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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended September 30, 2009

 

OR

 

o

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

 

For the transition period from        to        

 

COMMISSION FILE NUMBER 001-32363

 

ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

58-2332639

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

135 North Church Street

Spartanburg, South Carolina 29306

(Address of principal executive offices) (Zip Code)

 

864-342-5600

(Registrant’s telephone number, including area code)

 

None

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

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

 

Class

 

Outstanding as of November 6, 2009

Common Stock, par value $.01 per share

 

61,617,275 shares

 

 

 



Table of Contents

 

ADVANCE AMERICA, CASH ADVANCE CENTERS, INC.

Form 10-Q

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

 

 

 

Page

FORWARD-LOOKING STATEMENTS

3

 

 

 

PART I.

FINANCIAL INFORMATION

4

Item 1.

Financial Statements

4

 

Unaudited Consolidated Balance Sheets December 31, 2008 and September 30, 2009

4

 

Interim Unaudited Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2008 and 2009

5

 

Interim Unaudited Consolidated Statement of Stockholders’ Equity Nine Months Ended September 30, 2009

6

 

Interim Unaudited Consolidated Statements of Cash Flows Nine Months Ended September 30, 2008 and 2009

7

 

Notes to Interim Unaudited Consolidated Financial Statements

8

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

44

 

 

 

PART II.

OTHER INFORMATION

45

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 6.

Exhibits

45

 

 

 

SIGNATURES

46

 

 

 

INDEX TO EXHIBITS

47

 

2



Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

3



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Advance America, Cash Advance Centers, Inc.

 

Unaudited Consolidated Balance Sheets

 

December 31, 2008 and September 30, 2009

 

(in thousands, except per share data)

 

 

 

December 31,
2008

 

September 30,
2009

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

16,017

 

$

12,910

 

Advances and fees receivable, net

 

220,115

 

212,182

 

Deferred income taxes

 

13,008

 

13,008

 

Other current assets

 

15,721

 

16,281

 

Total current assets

 

264,861

 

254,381

 

Restricted cash

 

4,633

 

4,510

 

Property and equipment, net

 

46,091

 

34,738

 

Goodwill

 

126,661

 

127,030

 

Other assets

 

4,764

 

4,231

 

Total assets

 

$

447,010

 

$

424,890

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

13,977

 

$

12,023

 

Accrued liabilities

 

33,917

 

32,674

 

Income taxes payable

 

1,625

 

 

Accrual for third-party lender losses

 

3,960

 

4,334

 

Current portion of long-term debt

 

545

 

469

 

Total current liabilities

 

54,024

 

49,500

 

Revolving credit facility

 

189,817

 

149,039

 

Long-term debt

 

4,590

 

4,236

 

Deferred income taxes

 

22,311

 

22,311

 

Deferred revenue

 

4,791

 

3,222

 

Other liabilities

 

218

 

302

 

Total liabilities

 

275,751

 

228,610

 

Commitments and contingencies (Note 6)

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, par value $.01 per share, 25,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, par value $.01 per share, 250,000 shares authorized; 96,821 shares issued and 61,087 and 61,621 outstanding as of December 31, 2008 and September 30, 2009, respectively

 

968

 

968

 

Paid in capital

 

288,635

 

289,922

 

Retained earnings

 

143,961

 

166,780

 

Accumulated other comprehensive loss

 

(2,585

)

(1,846

)

Common stock in treasury (35,734 and 35,200 shares at cost at December 31, 2008 and September 30, 2009, respectively)

 

(259,720

)

(259,544

)

Total stockholders’ equity

 

171,259

 

196,280

 

Total liabilities and stockholders’ equity

 

$

447,010

 

$

424,890

 

 

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

 

4



Table of Contents

 

Advance America, Cash Advance Centers, Inc.

 

Interim Unaudited Consolidated Statements of Income

 

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

 

(in thousands, except per share data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Total Revenues

 

$

173,861

 

$

167,920

 

$

501,459

 

$

474,437

 

Center Expenses:

 

 

 

 

 

 

 

 

 

Salaries and related payroll costs

 

47,783

 

44,508

 

148,489

 

137,425

 

Provision for doubtful accounts

 

42,126

 

38,783

 

93,132

 

92,893

 

Occupancy costs

 

25,204

 

23,399

 

75,233

 

71,419

 

Center depreciation expense

 

4,115

 

3,159

 

12,638

 

10,142

 

Advertising expense

 

6,109

 

4,235

 

16,099

 

15,351

 

Other center expenses

 

11,095

 

10,558

 

36,730

 

34,870

 

Total center expenses

 

136,432

 

124,642

 

382,321

 

362,100

 

Center gross profit

 

37,429

 

43,278

 

119,138

 

112,337

 

Corporate and Other Expenses (Income):

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

18,312

 

14,259

 

50,696

 

42,128

 

Legal settlements

 

 

6,399

 

 

6,399

 

Corporate depreciation expense

 

760

 

671

 

2,320

 

2,038

 

Interest expense

 

3,029

 

1,556

 

8,246

 

4,850

 

Interest income

 

(37

)

(126

)

(107

)

(160

)

(Gain)/loss on disposal of property and equipment

 

221

 

(197

)

439

 

(244

)

Loss on impairment of assets

 

 

 

236

 

2,209

 

Income before income taxes

 

15,144

 

20,716

 

57,308

 

55,117

 

Income tax expense

 

6,689

 

8,135

 

24,775

 

20,751

 

Net income

 

$

8,455

 

$

12,581

 

$

32,533

 

$

34,366

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

$

0.21

 

$

0.50

 

$

0.56

 

Diluted

 

$

0.14

 

$

0.20

 

$

0.50

 

$

0.56

 

Dividends declared per common share

 

$

0.125

 

$

0.0625

 

$

0.375

 

$

0.1875

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

61,000

 

60,866

 

65,375

 

60,863

 

Diluted

 

61,008

 

61,712

 

65,378

 

61,613

 

 

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

 

5



Table of Contents

 

Advance America, Cash Advance Centers, Inc.

 

Interim Unaudited Consolidated Statement of Stockholders’ Equity

 

Nine Months Ended September 30, 2009

 

(in thousands, except per share data)

 

 

 

Common
Stock

 

 

 

 

 

Accumulated
Other

 

Common Stock

 

 

 

 

 

 

 

Par

 

Paid-In

 

Retained

 

Comprehensive

 

In Treasury

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Loss

 

Shares

 

Amount

 

Total

 

Balances, December 31, 2008

 

96,821

 

$

968

 

$

288,635

 

$

143,961

 

$

(2,585

)

(35,734

)

$

(259,720

)

$

171,259

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

34,366

 

 

 

 

34,366

 

Foreign currency translation

 

 

 

 

 

739

 

 

 

739

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,105

 

Dividends paid ($0.1875 per share)

 

 

 

 

(11,429

)

 

 

 

(11,429

)

Dividends payable

 

 

 

 

(118

)

 

 

 

(118

)

Purchases of treasury stock

 

 

 

 

 

 

(4

)

(11

)

(11

)

Issuance of restricted stock

 

 

 

 

 

 

564

 

 

 

Vesting of restricted stock issued from treasury stock

 

 

 

(156

)

 

 

 

156

 

 

Forfeitures of restricted stock

 

 

 

 

 

 

(30

)

 

 

Amortization of restricted stock

 

 

 

558

 

 

 

 

 

558

 

Stock option expense

 

 

 

909

 

 

 

 

 

909

 

Issuance of common stock to director in lieu of cash

 

 

 

(24

)

 

 

4

 

31

 

7

 

Balances, September 30, 2009

 

96,821

 

$

968

 

$

289,922

 

$

166,780

 

$

(1,846

)

(35,200

)

$

(259,544

)

$

196,280

 

 

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

 

6



Table of Contents

 

Advance America, Cash Advance Centers, Inc.

