 million through September 30, 2010. At this time, it is too early to predict the final outcome of this matter.

12. Subsequent Events

On October 27, 2010, the Company’s Board of Directors declared a cash dividend of $0.0625 per share of common stock, payable on December 3, 2010 to shareholders of record on November 23, 2010.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes in “Part I. Item 1. Financial Statements.” This discussion contains forward-looking statements that involve risks and uncertainties such as our plans, objectives, expectations and intentions. Our actual results could differ materially from those anticipated by these forward-looking statements. Please see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 and “Part II. Item 1.A “Risk Factors” of this Quarterly Report and “Forward-Looking Statements” at the end of this section for further discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

Headquartered in Spartanburg, South Carolina, we are the largest non-bank provider of cash advance services in the United States as measured by the number of centers operated. Our centers typically provide short-term, unsecured cash advances that are due on the customers’ next payday. As of September 30, 2010, we operated 2,322 centers in 31 states in the United States, 21 centers in the United Kingdom and 17 centers in Canada, and had 64 limited licensees in the United Kingdom.

Our industry has been significantly affected by increasing regulatory challenges. Legislation that negatively impacts cash advance services, whether through preclusions, interest rate ceilings, fee reductions, mandatory extensions of term length, limits on the amount or term of our products and services, or limits on consumers’ use of our products and services could materially and adversely affect our business. 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”), which is an industry trade group composed of our Company and more than 100 other companies engaged in the cash advance services industry.

Cash Advance Services

Our primary business is offering cash advance services, which consist primarily of cash advances but also include installment loans and lines of credit. However, we offer additional complimentary products and services.

In most states where we operate, we originate cash advance services under the authority of state-specific enabling statutes that allow for cash advances ranging from single and installment closed-end terms to revolving lines of credit with open-ended terms. The particular cash advance services offered in any given location may change from time to time depending upon changes in state law and federal law. Additionally, where permitted by applicable law, we may service customers for a third-party lender. 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 for all losses. The permitted size of a cash advance varies by jurisdiction and ranges from $50 to $5,000. However, our typical cash advance ranges from $50 to $1,000. The finance charges on cash advance services currently offered also vary by jurisdiction and range up to 22% of the amount of the cash advance.

A customer may obtain a cash advance in one of three ways: (1) by visiting one of our centers in person and completing an application; (2) by visiting our website, beginning the application process online, then visiting one of our centers in person to complete the application and receive a cash advance; or (3) by visiting our website, completing an application online and receiving a cash advance from a third-party lender that is directly deposited in the customer’s bank account.

Our customers also may obtain online cash advances made by third-party lenders that are governed by the laws of the state where the customer resides. We receive revenue from online cash advances made by third-party lenders based on a percentage of the net fees, defined as advance fees less a provision for doubtful accounts and a cost of capital charge, but otherwise are not contractually obligated for losses.

Additional fees that we may charge and collect include annual participation fees, fees for returned checks, late fees, and other fees as permitted by applicable law. Currently, none of the cash advance services we offer include annual participation fees. Fees for returned checks or

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electronic debits that are declined for non-sufficient funds (“NSF”) vary by state and range up to $30, and late fees vary by state and range up to $50. In Texas and online, the third-party lenders charge NSF fees and late fees in accordance with applicable law.

Each new customer must provide us with certain personal information such as his or her name, address, phone number, proof of identification, employment information or source of income, bank account, and references. This information is entered into our information system and, where applicable, that of the third-party lender. The customer’s identification, proof of income and/or employment and proof of bank account are verified. In jurisdictions where we provide the cash advance, we determine whether to approve a cash advance and the size of a cash advance based primarily on a customer’s income. We do not perform credit checks through consumer reporting agencies. In the future, we may consider other criteria in evaluating cash advances. When a third-party lender provides the cash advance, such as in Texas and online, the applicable third-party lender decides whether to approve a cash advance and establishes all of the underwriting criteria and terms, conditions, and features of the customer agreements.

After the documents presented by the customer have been reviewed for completeness and accuracy, copied for record-keeping purposes and the cash advance has been approved, the customer enters into an agreement governing the terms of the cash advance. The customer then provides a personal check or an Automated Clearing House (“ACH”) authorization, which enables electronic payment from the customer’s account, to cover the amount of the cash advance plus charges for applicable fees and/or interest and/or the balance due under the agreement, and makes an appointment to return on a specified due date, typically his or her next payday, to repay the cash advance plus the applicable charges. However, in some states, customers are not required to provide us with a personal check or ACH authorization, and payment cycles may vary depending upon state law and type of service. At the specified due date, the customer is required to make the applicable payment, usually payment in full of the cash advance plus fees and interest if applicable. Payment is usually made in person, in cash at the center where the cash advance was initiated or issued unless the cash advance was completed on the internet, in which case the customer makes payment by ACH authorization.

