ADVANCE AMERICA, CASH ADVANCE CENTERS, INC. - AEA Annual Report (10-K) ITEM 1. BUSINESS.

The following is an excerpt from a 10-K SEC Filing, filed by ADVANCE AMERICA, CASH ADVANCE CENTERS, INC. on 3/1/2007.

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ADVANCE AMERICA, CASH ADVANCE CENTERS, INC. - 10-K - 20070301 - BUSINESS

PART I

ITEM 1. BUSINESS.

Overview

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

	Customers(1)				U.S. Census 2000
Average age (years)		39				35.8
Percentage between 18-44		66		%		40		%
Median household income		$	40,557			$	41,994
Percentage homeowners		45		%		66		%
Percentage with high school degrees		86		%		80		%(2)

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

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

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

The following table presents key operating data for our business:

	Year Ended December 31,
	2004		2005		2006
Number of centers open at end of period	2,408		2,604		2,853
Number of customers served—all credit products (thousands)	1,412		1,534		1,494
Number of payday cash advances originated (thousands)	11,586		11,620		11,539
Aggregate principal amount of payday cash advances originated (thousands)	$	3,804,096	$	3,943,815	$	4,082,865
Average amount of payday cash advance originated	$	328	$	339	$	353
Average charge to customers for providing and processing a payday cash advance	$	52	$	55	$	55
Average duration of a payday cash advance (days)	15.4		15.8		16.2
Average number of lines of credit outstanding during the period (thousands)	—		—		20
Average amount of aggregate principal on lines of credit outstanding during the period (thousands)	—		—		$	8,963
Average principal amount on lines of credit outstanding during the period	—		—		$	448
Number of installment loans originated (thousands)	—		68		29
Aggregate principal amount of installment loans originated (thousands)	—		$	34,541	$	13,905
Average amount of installment loan originated	—		$	508	$	486
Average charge to customers for providing and processing an installment loan(1)	—		$	337	$	357

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

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

Our Industry

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

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

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

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

Competitive Strengths

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

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

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

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

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

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

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

Business Strategy

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

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

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

Support Improvement of the Legislative and Regulatory Environment. As of December 31, 2006, 39 states and the District of Columbia had specific laws that permitted payday cash advances or allowed a form of payday cash advances under small loan laws. Our goal is to work with policymakers and grass roots organizations to facilitate the implementation of a balanced, visible and predictable regulatory framework that protects the interests of the customers we serve while allowing us to operate profitably in every state.

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

Our Services

Historically, we have conducted our business in most states under the authority of a variety of enabling state statutes including payday advance, deferred presentment, check-cashing, small loan, credit service organization and other state laws (which we refer to as the standard business model). In certain states, we previously conducted business as a marketing, processing and servicing agent for Federal Deposit Insurance Corporation (“FDIC”) supervised, state-chartered banks that made payday cash advances and installment loans to their customers pursuant to the authority of the laws of the states in

which they were located and federal interstate banking laws, regulations and guidelines (which we refer to as the agency business model). We refer to the banks for which we acted as an agent under the agency business model as lending banks. Our advance services consist primarily of payday cash advances. We currently also offer lines of credit in Pennsylvania and installment loans in Illinois.

We provide advances and charge fees and/or interest as specified by the laws of the states where we operate under the standard business model. In the states where we previously operated under the agency business model, the lending banks provided advances and installment loans and charged fees and/or interest as specified by the laws of the states in which they were located and consistent with the regulatory authority of the FDIC and federal banking law. The permitted size of an advance varies by state and ranges from $50 to $1,000. The permitted fees and/or interest on an advance also vary by state and range from 10% to 22% of the amount of a payday cash advance. Fees and interest for installment loans are larger relative to the size of the advance because of the longer term of this product. Fees and interest for the line of credit product consist of a monthly service fee for the line of credit plus interest on the average outstanding balance.

Additional fees that we may collect include fees for returned checks and late fees. The returned check fee varies by state and ranges up to $30. We charge a customer this fee if a deposited check is returned due to non-sufficient funds (“NSF”) in the customer’s account or other reasons. In three states, we are also permitted to charge a late fee, the amount of which varies by state. In Texas, where we provide credit services as a Credit Services Organization (“CSO”), the third-party lender charges a late fee on its loan in accordance with state law. In two other states, a late fee was charged by the lending bank on the installment loan, the amount of which was determined by the lending bank. For the years ended December 31, 2006 and 2005, total NSF fees collected by us, the third-party lender in Texas and the lending banks were approximately $3.3 million and $2.8 million, respectively, and total late fees collected by us, the third-party lender in Texas and the lending banks were approximately $768,000 and $254,000, respectively.

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

Under the standard business model, we determine whether to approve an advance to our customers. Using this model, we do not undertake any evaluation of the creditworthiness of our customers in determining whether to approve customers for advances, other than requiring proof of identification, bank account and income source, as described above. We also consider the customer’s income in determining the amount of the advance. Under the agency business model, the lending banks used third-party credit scores to evaluate and approve each customer’s application. We currently act as a CSO in our centers in Texas. As a CSO, we offer a fee-based credit services package to assist customers in trying to improve their credit and in obtaining an extension of consumer credit through a third-party lender, who determines whether to approve the loan and establishes all of the loan underwriting criteria and terms, conditions and features of the loan agreement with the customer.

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

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

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

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

Seasonality

Our business is seasonal due to the impact of fluctuating demand for advances and fluctuating collection rates throughout the year. Demand has historically been higher in the third and fourth quarters of each year, corresponding to the back-to-school and holiday seasons, and lowest in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds.

Collection Procedures

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

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

If at the end of this past-due collection period, the center has been unable to collect the amount due, the customer’s check is then deposited. Additional collection efforts are not required if the customer’s deposited check clears. If the customer’s check does not clear and is returned because of non-sufficient funds in the customer’s account or because of a closed account or a stop-payment order, additional collection efforts begin. These additional collection efforts are carried out by the center employees and typically include contacting the customer by telephone or in person to obtain payment or a promise to pay and attempting to exchange the customer’s check for a cashier’s check if funds become available. We also send out a series of collection letters centrally which are automatically triggered based on a set of pre-determined criteria.

Center Operations

Centers

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

	As of December 31,
State	2004	2005	2006
Alabama	127	140	140
Arizona	49	53	60
Arkansas	30	30	30
California	290	298	302
Colorado	56	62	67
Delaware	10	13	14
Florida	173	211	248
Idaho	8	13	15
Illinois	61	60	72
Indiana	91	116	123
Iowa	21	35	37
Kansas	—	42	56
Kentucky	33	39	43
Louisiana	64	75	76
Michigan	87	111	137
Mississippi	51	53	53
Missouri	62	70	84
Montana	8	9	8
Nebraska	25	25	24
Nevada	10	10	11
New Hampshire	15	16	20
New Mexico	12	12	12
North Carolina(1)	118	—	—
North Dakota	—	7	8
Ohio	178	210	231
Oklahoma	68	67	67
Oregon	42	56	53
Pennsylvania	101	101	99
Rhode Island	—	3	15
South Carolina	105	112	129
South Dakota	10	11	12
Tennessee	59	62	65
Texas	204	207	231
Virginia	109	120	142
Washington	90	105	110
Wisconsin	37	45	52
Wyoming	4	5	7
Total	2,408	2,604	2,853

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

Internal Compliance Audit

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

Prior Relationships with the Lending Banks

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

Although we marketed, processed and serviced payday cash advances and installment loans offered, made and funded by the lending banks under the former agency business model, each lending bank was responsible for evaluating each of its customers’ applications and determining whether the payday cash advance or installment loan was approved. The lending banks utilized an automated third-party credit scoring system to evaluate and approve each customer application. We were not involved in the lending banks’ approval process or in determining their approval procedures or criteria and, in the normal course of business, we generally did not fund or acquire any payday cash advances or installment loans from the lending banks. The payday cash advances and installment loans were repayable solely to the lending banks and were assets of the lending banks. Consequently, the lending banks’ payday cash advances and installment loans have never been included in our balance sheet within our advances and fees receivable, net.

Under the MP&S Agreements, the lending banks were contractually obligated for all or a specified portion of the losses on their advances and loans. Therefore, our marketing, processing and servicing fees increased by the lending bank’s contractual obligation for losses. If actual losses by a lending bank exceeded the percentage specified in its MP&S Agreement, we were potentially obligated to pay the lending bank the outstanding amount of the advances and loans plus the lending bank’s fees and/or interest receivable on the advances and loans, less the lending bank’s contractually obligated portion of the losses.

Competition

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

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

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

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

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

Marketing and Advertising

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

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

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

Information Systems

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

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

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

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

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

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

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

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

Security

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

Because our business requires us to maintain a significant supply of cash in each of our centers, we are subject to the risk of cash shortages resulting from employee and third-party theft and errors. Cash shortages from employee and third-party theft and errors were approximately $2.0 million (0.29% of total revenues) in 2006, $1.6 million (0.25% of total revenues) in 2005 and $1.2 million (0.21% of total revenues) in 2004.

Human Resources

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

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

Employees

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

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

Intellectual Property and other Proprietary Rights

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

Other

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

Government Regulation

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

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

State Regulation

Our business is regulated under a variety of enabling state statutes, including payday cash advance, deferred presentment, check-cashing, money transmission, small loan and credit services organization state laws, all of which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. As of December 31, 2006, 39 states and the District of Columbia had specific laws that permitted payday cash advances or a similar form of short-term consumer credit. As of December 31, 2006, we operated in 35 of these 39 states. We do not currently conduct business in the remaining four states or in the District of Columbia because we do not believe it is economically attractive to operate in these jurisdictions due to specific legislative restrictions, such as interest rate ceilings, an unattractive population density or unattractive location characteristics. However, we may find it becomes economically attractive to open centers in any of these four states or the District of Columbia if any of these variables change. The remaining 11 states do not have laws specifically authorizing the payday cash advance or short-term consumer finance business. Despite the lack of specific laws, other laws may permit us to do business in these states. As of December 31, 2006, we operated in one of these 11 states.

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

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

During the last few years, legislation has been adopted in some states that prohibits or severely restricts advance services. Many bills have also been introduced in state legislatures. In 2006, bills that severely restrict or effectively prohibit advance services were introduced in 18 states. In addition, two states have sunset provisions in their advance laws that require renewal of the laws by the state legislatures at periodic intervals. Rules currently under consideration in New Mexico may effectively prohibit, or at least significantly restrict, our operations there. Oregon has enacted legislation that is currently slated to become effective in July 2007 that will provide for significant additional restrictions on the offering of advances. Similar laws prohibiting advance services or making them unprofitable could be passed in any other state at any time or existing payday cash advance laws could expire or be amended.

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

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

State attorneys general and banking regulators have begun to scrutinize payday cash advances and other alternative financial products and take actions that could require us to modify, suspend or cease operations in their respective states. In December 2005, after the conclusion of a contested case, the Commissioner of Banks for North Carolina ordered our North Carolina subsidiary to immediately cease all business operations. As a result, we closed all of our centers in North Carolina. In addition, the newly introduced Advance America Choice-Line of Credit is being challenged by the Office of the Pennsylvania Secretary of Banking in a lawsuit filed in the Commonwealth Court of Pennsylvania. See “Item 3. Legal Proceedings.” It is possible that other actions taken against the industry in the future by other state attorneys general and banking regulators could require us to suspend or cease operations in such jurisdictions and have a negative effect on our financial condition.

State-specific legislative or regulatory action can reduce our revenues and/or margins in a state, cause us to temporarily operate at a loss in a state, or even cause us to cease or suspend our operations in a state. From time to time, we may also choose to operate in a state even if legislation or regulations cause us to lose money on our operations in that state.

Federal Regulation

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

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

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

Local Regulation

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

Environmental, Health and Safety Matters

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

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

ITEM 1A. RISK FACTORS.

Risks Related to Our Business and Industry

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

Our business is subject to numerous federal, state and local laws and regulations, which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. These regulations govern or affect, among other things, interest rates and other fees, check cashing fees, lending practices, recording and reporting of certain financial transactions, privacy of personal consumer information and collection practices. As we develop new product and service offerings, we may become subject to additional federal, state and local regulations. If we expand our business to include international operations, we will become subject to foreign laws and regulations. State and local

governments may also seek to impose new licensing requirements or interpret or enforce existing requirements in new ways. In addition, changes in current laws and future laws or regulations may restrict our ability to continue our current methods of operation or expand our operations. Changes in laws or regulations, or our failure to comply with such laws and regulations, may have a material adverse effect on our business, results of operations and financial condition.

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

Our business is regulated under a variety of enabling state statutes, including payday advance, deferred presentment, check-cashing, money transmission, small loan and credit services organization state laws, all of which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. As of December 31, 2006, 39 states and the District of Columbia had specific laws that permitted payday cash advances or a similar form of short-term consumer loans. As of December 31, 2006, we operated in 35 of these 39 states. We do not currently conduct business in the remaining four states or in the District of Columbia because we do not believe it is economically attractive to operate in these jurisdictions due to specific legislative restrictions, such as interest rate ceilings, an unattractive population density or unattractive location characteristics. However, we may open centers in any of these states or the District of Columbia if we believe doing so may become economically attractive because of a change in any of these variables. The remaining 11 states do not have laws specifically authorizing the payday cash advance or short-term consumer finance business. Despite the lack of specific laws, other laws may permit us to do business in these states. As of December 31, 2006, we operated in one of these 11 states.

During the last few years, legislation has been adopted in some states that prohibits or severely restricts payday cash advance and similar services. Many bills have also been introduced in state legislatures. In 2006, bills that severely restrict or effectively prohibit payday cash advances were introduced in 18 states. In addition, two states have sunset provisions in their payday cash advance laws that require renewal of the laws by the state legislatures at periodic intervals. Rules currently under consideration in New Mexico may effectively prohibit, or at least significantly restrict, our operations there. Oregon has enacted legislation that is currently slated to become effective in July 2007 that will provide for significant additional restrictions on the industry. Any such legislation could have a material adverse impact on our results from operations. Laws prohibiting payday cash advance and similar services or making them unprofitable could be passed in any other state at any time or existing enabling laws could expire or be amended, any of which would have a material adverse effect on our business, results of operations and financial condition.

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

the staff of state regulatory bodies change, it is possible that their interpretations of applicable laws and regulations also may change and negatively affect our business. As a result, our reliance on staff interpretations could have a material adverse effect on our business, results of operations and financial condition.

Additionally, state attorneys general and banking regulators have begun to scrutinize payday cash advances and other alternative financial products and take actions that could require us to modify, suspend or cease operations in their respective states. In December 2005, after the conclusion of a contested case, the Commissioner of Banks for North Carolina ordered our North Carolina subsidiary to immediately cease all business operations. See “Item 3. Legal Proceedings.” As a result, we closed all of our centers in North Carolina. The lost revenues from these closures had a negative impact on our results of operations and financial condition. In addition, the newly introduced Advance America Choice-Line of Credit is being challenged by the Office of the Pennsylvania Secretary of Banking in a lawsuit filed in the Commonwealth Court of Pennsylvania. See “Item 3. Legal Proceedings.” An adverse ruling in this case could significantly impair our business or force us to cease offering that new product in Pennsylvania.

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

Although states provide the primary regulatory framework under which we offer advances, certain federal laws also impact our business. See “Item 1. Business—Federal Regulation.” Because advances are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and Regulation Z adopted under that Act. Additionally, we are subject to the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act. Any failure to comply with any of these federal laws and regulations could have a material adverse effect on our business, results of operations and financial condition.

Additionally, since 1999, various anti-payday cash advance legislation has been introduced in the U.S. Congress. Congressional members continue to receive pressure from consumer advocates and other industry opposition groups to adopt such legislation. Recent attention has focused on the use of short-term lending and payday cash advances by military personnel. On September 29, 2006, the John Warner National Defense Authorization Act for Fiscal Year 2007 (the “Act”) conference report was filed and the Act was signed into law on October 17, 2006. The Act places, among other restrictions, a limit on the effective annual percentage rate of 36% on extensions of credit, including payday cash advances, to active members of the military and their dependents. Any federal legislative or regulatory action that restricts or prohibits payday cash advance and similar services could have a material adverse impact on our business, results of operations and financial condition. On October 15, 2006, we voluntarily ceased qualifying customers for advances based on income from military service.

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

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

In addition to state and federal laws and regulations, our business can be subject to various local rules and regulations such as local zoning regulations. For example, several cities in Oregon have recently adopted local ordinances that have the effect of limiting our business. Any actions taken in the future by

local zoning boards or other local governing bodies to require special use permits for, or impose other restrictions on, providers of payday cash advances and similar services could have a material adverse effect on our business, results of operations and financial condition.

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

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

Our business is subject to lawsuits and regulatory proceedings that could generate adverse publicity and cause us to incur substantial expenditures. See “Item 3. Legal Proceedings.” Adverse rulings in some of these lawsuits or regulatory proceedings could significantly impair our business or force us to cease doing business in one or more states.

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

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

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

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

Our centers operated in 36 states during the year ended December 31, 2006, and our five largest states (measured by total revenues) accounted for approximately 47% of our total revenues. While we believe we have a diverse geographic presence, for the near term we expect that significant revenues will continue to

be generated by certain states, largely due to the currently prevailing economic, demographic, regulatory, competitive and other conditions in those states. For example, during 2006, California and Texas each accounted for more than 10% of our total revenues. Changes to prevailing economic, demographic, regulatory or any other conditions in the markets in which we operate could lead to a reduction in demand for our products and services, a decline in our revenues or an increase in our provision for doubtful accounts that could result in a deterioration of our financial condition.

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

Consumer advocacy groups and certain media reports advocate for governmental and regulatory action to prohibit or severely restrict payday cash advances and similar loans. The consumer groups and media reports typically focus on the cost to a consumer for an advance and typically characterize these advances as predatory or abusive toward consumers. If this negative characterization of advances becomes widely accepted by consumers, demand for advance services could significantly decrease, which could materially adversely affect our business, results of operations and financial condition. Negative perception of advances or our other activities could also result in increased regulatory scrutiny and litigation, encourage restrictive local zoning rules, make it more difficult to obtain government approvals necessary to open new centers and cause payday cash advance industry trade groups, such as the CSFA, to promote polices that cause our business to be less profitable. These trends could materially adversely affect our business, results of operations and financial condition.

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

For the years ended December 31, 2006 and 2005, we deposited approximately 5.7% and 5.5%, respectively, of all the customer checks we received and approximately 78% and 79%, respectively, of these deposited customer checks were returned unpaid because of non-sufficient funds in the customers’ bank accounts or because of closed accounts or stop-payment orders. Total charge-offs, net of recoveries, for the years ended December 31, 2006 and 2005 were approximately $110.4 million and $100.5 million, respectively. If the number of customer checks that we deposit increases or the percent of the customers’ returned checks that we charge-off increases, our provision for doubtful accounts will increase and our net income will decrease.

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

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

As of December 31 , 2006, our allowance for doubtful accounts was $57.4 million. This amount, however, is an estimate, and we have less experience upon which to base our estimates of losses from check-cashing, deferred-presentment, credit services, installment loans and lines of credit than with payday cash advances. If our actual losses are greater than our allowance for doubtful accounts, our provision for doubtful accounts would increase. This would result in a decline in our future revenues and earnings, which could have a material adverse effect on our stock price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We cannot assure you that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Our growth has placed significant demands on all aspects of our business, including our administrative, technical and financial personnel and systems. Additional growth or expansion may further strain our management, financial and other resources. Any international operations would increase the complexity of our organization, our administrative costs and the regulatory risks we face and therefore could destabilize our business, results of operations and financial condition. Our future results of operations will substantially depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. In addition, we cannot assure you that we will be able to implement our business strategy profitably in geographic areas or product lines we do not currently serve.

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

We may incur substantial additional debt in the future. As of December 31, 2006, our total debt was approximately $111.1 million and our stockholders’ equity was approximately $299.9 million. The total availability under our current credit facility is $265.0 million, which we may borrow at any time, subject to compliance with certain covenants and conditions. Due to the seasonal nature of our business, our total debt is historically the lowest during the first calendar quarter and then increases during the remainder of the year. If we incur substantial additional debt, it could have important consequences to our business. For example, it could:

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

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

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

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

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

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

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

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

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

We depend on borrowings under our revolving credit facility to fund advances, capital expenditures to build new centers and other needs. If our current or potential credit banks decide not to lend money to companies in our industry, we could face higher borrowing costs, limitations on our ability to grow our business as well as possible cash shortages, any of which could have a material adverse effect on our business, results of operations and financial condition. Certain banks have notified us and other companies in the payday cash advance and check-cashing industries, that they will no longer maintain bank accounts for these companies due to reputational risks and increased compliance costs of servicing money services businesses and other cash intensive industries. While none of our larger depository banks has requested that we close our bank accounts or put other restrictions on how we use their services, if any of our larger current or future depository banks were to take such action, we could face higher costs of managing our cash and limitations on our ability to grow our business, both of which could have a material adverse effect on our business, results of operations and financial condition.

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

We have an existing revolving credit facility that allows us to borrow up to $265.0 million, assuming we are in compliance with a number of covenants and conditions. Because we typically use substantially all of our available cash generated from our operations to repay borrowings on our revolving credit facility on a current basis, we have limited cash balances and we expect that a substantial portion of our liquidity needs, including any amounts to pay any future cash dividends on our common stock, will be funded primarily from borrowings under our revolving credit facility. As of December 31, 2006, we had approximately $156.3 million available for future borrowings under this facility. Due to the seasonal nature of our business, our borrowings are historically the lowest during the first calendar quarter and increase during the remainder of the year. If our existing sources of liquidity are insufficient to satisfy our financial needs, we may need to raise additional debt or equity in the future.

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

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

· incur additional debt;

· create liens;

· effect mergers or consolidations;

· make investments, acquisitions or dispositions;

· pay dividends, repurchase stock or make other payments;

· enter into certain sale and leaseback transactions; and

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

The breach of any covenant or obligation in our revolving credit facility will result in a default. If there is an event of default under our revolving credit facility, the lenders under the revolving credit facility could cause all amounts outstanding thereunder to be due and payable, subject to applicable grace periods. This could trigger cross-defaults under our other existing or future debt instruments. As a result, our ability to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might further our growth strategy. If we are unable to repay, refinance or restructure our indebtedness under our revolving credit facility, the lenders under that facility could proceed against the collateral securing that indebtedness. Our obligations under the revolving credit facility are guaranteed by each of our existing and future domestic subsidiaries. The borrowings under the revolving credit facility and the subsidiary guarantees are secured by substantially all of our assets and the assets of the subsidiary guarantors. In addition, borrowings under the revolving credit facility are secured by a pledge of substantially all of the capital stock, or similar equity interests, of the subsidiary guarantors. In the event of our insolvency, liquidation, dissolution or reorganization, the lenders under our revolving credit facility and any other existing or future debt of ours would be entitled to payment in full from our assets before distributions, if any, were made to our stockholders.

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

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

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

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

Because our business requires us to maintain a significant supply of cash in each of our centers, we are subject to the risk of cash shortages resulting from employee and third-party theft and errors. Although we have implemented various programs to reduce these risks, maintain insurance coverage for theft and provide security for our employees and facilities, we cannot assure you that employee and third-party theft

and errors will not occur. Cash shortages from employee and third-party theft and errors were approximately $2.0 million (0.29% of total revenues) in 2006, $1.6 million (0.25% of total revenues) in 2005 and $1.2 million (0.21% of total revenues) in 2004. Theft and errors could lead to cash shortages and could adversely affect our business, results of operations and financial condition. It is also possible that crimes such as armed robberies may be committed at our centers. We could experience liability or adverse publicity arising from such crimes. For example, we may be liable if an employee, customer or bystander suffers bodily injury, emotional distress or death. Any such event may have a material adverse effect on our business, results of operations and financial condition.

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

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

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

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

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

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

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

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

· diversion of financial and management resources from existing operations;

· risks of entering new markets;

· potential loss of key employees; and

· inability to generate sufficient revenues to offset acquisition costs.

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

may incur costs in excess of what we anticipate, either of which could have a material adverse effect on our business, results of operations and financial condition.

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

The annual turnover as of December 31, 2006, among our center managers was approximately 53% and among our other center employees was approximately 106%. Approximately 50% of the turnover has traditionally occurred in the first six months following the hire date of our center managers and employees. This turnover increases our cost of operations and makes it more difficult to operate our centers. If we are unable to retain our employees in the future, our business, results of operations and financial condition could be adversely affected.

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

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

Risks Related to Our Common Stock

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

Our executive officers and directors, together with certain family members and trusts for their benefit, control approximately 24% of our outstanding common stock. As a result, these stockholders, if they act together, may be able to influence any matter requiring our stockholders’ approval, including the election of directors and approval of significant corporate transactions. As a result, this concentration of ownership may delay, prevent or deter a change in control, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or its assets and might reduce the market price of our common stock.

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.