 

Interim Unaudited Consolidated Statements of Cash Flows

 

Nine Months Ended September 30, 2008 and 2009

 

(in thousands)

 

 

 

2008

 

2009

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

32,533

 

$

34,366

 

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition

 

 

 

 

 

Depreciation and amortization

 

14,993

 

12,223

 

Non-cash interest expense

 

548

 

483

 

Provision for doubtful accounts

 

93,132

 

92,893

 

Deferred income taxes

 

2,355

 

 

(Gain)/loss on disposal of property and equipment

 

439

 

(244

)

Loss on impairment of assets

 

236

 

2,209

 

Amortization of restricted stock

 

665

 

558

 

Stock option expense

 

979

 

909

 

Common stock issued to director in lieu of cash

 

71

 

7

 

Changes in operating assets and liabilities

 

 

 

 

 

Fees receivable, net

 

(13,360

)

(17,858

)

Other current assets

 

(8,825

)

(517

)

Other assets

 

209

 

65

 

Accounts payable

 

(1,379

)

441

 

Accrued liabilities

 

(4,092

)

(1,335

)

Income taxes payable

 

 

(1,625

)

Deferred revenue

 

5,365

 

(1,569

)

Net cash provided by operating activities

 

123,869

 

121,006

 

Cash flows from investing activities

 

 

 

 

 

Changes in advances receivable

 

(70,413

)

(66,564

)

Changes in restricted cash

 

500

 

123

 

Acquisition of business, net of cash acquired

 

(769

)

 

Proceeds from sale of property and equipment

 

22

 

472

 

Purchases of property and equipment

 

(7,743

)

(3,042

)

Net cash used in investing activities

 

(78,403

)

(69,011

)

Cash flows from financing activities

 

 

 

 

 

(Payments on)/proceeds from revolving credit facility, net

 

60,703

 

(40,778

)

Payments on mortgage payable

 

(307

)

(330

)

Payments on note payable

 

(97

)

(101

)

Payments of financing costs

 

(1,622

)

 

Purchases of treasury stock

 

(88,953

)

(11

)

Payments of dividends

 

(24,377

)

(11,429

)

Changes in book overdrafts

 

(2,872

)

(2,459

)

Net cash used in financing activities

 

(57,525

)

(55,108

)

Effect of exchange rate changes on cash and cash equivalents

 

(191

)

6

 

Net decrease in cash and cash equivalents

 

(12,250

)

(3,107

)

Cash and cash equivalents, beginning of period

 

28,251

 

16,017

 

Cash and cash equivalents, end of period

 

$

16,001

 

$

12,910

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

7,681

 

$

4,726

 

Income taxes

 

28,029

 

22,177

 

Supplemental schedule of non-cash investing and financing activity:

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued expenses

 

42

 

3

 

Restricted stock dividends payable

 

105

 

118

 

Net assets acquired through acquisition of business

 

61

 

 

 

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

 

7



Table of Contents

 

Advance America, Cash Advance Centers, Inc.

 

Notes to Interim Unaudited Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

Description of Business

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

Concentration of Risk

 

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

 

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

 

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

 

Income Taxes

 

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

 

8



Table of Contents

 

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

 

Earnings Per Share

 

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

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Reconciliation of denominator:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding—basic

 

61,000

 

60,866

 

65,375

 

60,863

 

Effect of dilutive unvested restricted stock

 

8

 

448

 

3

 

407

 

Effect of dilutive outstanding stock options

 

 

398

 

 

343

 

Weighted average number of common shares outstanding—diluted

 

61,008

 

61,712

 

65,378

 

61,613

 

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

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

 

In December 2007, the FASB issued ASC 805-10-65, “Transition Related to FASB No. 141 (Revised 2007), Business Combinations” (“ASC 805-10-65”). ASC 805-10-65 modifies the accounting for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition-date fair value.  In addition, ASC 805-10-65 requires the expensing of acquisition-related transaction and restructuring costs and requires that certain contingent assets and liabilities acquired, as well as contingent consideration, be recognized at fair value.  ASC 805-10-65 also modifies the accounting for certain acquired income tax assets and liabilities.  ASC 805-10-65 is effective for acquisitions consummated on or after January 1, 2009.  The adoption of ASC 805-10-65 did not have a material impact on the Company’s financial position or results of operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

2. Advances and Fees Receivable, Net

 

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

 

 

 

December 31,
2008

 

September 30,
2009

 

Advances receivable

 

$

215,577

 

$

204,471

 

Fees and interest receivable

 

33,633

 

35,246

 

Returned items receivable

 

42,996

 

40,437

 

Other

 

3,751

 

5,491

 

Allowance for doubtful accounts

 

(59,441

)

(58,290

)

Unearned revenues

 

(16,401

)

(15,173

)

Advances and fees receivable, net

 

$

220,115

 

$

212,182

 

 

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

 

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

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Beginning balance

 

$

53,496

 

$

56,910

 

$

61,306

 

$

59,441

 

Provision for doubtful accounts

 

41,988

 

38,302

 

93,964

 

92,519

 

Charge-offs

 

(41,164

)

(40,508

)

(116,668

)

(111,913

)

Recoveries

 

4,544

 

3,586

 

20,262

 

18,243

 

Ending balance

 

$

58,864

 

$

58,290

 

$

58,864

 

$

58,290

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Beginning balance

 

$

3,617

 

$

3,853

 

$

4,587

 

$

3,960

 

Provision for doubtful accounts

 

138

 

481

 

(832

)

374

 

Ending balance

 

$

3,755

 

$

4,334

 

$

3,755

 

$

4,334

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Beginning balance

 

$

57,113

 

$

60,763

 

$

65,893

 

$

63,401

 

Provision for doubtful accounts

 

42,126

 

38,783

 

93,132

 

92,893

 

Charge-offs

 

(41,164

)

(40,508

)

(116,668

)

(111,913

)

Recoveries

 

4,544

 

3,586

 

20,262

 

18,243

 

Ending balance

 

$

62,619

 

$

62,624

 

$

62,619

 

$

62,624

 

 

4. Other Current Assets

 

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

 

 

 

December 31,
2008

 

September 30,
2009

 

Prepaid rent

 

$

6,745

 

$

6,386

 

Prepaid insurance

 