Upon payment in full, the customer’s check is returned and/or his or her ACH authorization is deemed to be revoked. If the customer does not repay the outstanding cash advance in full on or before the due date, we will seek to collect from the customer the amount of the cash advance and any applicable fees, including late and NSF fees due, and may deposit the customer’s personal check or initiate the electronic payment from the customer’s bank account.

Other Products

We may offer alternative products and services to our customers where permissible under applicable law. For instance, in Ohio, we currently offer check cashing services at state authorized rates. We may also offer the products or services of a third party that we market, process, and/or service at our centers pursuant to an agreement with the third party. For instance, we currently offer pre-paid debit cards and money orders, money transmission, and bill payment services. Our Advance America branded pre-paid Visa debit card is issued by a federally chartered bank and regulated by the Office of Thrift Supervision. The card allows a cardholder to load cash onto the card and use the card wherever VISA debit cards are accepted. We are compensated under an agreement with the bank based on a number of factors related to the bank’s revenue from purchases and subsequent cardholder activity, such as charges for loads, ATM withdrawals, account maintenance/plan charges, and purchases. We also sell money orders, and provide money transfer services and bill payment services as an agent of a licensed third-party money transmitter. We are compensated by the money transmitter based upon the number and value of money transfers, money orders, and bill payments made at our centers.

Approval Process

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 a cash advance, he or she is required to have a bank account and a regular source of income, such as a job. To obtain a cash 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;

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·                  enters into an agreement governing the terms of the cash advance, including the customer’s agreement to repay the amount advanced 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 or ACH authorization until the due date;

·                  writes a personal check or provides an ACH authorization to cover the amount advanced plus charges for applicable fees and/or interest; and

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

In jurisdictions where we provide cash advances, we determine whether to approve the cash advance to our customers. We require proof of identification, bank account, and income source, as described above, and we primarily consider the customer’s income in determining the amount of the cash advance. In the future we may consider other criteria in evaluating cash advances. When a third-party lender provides the cash advance, such as in Texas and online, the applicable third-party lender decides whether to approve a cash advance and establishes all of the underwriting criteria and terms, conditions, and features of the customer agreements.

Payment Plans

In most states, a customer may qualify for an extended payment plan (“Payment Plan”). Generally, the terms of our Payment Plans conform to the CFSA Best Practices for extended payment plans. Certain states have specified their own terms and eligibility requirements for Payment Plans. Typically, 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 do 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, we may resume our normal collection procedures. We do not offer a Payment Plan for installment loans or lines of credit. The third-party lender in Texas does not offer a Payment Plan for advances to its customers. The third-party internet lenders offer Payment Plans as required by state law.

Certain states also provide for credit counseling plans. If a customer informs us that he or she has entered into a credit counseling plan, we work with the credit counselor and the customer to create a modified payment plan.

Collection Process

Repayment terms vary depending upon state law, the type of cash advance service offered, and whether the cash advance was completed online or in one of our centers. Generally, as part of the closing process, we explain the customer’s repayment obligations and establish the expectation that the customer will pay us in cash on or before the due date in accordance with their agreement with us. The day before the due date, we generally call the customer to confirm their payment.

If a customer does not pay the amount due, our center management has the discretion to either commence past-due collection efforts, which may proceed for up to 14 days in most states, or deposit the customer’s personal check or debit their bank account in accordance with their ACH authorization. If center management decides to commence past-due collection efforts, employees typically contact the customer by telephone or in person to obtain a payment or a promise to pay and, in cases where we hold a check, attempt to exchange the customer’s check for a cashier’s check, if funds are available.

If, at the end of this past-due collection period or Payment Plan, the center has been unable to collect the amount due, the customer’s check is deposited or their ACH authorization is processed. Additional collection efforts are not required if the customer’s deposited check or ACH debit clears. For the year ended December 31, 2009, and the nine months ended September 30, 2010, we deposited customer checks or presented an ACH authorization for approximately 5.9% and 6.4%, respectively, of all customer checks we received and approximately 30% and 35.4%, respectively, of these deposited customer checks or presented ACH’s cleared.  If the customer’s check or ACH debit 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, we begin additional collection efforts. 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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In the case of cash advances in the form of lines of credit, if a customer fails to make a payment when due in accordance with the terms of their agreement with us, center management may close the line of credit, accelerate the maturity date, and take the steps outlined above or work with the customer to bring his or her payments current. If we close the line of credit and accelerate the maturity date, we stop charging interest on the outstanding amount and begin collection efforts as described above.

Selected Operating Data

The following table presents key operating data for our business: