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EX-31.2 - WORLD ACCEPTANCE CORPv172691_ex31-2.htm
EX-31.1 - WORLD ACCEPTANCE CORPv172691_ex31-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
    Washington, D.C. 20549    

Form 10-Q

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

For the quarterly period ended December 31, 2009.

 
or

¨  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:  0-19599

WORLD ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter.)

South Carolina
 
57-0425114
(State or other jurisdiction of
 
(I.R.S. Employer Identification
incorporation or organization)
 
Number)

108 Frederick Street
         Greenville, South Carolina 29607         
(Address of principal executive offices)
(Zip Code)

         (864) 298-9800         
(registrant's telephone number, including area code)

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 shorter period than 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 ¨

Indicate by check mark whether the registrant has submitted 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 ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer ¨
Accelerated Filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

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

The number of outstanding shares of the issuer’s no par value common stock as of February 1, 2010 was 16,412,386
 

 
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES

TABLE OF CONTENTS

     
Page
       
PART I - FINANCIAL INFORMATION
   
       
Item 1.
Consolidated Financial Statements (unaudited):
   
       
 
Consolidated Balance Sheets as of December 31,
   
 
2009, March 31, 2009 and December 31, 2008
 
3
       
 
Consolidated Statements of Operations for the three and
   
 
nine months ended December 31, 2009 and 2008
 
4
       
 
Consolidated Statements of Shareholders' Equity and
   
 
Comprehensive Income (loss) for the year ended March 31, 2009
   
 
and the nine months ended December 31, 2009
 
5
       
 
Consolidated Statements of Cash Flows for the
   
 
nine months ended December 31, 2009 and 2008
 
6
       
 
Notes to Consolidated Financial Statements
 
7
       
Item 2.
Management's Discussion and Analysis of Financial
 
22
 
Condition and Results of Operations
   
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
27
       
Item 4.
Controls and Procedures
 
28
       
PART II - OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
28
       
Item 1A.
Risk Factors
 
28
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
28
       
Item 6.
Exhibits
 
29
       
Signatures
 
31
 
2

 
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
December 31,
   
March 31,
   
December 31,
 
   
2009
   
2009
   
2008
 
         
As adjusted (Note 2)
 
ASSETS
                 
                   
Cash and cash equivalents
  $ 12,945,733       6,260,410       7,138,665  
Gross loans receivable
    838,864,378       671,175,985       736,234,490  
Less:
                       
Unearned interest and fees
    (223,441,039 )     (172,743,440 )     (194,871,842 )
Allowance for loan losses
    (47,679,342 )     (38,020,770 )     (42,575,525 )
Loans receivable, net
    567,743,997       460,411,775       498,787,123  
Property and equipment, net
    22,936,050       23,060,360       23,068,885  
Deferred income taxes
    13,027,279       12,250,834       13,680,570  
Income taxes receivable
    -       -       1,569,306  
Other assets, net
    10,350,317       9,541,757       9,162,051  
Goodwill
    5,580,946       5,580,946       5,583,864  
Intangible assets, net
    7,541,218       8,987,551       9,513,171  
Total assets
  $ 640,125,540       526,093,633       568,503,635  
                         
LIABILITIES & SHAREHOLDERS' EQUITY
                       
                         
Liabilities:
                       
Senior notes payable
    185,560,000       113,310,000       185,350,000  
Convertible senior subordinated notes payable
    84,000,000       95,000,000       105,000,000  
Debt discount
    (7,065,673 )     (11,268,462 )     (13,615,511 )
Income taxes payable
    5,624,845       11,412,722       -  
Accounts payable and accrued expenses
    24,854,275       21,304,466       22,734,404  
Total liabilities
    292,973,447       229,758,726       299,468,893  
                         
Shareholders' equity:
                       
Preferred stock, no par value
                       
Authorized 5,000,000 shares, no shares issued or outstanding
    -       -       -  
Common stock, no par value
                       
Authorized 95,000,000 shares; issued and Outstanding 16,376,553, 16,211,659 and 16,159,559 shares at December 31, 2009, March 31, 2009 and December 31, 2008, respectively
    -       -       -  
Additional paid-in capital
    22,072,097       17,046,310       15,383,414  
Retained earnings
    327,516,403       283,518,260       257,177,596  
Accumulated other comprehensive loss
    (2,436,407 )     (4,229,663 )     (3,526,268 )
Total shareholders' equity
    347,152,093       296,334,907       269,034,742  
Commitments and contingencies
                       
    $ 640,125,540       526,093,633       568,503,635  

See accompanying notes to consolidated financial statements.
 