2,848

 

3,636

 

Prepaid taxes and licenses

 

1,430

 

1,400

 

Prepaid income taxes

 

1,568

 

1,369

 

Prepaid workers compensation loss fund

 

321

 

346

 

Other

 

2,809

 

3,144

 

Total

 

$

15,721

 

$

16,281

 

 

5. Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

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December 31,
2008

 

September 30,
2009

 

Employee compensation

 

$

13,533

 

$

9,797

 

Legal fines and settlements

 

2,600

 

6,476

 

Workers’ compensation

 

4,851

 

4,528

 

Straight-line rent accrual

 

3,011

 

2,353

 

Deferred revenue

 

1,830

 

1,722

 

Accounting and tax

 

1,158

 

1,040

 

Center closing costs

 

871

 

964

 

Advertising

 

584

 

948

 

Legal

 

1,128

 

855

 

Property, sales and franchise taxes

 

558

 

778

 

Severance

 

374

 

269

 

Construction in progress

 

99

 

3

 

Other

 

3,320

 

2,941

 

Total

 

$

33,917

 

$

32,674

 

 

6. Commitments and Contingencies

 

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

 

Legal Proceedings

 

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

 

On February 27, 2007, Brenda McGinnis filed a putative class action in the Circuit Court of Clark County, Arkansas alleging violations of the Arkansas usury law, the Arkansas Deceptive Trade Practices Act, and a 2001 class action settlement agreement entered into by the Company’s prior subsidiary in Arkansas.  The complaint alleges that the Company’s current subsidiary made usurious loans under the Arkansas Check Cashers Act and seeks compensatory damages in an amount equal to twice the interest paid on the deferred presentment transactions made from 2001 to present (which would total approximately $21.4 million for deferred presentment transactions made during that time or approximately $87 million in damages for all transactions originated, processed, and serviced during that time) as well as a declaration that the contracts are void, enforcement of the 2001 class action settlement agreement, attorneys’ fees, and costs.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company and the Company’s subsidiary, McKenzie Check Advance of Florida, LLC (“McKenzie”), are defendants in a putative class action lawsuit commenced by former customers, Wendy Betts and Donna Reuter, on January 11, 2001, and a third named class representative, Tiffany Kelly, in the Circuit Court of Palm Beach County, Florida.  This putative class action alleges that McKenzie, by and through the actions of certain officers, directors and employees, engaged in unfair and deceptive trade practices and violated Florida’s criminal usury statute, the Florida Consumer Finance Act, and the Florida Racketeer Influenced and Corrupt Organizations Act.  The suit seeks unspecified damages, and the named defendants could be required to refund fees and/or interest collected, refund the principal amount of cash advances, pay multiple damages, and pay other monetary penalties.  Ms. Reuter’s claim has been held to be subject to binding arbitration, which the Company expects to proceed in parallel with this case.  However, the trial court has denied the defendants’ motion to compel arbitration of Ms. Kelly’s claims, the substituted named plaintiff, and the resulting appeal has been dismissed by the Florida court of appeals.  The Company has sought review of the arbitration issue by the Florida Supreme Court.

 

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

 

A second Florida lawsuit was filed on August 24, 2004, in the Circuit Court of Palm Beach County by former customers Gerald Betts and Ms. Reuter against the Company, the Company’s Florida subsidiary, Advance America, Cash Advance Centers of Florida, Inc., and certain officers and directors.  The allegations, relief sought, and the Company’s defenses in this lawsuit are nearly identical to those alleged in the first Betts and Reuter lawsuit described above.  The Company and individual defendants appealed the trial court’s denial of certain defendants’ motion to dismiss for lack of personal jurisdiction.  The appellate court affirmed the trial court’s ruling.  A petition for certiorari has been filed in the Florida Supreme Court on behalf of the individual Advance America defendants, but the case will proceed against the Company.

 

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

 

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

 

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

 

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

 

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

 

On July 27, 2004, John Kucan, Welsie Torrence, and Terry Coates, each of whom was a customer of Republic Bank & Trust Company (“Republic”), the lending bank for whom the Company previously marketed, processed and serviced cash advances in North Carolina, filed a putative class action lawsuit in the General Court of Justice for the Superior Court Division for New Hanover County, North Carolina against the Company and Mr. William M. Webster IV, Chairman of the Company’s Board of Directors and prior Chief Executive Officer, alleging, among other things, that the relationship between the Company’s North Carolina subsidiary and Republic was a “rent a charter” relationship and therefore Republic was not the “true lender” of the cash advances it offered.  The lawsuit also claims that the cash advances were made, administered, and collected in violation of numerous North Carolina consumer protection laws.  The lawsuit seeks an injunction barring the subsidiary from continuing to do business in North Carolina, the return of the principal amount of the cash advances made to the plaintiff class since August 2001, the return of any interest or fees associated with those advances, treble damages, attorneys’ fees, and other unspecified costs.  The Company sought to enforce the arbitration provisions in the customer agreements and in June 2009, the trial court ruled that the arbitration clause is unenforceable.  The Company is appealing this ruling.

 

North Carolina Commissioner of Banks Order

 

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

 

Pennsylvania Department of Banking v. NCAS of Delaware, LLC

 

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

 

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

 

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

 

On August 1, 2007, Sharlene Johnson, Helena Love and Bonny Bleacher filed a putative class action lawsuit in the United States District Court, Eastern District of Pennsylvania against the Company and two of its subsidiaries alleging that they provided lines of credit to borrowers in Pennsylvania without a license required under Pennsylvania law and with interest and fees in excess of the amounts permitted by Pennsylvania law.  The complaint seeks, among other things, a declaratory judgment that the monthly participation fee charged to customers with a line of credit is illegal, an injunction prohibiting the collection of the monthly participation fee, and the payment by the Company of damages equal to three times the monthly participation fees paid by customers since June 2006, which could total approximately $135 million in damages, plus attorneys’ fees and costs.  In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless determined otherwise by the arbiter.  All parties appealed that order and the appeal has been stayed, pending a decision from the United States Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., a case involving enforceability of arbitration clauses.

 

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

 

On January 18, 2007, Raymond King and Sandra Coates, who were customers of BankWest Inc., the lending bank for which the Company previously marketed, processed and serviced cash advances in Pennsylvania, filed a putative class action lawsuit in the United States District Court, Eastern District of Pennsylvania alleging various causes of action, including that the Company’s Pennsylvania subsidiary made illegal cash advance loans in Pennsylvania in violation of Pennsylvania’s usury law, the Pennsylvania Consumer Discount Company Act, the Pennsylvania Unfair Trade Practices and Consumer Protection Law, the Pennsylvania Fair Credit Extension Uniformity Act and the Pennsylvania Credit Services Act.  The complaint alleges that BankWest Inc. was not the “true lender” and that the Company’s Pennsylvania subsidiary was the “lender in fact.”  The complaint seeks compensatory damages, attorneys’ fees, punitive damages and the trebling of any compensatory damages.  In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless determined otherwise by the arbiter.  All parties appealed that order and the appeal has been stayed, pending a decision from the United States Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.

 

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

 

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

 

Class Actions Against South Carolina Subsidiary

 

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

 

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on August 27, 2007 in the Horry County Court of Common Pleas; Margaret Horne filed a complaint on September 6, 2007 in the Spartanburg County Court of Common Pleas; Tawan Smalls filed a complaint on September 10, 2007 in the Charleston County Court of Commons Pleas; Chadric and Lisa Wiley filed a complaint on September 27, 2007 in the Richland County Court of Common Pleas; Mildred Weaver filed a complaint on September 27, 2007 in the Darlington County Court of Common Pleas; Lisa Johnson and Gilbert Herbert filed a complaint on October 2, 2007 in the Georgetown County Court of Common Pleas; Kimberly Kinney filed a complaint on October 12, 2007 in the Marion County Court of Common Pleas; and Carl G. Ferrell filed a complaint on October 30, 2008.  The allegations and relief sought are similar in each case.  Plaintiffs allege that the Company’s South Carolina subsidiary violated the South Carolina Deferred Presentment Services Act and the Consumer Protection Code by failing to perform a credit check and evaluate a customer’s ability to repay the advance.  Each complaint seeks an injunction to prohibit the Company from continuing its operations, the return of fees and interest, unspecified actual damages, punitive damages, and attorneys’ fees and costs.  Each of the lawsuits have been joined to ongoing litigation in the South Carolina state court system pursuant to an order of the South Carolina Supreme Court consolidating all cases brought against the industry.

 

Other Matters

 

The Company is also involved in other litigation and administrative proceedings that are incidental to its business, including, without limitation, regulatory enforcement matters, individual consumer claims, contractual disputes, employee claims for workers’ compensation, wrongful termination, harassment, discrimination, payment of wages due, and customer claims relating to collection practices and violations of state and/or federal consumer protection laws.

 

SEC Investigation

 

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

 

Changes in Legislation

 

Ohio Legislation

 

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

 

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

 

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

 

South Carolina and Kentucky Legislation

 

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

 

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

 

Washington Legislation

 

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

 

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

 

Other Commitments and Contingencies

 

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

 

7. Capital Stock and Stock-Based Compensation Plans

 

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

 

 

 

Three months ended September 30, 2008

 

Three months ended September 30, 2009

 

 

 

Shares

 

Dollars

 

Shares

 

Dollars

 

Stock Repurchase Program

 

1,700

 

$

9,045

 

 

$

 

Omnibus Stock Plan

 

2

 

11

 

1

 

6

 

Total

 

1,702

 

$

9,056

 

1

 

$

6

 

 

 

 

Nine months ended September 30, 2008

 

Nine months ended September 30, 2009

 

 

 

Shares

 

Dollars

 

Shares

 

Dollars

 

Stock Repurchase Program

 

11,911

 

$

88,915

 

 

$

 

Omnibus Stock Plan

 

6

 

38

 

4

 

11

 

Total

 

11,917

 

$

88,953

 

4

 

$

11

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

2008

 

2009

 

Expected term (years)

 

5.42

 

2.00

 

Expected volatility

 

48

%

66

%

Expected dividends (yield)

 

4.1

%

21.9

%

Risk-free rate

 

2.93

%

1.03

%

 

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

 

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

 

 

 

Outstanding

 

Exercisable

 

Number of stock options

 

2,074,500

 

729,498

 

Range of exercise prices

 

$1.14 - $14.70

 

$8.48 - $14.70

 

Weighted average exercise price

 

$              9.18

 

$            12.67

 

Aggregate intrinsic value (in thousands)

 

$                 —

 

$                 —

 

Weighted average remaining contractual term (years)

 

7.4

 

6.6

 

 

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

 

 

 

 

 

Outstanding

 

 

 

Weighted Average

 

 

 

Authorized

 

Restricted
Stock

 

Stock
Options

 

Available
For Grant

 

Stock Option
Exercise Price

 

At December 31, 2008

 

5,200,000

 

549,988

 

1,582,500

 

3,067,512

 

$

11.81

 

Authorized

 

 

 

 

 

 

Granted

 

 

564,500

 

539,500

 

(1,104,000

)

1.14

 

Exercised

 

 

 

 

 

 

Canceled

 

 

(61,218

)

(47,500

)

108,718

 

5.46

 

At September 30, 2009

 

5,200,000

 

1,053,270

 

2,074,500

 

2,072,230

 

$

9.18

 

 

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

 

 

 

Shares

 

Weighted
Average
Fair Value

 

Nonvested at December 31, 2008

 

241,363

 

$

10.30

 

Granted

 

564,500

 

1.14

 

Vested

 

(21,512

)

11.84

 

Forfeited

 

(30,001

)

4.95

 

Nonvested at September 30, 2009

 

754,350

 

$

3.20

 

 

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

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Restricted stock

 

$

225

 

$

154

 

$

665

 

$

558

 

Stock options

 

329

 

294

 

979

 

909

 

Total stock-based compensation expense

 

$

554

 

$

448

 

$

1,644

 

$

1,467

 

 

As of September 30, 2009, the total compensation expense not yet recognized related to nonvested stock awards under the Company’s plans is approximately $5.3 million.  The weighted average period over which this expense is expected to be recognized is approximately 3.4 years.

 

8. Transactions with Variable Interest Entities

 

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

 

The Company has determined that the lender is a variable interest entity (“VIE”) but that the Company is not the primary beneficiary of this VIE.  Therefore, the Company has not consolidated the lender as of and for the three and nine months ended September 30, 2008 and 2009.

 

Under the terms of the Company’s agreement with its third-party lender, the Company is contractually obligated to reimburse the lender for the full amount of the loans and certain interest and related fees that are not collected from the customers.  As of September 30, 2008 and 2009, the third-party lender’s outstanding advances and interest receivable (which were not recorded on the

 

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Company’s balance sheet) totaled approximately $17.3 million and $19.1 million, respectively, which is the amount the Company would be obligated to pay the third-party lender if these amounts were to become uncollectible.  Additionally, if these advances were to become uncollectible, the Company would also be required to pay the third-party lender all related NSF fees and late fees on these advances.

 

Because of the Company’s economic exposure for losses related to the third-party lender’s advances, fees, and interest receivable, the Company has established an accrual for third-party lender losses to reflect the Company’s estimated probable losses related to the estimated uncollectible third-party lender advances and related fees and interest.  The accrual for third-party lender losses that was reported in the Company’s balance sheet at September 30, 2008 and 2009 was approximately $3.8 million and $4.3 million, respectively, and was established on a basis similar to the allowance for doubtful accounts.

 

9. Related Party Transactions

 

In January 2009, the Company entered into a one-year consulting arrangement with Mr. Tony S. Colletti, a member of the Board of Directors, for his support of government relations initiatives on the Company’s behalf in Illinois and Washington, D.C.  Included in general and administrative expenses, for the three and nine months ended September 30, 2009, are payments of approximately $58,000 and $179,000 respectively, related to this consulting arrangement.  In addition, in connection with his appointment to the Board of Directors in February 2009, Mr. Colletti was granted 15,000 shares of restricted stock with a fair market value of $16,650 and a three-year vesting period.  During the three and nine months ended September 30, 2009, approximately $1,000 and $3,000, respectively, was included in general and administrative expense related to the amortization of this restricted stock grant.

 

Included in center expenses are expenses for center leases with related parties of approximately $5,000 for the nine months ended September 30, 2008. Included in general and administrative expenses are expenses with related parties, relating primarily to aircraft operating expenses, and legal fees, of approximately $70,000 and $69,000 for the three months ended September 30, 2008 and 2009, respectively, and approximately $243,000 and $193,000 for the nine months ended September 30, 2008 and 2009, respectively.

 

In addition, under a time-share arrangement, the Company’s current Chairman and former Chairman have used the Company’s aircraft for private purposes in exchange for the Company’s use of an identical aircraft owned by the Company’s former Chairman and formerly owned, in part, by the Company’s current Chairman. Included in accounts receivable at September 30, 2009 is approximately $4,000 net receivable related to this arrangement.

 

In addition, on July 13, 2009, the Company entered into a one-year Aircraft Dry Lease Agreement with Carabo Capital, LLC, an entity of which the Company’s current Chairman is a Member.  Under the Aircraft Dry Lease, the Company may use Carabo’s aircraft from time to time in exchange for one dollar and the Company’s fulfillment of its obligations under the Aircraft Dry Lease.  A copy of the Aircraft Dry Lease between the Company and Carabo Capital, LLC is attached hereto as Exhibit 10.1.  For the three and nine months ended September 30, 2009, the Company paid Carabo Capital, LLC approximately $20,000 in operating expenses in connection with the use of this aircraft by the Company’s Chairman for Company business.

 

The Company incurred costs and expenses of approximately $483,000 and $641,000 for the three and nine months ended September 30, 2009, respectively, for the advancement of the expenses incurred by certain of the Company’s officers and directors in connection with their responses to requests for information and subpoenas as part of an investigation by the United States Securities and Exchange Commission (“SEC”) into alleged insider trading by third parties in the Company’s securities.  These costs were incurred by the Company pursuant to indemnification agreements between the Company and certain officers and directors, which agreements require the Company to advance expenses, and may require the Company to indemnify those persons for damages, incurred by them in responding to the pending SEC investigation or defending against any related enforcement proceedings, including the “Wells Notice” issued by the SEC to the Company’s Chief Executive Officer on July 22, 2009.

 

10. Revolving Credit Facility and Long-Term Debt

 

In March 2008, the Company amended and restated its prior revolving credit facility with a syndicate of banks. This credit facility now provides the Company with a $270.0 million revolving line of credit, which includes the ability to issue up to $25.0 million in letters of credit. This revolving credit facility matures on March 24, 2013. The Company has the option to increase the revolving credit facility by an additional $95.0 million, subject to compliance with the credit agreement’s covenants and conditions and upon receipt of sufficient commitments from lenders in the lending syndicate. In connection with this amended and restated credit facility, the Company incurred approximately $1.6 million in loan origination costs during the year ended December 31, 2008 that were capitalized in other assets and are being amortized over the remaining term of the credit facility.

 

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The credit facility is collateralized by substantially all of the Company’s assets and contains various financial covenants that require, among other things, the maintenance of a minimum net worth, certain leverage and fixed charge coverage ratios, and charge-off ratios and also restricts the encumbrance of assets and the creation of indebtedness. A breach of a covenant or an event of default could prohibit the Company from accessing otherwise available borrowings, or could cause all amounts outstanding under the revolving credit facility to become immediately due and payable. The Company was in compliance with all financial covenants at September 30, 2009.

 

In general, the Company’s borrowings under the revolving credit facility bear interest, at the Company’s option, at a base rate plus an applicable margin or a LIBOR-based rate plus an applicable margin. The base rate equals the greater of: (i) the prime rate set by Bank of America; and (ii) the sum of the federal funds rate plus 0.50%. The applicable margin is determined each quarter by a pricing grid based on the Company’s total leverage ratio of consolidated debt to consolidated EBITDA. The base rate applicable margin ranges from 1.50% to 2.25% based upon the Company’s total leverage ratio. The LIBOR-based applicable margin ranges from 2.50% to 3.25% based upon the Company’s total leverage ratio. As of September 30, 2009, the applicable margin for the prime-based rate was 1.75% and the applicable margin for the LIBOR-based rate was 2.75%.

 

As of September 30, 2009, the Company had $149.0 million outstanding on the revolving portion of the credit facility and $1.4 million of commitments under outstanding letters of credit.  Borrowings under the revolving credit facility are subject to compliance with certain covenants and conditions.

 

The carrying value of the credit facility approximated its fair value at December 31, 2008 and September 30, 2009.

 

In October 2008, our United Kingdom operations entered into an overdraft facility. The maximum borrowings under this facility are GBP 400,000, which is equivalent to approximately $637,000 at September 30, 2009. The interest rate on any borrowings under this overdraft facility is the Bank of England base rate plus 1.75%. This facility is repayable upon demand by the lender. The Company did not have an outstanding balance on this facility at September 30, 2009.  The carrying value of this overdraft facility approximates its fair value at September 30, 2009.

 

The Company owns its headquarters building and related land subject to a mortgage loan, the principal amount of which was approximately $5.0 million and $4.7 million at December 31, 2008 and September 30, 2009, respectively. The mortgage loan is payable to an insurance company and is collateralized by our corporate headquarters building and related land. The mortgage loan is payable in 180 monthly installments of approximately $66,400, including principal and interest, and bears interest at a fixed rate of 7.30% over its term. The mortgage loan matures on June 10, 2017. The carrying amount of our corporate headquarters (land, land improvements, and building) was approximately $4.7 million and $4.6 million at December 31, 2008 and September 30, 2009, respectively.

 

The fair market value of our long-term debt is estimated using a discounted cash flow analysis and was approximately $5.8 million and $5.5 million at December 31, 2008 and September 30, 2009, respectively.

 

11. Income Taxes

 

The effective income tax rate as a percentage of income before income taxes was 44.2% and 39.3% for the three months ended September 30, 2008 and 2009, respectively. The effective income tax rate as a percentage of income before income taxes was 43.2% and 37.7% for the nine months ended September 30, 2008 and 2009, respectively. The decrease in the effective tax rate in the current year is primarily due to claims filed for recovery of taxes recognized in prior years in the amount of $3.5 million and a reduction in other discrete items for the nine months ended September 30, 2009.

 

12. Loss on Impairment of Assets

 

During the first quarter of 2009, the Company identified approximately 170 centers to be closed, in addition to all of its 24 centers in New Hampshire.  The impairment charge related to these 170 centers was approximately $2.2 million, which represents the write-down of the undepreciated costs of the fixed assets. The estimated cost to close these centers, including the impairment charge, is approximately $5.5 million, of which approximately $0.2 million and $5.3 million were recognized during the three and nine months ended September 30, 2009, respectively.  For the three months ended September 30, 2009, these amounts are included in the income statement as a $0.2 million increase in other center expenses.  For the nine months ended September 30, 2009, these amounts are included in the income statement as a $2.8 million increase in other center expenses, $2.2 million in loss on impairment of assets, and $0.3 million increase in center salaries and related payroll costs.