3

 
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three months ended
   
Nine months ended
 
   
December 31,
   
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
         
As adjusted
         
As adjusted
 
         
(Note 2)
         
(Note 2)
 
                         
Revenues:
                       
Interest and fee income
  $ 97,610,049       84,880,761       274,218,046       241,283,794  
Insurance and other income
    14,700,088       14,280,193       42,528,223       38,018,758  
Total revenues
    112,310,137       99,160,954       316,746,269       279,302,552  
                                 
Expenses:
                               
Provision for loan losses
    29,632,781       29,490,333       75,217,079       70,654,378  
General and administrative expenses:
                               
Personnel
    34,028,477       31,699,778       104,231,703       96,215,404  
Occupancy and equipment
    7,657,755       6,491,005       21,474,593       19,022,649  
Data processing
    475,639       572,987       1,503,650       1,743,384  
Advertising
    5,070,758       5,087,427       9,891,852       10,329,015  
Amortization of intangible assets
    563,183       621,355       1,695,641       1,844,902  
Other
    7,741,575       7,242,789       21,827,628       19,729,143  
      55,537,387       51,715,341       160,625,067       148,884,497  
                                 
Interest expense
    3,756,054       3,928,135       10,483,235       11,428,618  
Total expenses
    88,926,222       85,133,809       246,325,381       230,967,493  
                                 
Income before income taxes
    23,383,915       14,027,145       70,420,888       48,335,059  
                                 
Income taxes
    8,632,677       5,163,799       26,422,745       18,183,133  
                                 
Net income
  $ 14,751,238       8,863,346       43,998,143       30,151,926  
                                 
Net income per common share:
                               
Basic
  $ 0.91       0.55       2.71       1.85  
Diluted
  $ 0.89       0.54       2.68       1.82  
                                 
Weighted average common shares outstanding:
                               
Basic
    16,298,477       16,203,282       16,253,140       16,289,319  
Diluted
    16,575,841       16,341,536       16,434,380       16,543,043  

See accompanying notes to consolidated financial statements.
 
4

 
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
               
Accumulated
             
               
Other
             
   
Additional
         
Comprehensive
   
Total
   
Total
 
   
Paid-in
   
Retained
   
Income
   
Shareholders’
   
Comprehensive
 
   
Capital
   
Earnings
   
(Loss)
   
Equity
   
Income
 
                               
Balances at March 31, 2008
  $ 1,323,001       232,812,768       169,503       234,305,272        
Cumulative effect of change in accounting principle (Note 2)
    14,961,722       (4,466,014 )     -       10,495,708        
Proceeds from exercise of stock options (142,683 shares), including tax benefits of $1,320,974
    2,975,335       -       -       2,975,335        
Common stock repurchases (288,700 shares)
    (6,527,680 )     (1,321,084 )     -       (7,848,764 )      
Issuance of restricted common stock under stock option plan (78,592 shares)
    1,418,031       -       -       1,418,031        
Stock option expense
    3,232,229       -       -       3,232,229        
Repurchase and cancellation of convertible notes
    (336,328 )     -       -       (336,328 )      
Other comprehensive loss
    -       -       (4,399,166 )     (4,399,166 )     (4,399,166 )
Net income
    -       56,492,590       -       56,492,590       56,492,590  
Total comprehensive income
    -       -       -       -       52,093,424  
Balances at March 31, 2009 (As Adjusted – Note 2)
    17,046,310       283,518,260       (4,229,663 )     296,334,907          
                                         
Proceeds from exercise of stock options (96,850 shares), including tax benefits of $495,835
    1,903,469       -       -       1,903,469          
Issuance of restricted common stock under stock option plan (68,044 shares)
    1,250,993       -       -       1,250,993          
Stock option expense
    2,427,228       -       -       2,427,228          
Repurchase and cancellation of convertible notes
    (555,903 )     -       -       (555,903 )        
Other comprehensive income
    -       -       1,793,256       1,793,256       1,793,256  
Net income
    -       43,998,143       -       43,998,143       43,998,143  
Total comprehensive income.
    -       -       -       -       45,791,399  
Balances at December 31, 2009
  $ 22,072,097       327,516,403       (2,436,407 )     347,152,093          

See accompanying notes to consolidated financial statements.
 
5

 
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine months ended
 
   
December 31,
 
   
2009
   
2008
 
         
As adjusted
 
         
(Note 2)
 
Cash flows from operating activities:
           
                 
Net income
  $ 43,998,143       30,151,926  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of intangible assets
    1,695,641       1,844,902  
Amortization of loan costs and discounts
    318,027       569,502  
Provision for loan losses
    75,217,079       70,654,378  
Gain on the extinguishment of debt
    (2,478,331 )     (1,588,720 )
Amortization of convertible note discount
    2,957,197       3,539,484  
Depreciation
    4,176,174       3,378,260  
Deferred income tax (expense) benefit
    (776,445 )     1,818,505  
Compensation related to stock option and restricted stock plans
    3,678,221       3,718,932  
Unrealized (gains) losses on interest rate swap
    (891,068 )     869,123  
                 
Change in accounts:
               
Other assets, net
    (1,147,626 )     (2,543,331 )
Income taxes payable
    (5,744,672 )     (17,976,045 )
Accounts payable and accrued expenses
    4,303,526       3,122,082  
Net cash provided by operating activities
    125,305,866       97,558,998  
                 
Cash flows from investing activities:
               
                 
Increase in loans receivable, net
    (180,449,244 )     (150,922,924 )
Assets acquired from office acquisitions, primarily loans
    (765,550 )     (8,601,606 )
Increase in intangible assets from acquisitions
    (249,308 )     (1,591,935 )
Purchases of property and equipment, net
    (3,774,819 )     (8,110,470 )
                 
Net cash used in investing activities
    (185,238,921 )     (169,226,935 )
                 
Cash flows from financing activities:
               
                 
Proceeds of senior revolving notes payable, net
    72,250,000       80,850,000  
Repayment of convertible senior subordinated notes payable
    (7,657,500 )     (2,916,000 )
Repurchases of common stock
    -       (7,848,764 )
Repayment of other notes payable
    -       (400,000 )
Proceeds from exercise of stock options
    1,407,634       1,374,545  
Excess tax benefit from exercise of stock options
    495,835       704,244  
                 
Net cash provided by financing activities
    66,495,969       71,764,025  
                 
Increase (decrease) in cash and cash equivalents
    6,562,914       96,088  
                 
Cash and cash equivalents at beginning of period
    6,260,410       7,589,575  
                 
Effect of foreign currency fluctuation on cash
    122,409       (546,998 )
                 
Cash and cash equivalents at end of period
  $ 12,945,733       7,138,665  

See accompanying notes to consolidated financial statements.

 
6

 

WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The Consolidated Financial Statements of the Company at December 31, 2009, and for the three and nine months then ended were prepared in accordance with the instructions for Form 10-Q and are unaudited; however, in the opinion of management, all adjustments (consisting only of items of a normal recurring nature) necessary for a fair presentation of the financial position at December 31, 2009, and the results of operations and cash flows for the periods ended December 31, 2009 and 2008, have been included.  The results for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

Certain reclassification entries have been made for fiscal 2009 to conform with fiscal 2010 presentation.  These reclassifications had no impact on shareholders’ equity and comprehensive income or net income.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

These Consolidated Financial Statements do not include all disclosures required by U.S. generally accepted accounting principles and should be read in conjunction with the Company's audited Consolidated Financial Statements and related notes for the fiscal year ended March 31, 2009, included in the Company's 2009 Annual Report to Shareholders.