 

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The Company has approximately $4.4 million of goodwill in its United Kingdom operations.  As of September 30, 2009, these operations have cumulatively generated negative cash flow and have not reached break-even at the center gross profit level.  The Company’s expansion efforts in the United Kingdom began during the third quarter of 2007.  The goodwill impairment model projects future positive cash flows sufficient to support the goodwill and long-lived asset base.

 

13. Subsequent Events

 

On October 28, 2009, the Company’s Board of Directors declared a cash dividend of $0.0625 per share of common stock, payable on December 4, 2009 to shareholders of record on November 24, 2009.

 

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

 

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

 

Overview

 

Headquartered in Spartanburg, South Carolina, we are the largest provider of cash advance services in the United States as measured by the number of centers operated. Our centers provide short-term, cash advances that are typically unsecured and due on the customers’ next payday. As of September 30, 2009, we operated 2,580 centers in 33 states in the United States, 21 centers in the United Kingdom, and 13 centers in Canada, and had 75 limited licensees in the United Kingdom.

 

Cash Advance Services

 

In most states where we operate, we originate cash advance services under the authority of different state-governed enabling statutes that allow for cash advances ranging from single and multiple installment closed-end terms to revolving lines of credit with open-ended terms.  We refer to these products and services collectively as cash advance services.  The particular cash advance services offered in any given location may change from time to time depending upon changes in state and federal law.  Additionally, where permitted by applicable law, we may assume the responsibility of serving as an agent to a regulated lender.  In Texas, where we operate as a credit services organization (“CSO”), we offer a fee-based credit services package to assist customers in trying to improve their credit and in obtaining an extension of consumer credit through a third-party lender. Under the terms of our agreement with this lender, we process customer applications and are contractually obligated for all losses.

 

We provide cash advance services as specified by the laws of the jurisdictions where we operate. Loans made by the third-party lender in Texas are governed by Texas law.  Online cash advances made by a third-party lender are governed by the laws of the state where the customer resides.  The permitted size of an advance varies by jurisdiction and ranges from $50 to $5,000. However, our typical cash advance will range from $50 to $1,000.  The finance charges on cash advance services currently offered by us also vary by jurisdiction.

 

Additional fees that we may collect include origination fees, annual participation fees, fees for returned checks or electronic debits, late fees, and other fees as permitted by applicable law. Presently, none of the cash advance services we offer include annual participation fees.  Origination fees on services currently offered by us range from $15 to $30, but future cash advance services may have higher or lower origination fees depending on applicable state law.  Fees for returned checks or electronic debits that are declined for non-sufficient funds (“NSF”) vary by state but are generally in amounts up to $30.  In Texas, the third-party lender charges an NSF fee and a late fee on its loans in accordance with Texas law.

 

A customer may obtain a cash advance in one of three ways: (1) by visiting one of our centers in-person and completing an application; (2) by visiting our website, beginning the application process online, then visiting one of our centers in-person to complete the application and receive funding; or (3) by visiting our website, completing an application online and receiving a cash advance from a third-party lender that is directly deposited in the customer’s bank account. Each new customer must provide us with certain 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 and that of the applicable lender. In order for a new customer to be approved for a cash advance from us, we must be able to verify his or her identification and he or she is required to have a bank account and a regular source of income, such as a job.

 

Except for cash advances completed by a third-party lender, we determine whether to approve a cash advance to our customers in every jurisdiction. Where cash advances are made by a third-party lender, the third-party lender decides whether to approve the cash advance and establishes all of the underwriting criteria and terms, conditions, and features of the customer agreement. We require proof of identification, bank account, and income source, as described above, and we primarily consider the customer’s income in determining the amount of the cash advance. In some cases, we obtain a security interest in the customer’s motor vehicle.  We do not perform credit checks through consumer reporting agencies.

 

After the documents presented by the customer have been reviewed for completeness and accuracy, copied for record-keeping purposes, and the cash advance has been approved, the customer enters into an agreement governing the terms of the cash advance. The customer then provides a personal check or an Automated Clearing House (“ACH”) authorization, which enables electronic payment from the customer’s account, to cover the amount of the cash advance plus charges for applicable fees and/or interest and/or the balance due under the agreement, and makes an appointment to return on a specified due date, typically his or her

 

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next payday, to repay the advance plus the applicable charges. However, in some states, customers are not required to provide us with a personal check or ACH authorization, and payment cycles may vary depending upon state law and product type. At the specified due date, the customer is required to make the applicable payment, usually payment in full of the cash advance plus fees and interest, if applicable. Payment is usually made in person in cash at the center where the cash advance was initiated or issued unless the cash advance was completed on the internet, in which case the customer makes payment by ACH authorization.

 

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

 

Other Products

 

We may offer alternative products and services to our customers where permissible under applicable law. For instance, in Ohio, we currently offer check cashing services at state authorized rates. We may also offer the products or services of a third party that we market, process, and/or service at our centers pursuant to an agreement with the third party. For example, we currently offer pre-paid debit cards, money orders, and money transmission and bill payment services.  During the tax return season, we also offer tax preparation services by a third party.

 

Our Advance America branded pre-paid Visa debit card is issued by a federally chartered bank and regulated by the Office of Thrift Supervision. The card allows a cardholder to load cash onto the card and use the card wherever VISA debit cards are accepted. We are compensated under an agreement with the bank based on a number of factors related to the bank’s revenue from purchases and subsequent cardholder activity, such as charges for loads, ATM withdrawals, account maintenance/plan charges and purchases. In the third and fourth quarters of 2007, we began selling money orders and providing money transfer services and bill payment services as an agent of a licensed third-party money transmitter. We are compensated by the money transmitter based on the number and value of money transfers, money orders and bill payments made by our centers. Finally, in 2008, we began facilitating the offering of tax preparation services by a third-party tax preparation provider. We receive a percentage of the tax preparation provider’s fees from customers related solely to tax preparation services.

 

Our industry has been significantly affected by increasing regulatory challenges. Legislation that negatively impacts cash advance services and similar services, whether through preclusions, interest rate ceilings, fee reductions, mandatory extensions of term length, limits on the amount or term of our products and services, or limits on consumers’ use of our products and services could materially and adversely affect our business. We are very active in monitoring and evaluating regulatory initiatives in all of the states and are closely involved with the efforts of the Community Financial Services Association of America (“CFSA”).

 

Although there are numerous differences under the various enabling regulations, the application and approval process, underwriting criteria, delivery method, repayment and collection practices, customer and market characteristics, and underlying economics of our principal products and services generally are substantially similar in most jurisdictions.

 

Approval Process

 

To obtain a cash advance, a customer typically:

 

·                  completes an application and presents the required documentation: usually proof of identification, a pay stub or other evidence of income, and a bank statement;

 

·                  enters into an agreement governing the terms of the cash advance, including the customer’s agreement to repay the amount advanced in full on or before a specified due date (usually the customer’s next payday), and our agreement to defer the presentment or deposit of the customer’s check or ACH authorization until the due date;

 

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

 

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

 

We determine whether to approve a cash advance to our customers except that the third-party lenders make this determination in Texas and for cash advances directly deposited to bank accounts of online customers. We require proof of identification, bank account, and income source, as described above, and we primarily consider the customer’s income in determining

 

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the amount of the cash advance. Starting in April 2009 in Virginia, we require the customer to grant us a security interest in a motor vehicle to qualify for an open-ended line of credit.

 

Repayment and Collection Process

 

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

 

If a customer does not pay the amount due, our management 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 or debit their bank account in accordance with their ACH authorization. If management decides to commence past-due collection efforts, employees typically contact the customer by telephone or in person to obtain a payment or a promise to pay, and, in cases where we hold a check, attempt to exchange the customer’s check for a cashier’s check, if funds are available.

 

If unable to meet his or her payment obligations, the customer may qualify for an extended payment plan (“Payment Plan”). In most states, the terms of our Payment Plan conform to the CFSA Best Practices for extended payment plans. Certain states have specified their own terms and eligibility requirements for Payment Plans. Generally, a customer may enter into a Payment Plan for no additional fee once every twelve months.  The Payment Plan will call for scheduled payments that coincide with the customer’s next four paydays. In some states, a customer may enter into a Payment Plan more frequently. We do not engage in collection efforts while a customer is enrolled in a Payment Plan, however, if a customer misses a scheduled payment under a Payment Plan we may resume normal collection procedures. We do not offer a Payment Plan for installment loans or lines of credit, nor does the third-party lender in Texas offer a Payment Plan for advances to its customers.  The third-party internet lender offers Payment Plans as required by state law.

 

If, at the end of this past-due collection period or Payment Plan, the center has been unable to collect the amount due, the customer’s check is then deposited or their ACH authorization is processed. Additional collection efforts are not required if the customer’s deposited check or our ACH debit clears. For the year ended December 31, 2008 and the nine months ended September 30, 2009, we deposited or presented for debit approximately 5.9% of all customer checks or ACH authorizations we received, and approximately 25% and 30% of deposited customer checks or ACH debits cleared, respectively, excluding our installment loan and line of credit products.  If the customer’s check or the ACH debit does not clear and is returned because of non-sufficient funds in the customer’s account or because of a closed account or a stop-payment order, additional collection efforts begin. These additional collection efforts are carried out by center employees and typically include contacting the customer by telephone or in person to obtain payment or a promise to pay and, in cases where we hold a check, attempting to exchange the customer’s check for a cashier’s check, if funds become available. We also send out a series of collection letters, which are automatically distributed from a central location based on a set of pre-determined criteria.

 

In the case of cash advances in the form of lines of credit, if a customer fails to make two consecutive payments when due in accordance with the terms of their agreement, we may close the line of credit and accelerate the maturity date or work with the customer to bring his or her payments current.  If we close the line of credit and accelerate the maturity date, we stop charging interest on the outstanding amount and begin collection efforts as described above.

 

Selected Operating Data

 

The following table presents key operating data for our business:

 

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Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Number of centers open at end of period

 

2,840

 

2,614

 

2,840

 

2,614

 

Number of customers served—all credit products (thousands)

 

865

 

816

 

1,245

 

1,147

 

Number of payday cash advances originated (thousands)

 

3,047

 

2,862

 

8,692

 

7,836

 

Aggregate principal amount of payday cash advances originated (thousands)

 

$

1,114,016

 

$

1,034,647

 

$

3,179,976

 

$

2,824,109

 

Average amount of each payday cash advance originated

 

$

366

 

$

362

 

$

366

 

$

360

 

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

 

$

55

 

$

53

 

$

56

 

$

53

 

Average duration of a payday cash advance (days)

 

16.8

 

17.6

 

16.7

 

17.5

 

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

 

 

20

 

 

27

 

Average amount of aggregate principal on lines of credit outstanding during the period (thousands) (1)

 

$

 

$

7,410

 

$

 

$

12,625

 

Average principal amount on each line of credit outstanding during the period (1)

 

$

 

$

354

 

$

 

$

446

 

Number of installment loans originated (thousands) (2)

 

9

 

10

 

23

 

25

 

Aggregate principal amount of installment loans originated (thousands) (2)

 

$

4,534

 

$

4,479

 

$

10,908

 

$

11,202

 

Average principal amount of each installment loan originated (2)

 

$

480

 

$

461

 

$

468

 

$

443

 

 


(1)                                  We began offering lines of credit in Virginia in November 2008.

 

(2)                                  The installment loan activity reflects loans we originated as the lender in Illinois.

 

Revenues and Expenses

 

Our revenues consist of fees and/or interest paid to us directly by our customers. Our expenses relate primarily to the operation of our centers. These expenses include salaries and related payroll costs, occupancy expense related to our leased centers, center depreciation expense, advertising expense, and other center expenses that consist principally of costs related to center closings, communications, delivery, supplies, travel, bank charges, various compliance and collection costs, and costs associated with theft.

 

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

 

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

 

The provision for doubtful accounts decreased from 24.2% of revenues for the three months ended September 30, 2008 to 23.1% of revenues for the same period in 2009.  This decrease was mainly due to the fact that in the third quarter of 2008, the provision included a charge related to the suspension of operations in Arkansas of approximately $1.1 million.  Offsetting this are higher losses in Virginia related to the introduction of the open-ended line of credit product during the fourth quarter of 2008, which has experienced a higher loss rate than our cash advance and installment loan products.  Excluding the charge related to the suspension of operations in Arkansas in the prior year and the applicable revenue and loss rates for the Virginia line of credit product, the provision for doubtful accounts for the three months ended September 30, 2008 and 2009 would have been 23.7% and 21.5%, respectively.

 

The provision for doubtful accounts increased from 18.6% of revenues for the nine months ended September 30, 2008 to 19.6% of revenues for the same period in 2009.  This increase was due primarily to higher losses in Virginia related to the introduction of the open-ended line of credit product during the fourth quarter of 2008, which has experienced a higher loss rate than our cash advance and installment loan products.  During the nine months ended September 30, 2008 and 2009, we received proceeds from the sale of receivables in the amount of $0.6 million and $2.2 million, respectively.  In the third quarter of 2008, the provision included a charge related to the suspension of operations in Arkansas of approximately $1.1 million.  Excluding the sale of receivables, the applicable revenue, and loss rates for the Virginia line of credit product, and the charge related to the suspension of operations in Arkansas in the prior year, the provision for doubtful accounts for the nine months ended September 30, 2008 and 2009 would have been 18.5% and 17.4%, respectively.

 

Income Taxes

 

The effective income tax rate as a percentage of income before income taxes was 44.2% and 39.3% for the three months ended September 30, 2008 and 2009, respectively. The effective income tax rate as a percentage of income before income taxes was 43.2% and 37.7% for the nine months ended September 30, 2008 and 2009, respectively. The decrease in the effective tax rate in the current period is primarily due to claims filed for recovery of taxes recognized in prior years in the amount of $3.5 million and a

 

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reduction in other discrete items for the nine months ended September 30, 2009.  We anticipate our effective tax rate for the current year will be in the range of 40% to 42%.

 

Changes in Legislation

 

During the last few years, legislation that prohibits or severely restricts our products and services has been introduced or adopted in a number of states and at the federal level, and we expect that trend to continue in other states for the foreseeable future. Legislation was adopted in New Hampshire in 2008 that effectively prohibits us from offering cash advances to consumers in that state. As a result, in February 2009, we decided to close all of our centers in New Hampshire.  In April 2009, the Governor of Virginia signed a bill into law that restricts us from offering both our cash advance product and our open-ended line of credit product at the same center unless the line of credit is secured by a motor vehicle.  This limitation could reduce our customer base and lower our revenues and profits in Virginia.  In May 2009, a bill was signed into law in the State of Washington that places a number of restrictions on our cash advance product including limiting the number of cash advances a customer may take to eight advances in any one year.  Once the law becomes effective on January 1, 2010, we expect that our revenues and profits in Washington will be significantly reduced.  If we are unable to operate profitably in Washington, we may cease operating in that state.  New laws in each of South Carolina and Kentucky will become effective during the first half of 2010 that will, among other things, implement in each state a statewide database to monitor the number of loans made to customers within that state.  Further, legislation permitting cash advances in Arizona and Mississippi is scheduled to expire in 2010 and 2012, respectively. This legislation may not be renewed or could be modified in a manner that affects our operations negatively. We are regularly refining our cash advance services and developing new products and services or operations to address recent or anticipated legislative and regulatory changes. Some of these legislative and regulatory changes may result in our discontinuing operations in a state, while other changes may result in less significant short-term or long-term changes, interruptions in revenues, and lower operating margins. We generally cannot estimate what effect, if any, operational changes we make in response to legislative and regulatory changes may have on our financial results until we are able to develop legal and financially-viable alternative products and services.

 

Operations in Ohio

 

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

 

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

 

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

 

For the three months ended September 30, 2008 and 2009, 7.9% and 5.9%, respectively, of our total revenues were generated from our operations in Ohio. For the nine months ended September 30, 2008 and 2009, 8.5% and 5.5%, respectively, of our total revenues were generated from our operations in Ohio.  The following is a summary of financial information for our operations in Ohio for the three and nine months ended September 30, 2008 and 2009 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Total revenues

 

$

13,767

 

$

9,869

 

$

42,734

 

$

26,164

 

Total center expenses

 

11,926

 

8,709

 

33,551

 

27,274

 

Center gross profit (loss)

 

$

1,841

 

$

1,160

 

$

9,183

 

$

(1,110

)

 

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Operations in Arizona

 

Legislation permitting cash advances in Arizona is scheduled to expire in 2010.  If it is not economically viable to continue operations in Arizona and we decide to close our remaining Arizona centers, our estimated range of closing costs, including severance, center tear-down costs, lease termination costs and the write-down of fixed assets would be approximately $1.4 million to $4.5 million, and the collectibility of advances and fees receivable in Arizona most likely would be impaired. As of September 30, 2009, the net advances and fees receivable balance in Arizona was approximately $4.3 million. At this time we are not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Arizona.

 

For the three months ended September 30, 2008 and 2009, 2.3% and 2.5%, respectively, of our total revenues were generated from our operations in Arizona. For the nine months ended September 30, 2008 and 2009, 2.4%, of our total revenues were generated from our operations in Arizona.  The following is a summary of financial information for our operations in Arizona for the three and nine months ended September 30, 2008 and 2009 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Total revenues

 

$

4,078

 

$

4,153

 

$

12,172

 

$

11,393

 

Total center expenses

 

3,128

 

2,888

 

8,842

 

7,790

 

Center gross profit (loss)

 

$

950

 

$

1,265

 

$

3,330

 

$

3,603

 

 

Operations in Washington

 

In the state of  Washington a law will become effective on January 1, 2010, that will limit the number of cash advances a customer may take in any one year, limit the advance amount that can be taken out at any one time, and implement a statewide database to monitor the number of loans.  We believe this law will negatively impact our revenue and profitability in that state.  We may close or consolidate some or all of our centers in Washington.

 

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

 

For the three months ended September 30, 2008 and 2009, 4.1% and 4.2%, respectively, of our total revenues were generated from our operations in Washington. For the nine months ended September 30, 2008 and 2009, 4.0% and 4.2%, respectively, of our total revenues were generated from our operations in Washington.  The following is a summary of financial information for our operations in Washington for the three and nine months ended September 30, 2008 and 2009 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Total revenues

 

$

7,160

 

$

6,998

 

$

20,086

 

$

19,805

 

Total center expenses

 

6,181

 

5,178

 

17,280

 

14,848

 

Center gross profit (loss)

 

$

979

 

$

1,820

 

$

2,806

 

$

4,957

 

 

Changes in Other States

 

New laws in each of South Carolina and Kentucky will become effective during the first half of 2010 that will, among other things, implement a statewide database to monitor the number of loans made to customers within that state.  The Company believes these laws will negatively impact its revenue and profitability in South Carolina and Kentucky.  The Company intends to comply with the new laws when they become effective.  Although we expect these laws to have a negative impact on our operations in those states, we expect our South Carolina and Kentucky operations to remain economically viable.

 

For the three months ended September 30, 2008 and 2009, 5.1% and 5.4%, respectively, of our total revenues were generated from our operations in South Carolina. For the nine months ended September 30, 2008 and 2009, 5.1% and 5.2%, respectively, of our

 

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total revenues were generated from our operations in South Carolina.  As of September 30, 2009, the net advances and fees receivable balance in South Carolina was approximately $12.4 million.The following is a summary of financial information for our operations in South Carolina for the three and nine months ended September 30, 2008 and 2009 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Total revenues

 

$

8,938

 

$

9,013

 

$

25,547

 

$

24,896

 

Total center expenses

 

6,908

 

6,400

 

19,019

 

17,176

 

Center gross profit (loss)

 

$

2,030

 

$

2,613

 

$

6,528

 

$

7,720

 

 

For the three months ended September 30, 2008 and 2009, 1.2% and 1.3%, respectively, of our total revenues were generated from our operations in Kentucky. For the nine months ended September 30, 2008 and 2009, 1.2% of our total revenues were generated from our operations in Kentucky.  As of September 30, 2009, the net advances and fees receivable balance in Kentucky was approximately $2.6 million.  The following is a summary of financial information for our operations in Kentucky for the three and nine months ended September 30, 2008 and 2009 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

2009

 

Total revenues

 

$

2,077

 

$

2,114

 

$

6,113

 

$

5,861

 

Total center expenses

 

1,609

 

1,604

 

4,559

 

4,535

 

Center gross profit (loss)

 

$

468

 

$

510

 

$