NOTE 2 – SUMMARY OF SIGNIFICANT POLICIES

Change in Accounting Principle

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 470-20 (Prior authoritative literature: FASB Staff Position No. APB 14-1 “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)”).  FASB ASC 470-20 applies to any convertible debt instrument that at conversion may be settled wholly or partly with cash, requires cash-settleable convertibles to be separated into their debt and equity components at issuance and prohibits the use of the fair-value option for such instruments.  FASB ASC 470-20 is effective for the first fiscal period beginning after December 15, 2008 and must be applied retrospectively to all periods presented with a cumulative effect adjustment being made as of the earliest period presented.  The Company adopted FASB ASC 470-20 effective April 1, 2009.  The impact on our Consolidated Financial Statements is as follows:

   
Three Months Ended December 31,
 
   
2008
   
2007
 
               
Upon
               
Upon
 
   
As
   
Impact of
   
Adoption
   
As
   
Impact of
   
Adoption
 
   
Previously
   
FASB
   
of FASB
   
Previously
   
FASB
   
FASB
 
   
Reported
   
ASC 470-20
   
ASC 470-20
   
Reported
   
ASC 470-20
   
ASC 470-20
 
   
(in thousands, except per share data)
 
Consolidated Statements of Operations
                                   
Insurance and other income
  $ 14,775       (495 )     14,280       12,835       -       12,835  
Interest expense
    2,787       1,141       3,928       3,338       1,099       4,437  
Income before income taxes
    15,663       (1,636 )     14,027       14,011       (1,099 )     12,912  
Income taxes
    5,659       (495 )     5,164       6,723       (409 )     6,314  
Net income
    10,004       (1,141 )     8,863       7,288       (690 )     6,598  
                                                 
Earnings per common share
                                               
Basic
  $ 0.62       (0.07 )     0.55       0.43       (0.04 )     0.39  
Diluted
    0.61       (0.07 )     0.54       0.43       (0.05 )     0.38  
 
 
7

 

   
Nine Months Ended December 31,
 
   
2008
   
2007
 
               
Upon
               
Upon
 
   
As
   
Impact of
   
Adoption
   
As
   
Impact of
   
Adoption
 
   
Previously
   
FASB
   
of FASB
   
Previously
   
FASB
   
FASB
 
   
Reported
   
ASC 470-20
   
ASC 470-20
   
Reported
   
ASC 470-20
   
ASC 470-20
 
   
(in thousands, except per share data)
 
Consolidated Statements of Operations
                                   
Insurance and other income
  $ 38,514       (495 )     38,019       34,327       -       34,327  
Interest expense
    8,016       3,413       11,429       8,606       3,255       11,861  
Income before income taxes
    52,243       (3,909 )     48,334       48,577       (3,255 )     45,322  
Income taxes
    19,523       (1,340 )     18,183       19,972       (1,212 )     18,760  
Net income
    32,719       (2,567 )     30,152       28,604       (2,043 )     26,561  
                                                 
Earnings per common share
                                               
Basic
  $ 2.01       (0.16 )     1.85       1.66       (0.12 )     1.54  
Diluted
    1.98       (0.16 )     1.82       1.63       (0.11 )     1.52  

   
As of March 31, 2009
   
As of December 31, 2008
 
               
Upon
               
Upon
 
   
As
   
Impact of
   
Adoption
   
As
   
Impact of
   
Adoption
 
   
Previously
   
FASB
   
of FASB
   
Previously
   
FASB
   
FASB
 
   
Reported
   
ASC 470-20
   
ASC 470-20
   
Reported
   
ASC 470-20
   
ASC 470-20
 
   
(in thousands)
 
Consolidated Balance Sheets
                                   
Deferred income taxes
  $ 16,983       (4,732 )     12,251       18,927       (5,246 )     13,681  
Income tax receivable
    -       -       -       1,714       (145 )     1,569  
Other assets, net
    9,970       (428 )     9,542       9,629       (467 )     9,162  
Total assets
    531,254       (5,160 )     526,094       574,362       (5,858 )     568,504  
                                                 
Convertible senior subordinated notes payable, net of discount
    95,000       (11,269 )     83,731       105,000       (13,616 )     91,384  
Income taxes payable
    11,253       160       11,413       -       -       -  
Total liabilities
    240,868       (11,109 )     229,759       313,084       (13,615 )     299,469  
                                                 
Additional paid-in capital
    2,421       14,625       17,046       593       14,790       15,383  
Retained earnings
    292,195       (8,677 )     283,518       264,211       (7,033 )     257,178  
Total shareholders’ equity
    290,386       5,949       296,335       261,278       7,757       269,035  
                                                 
Total liabilities and shareholders’ equity
    531,254       (5,160 )     526,094       574,362       (5,858 )     568,504  

Recent Accounting Pronouncements:

FASB Accounting Standards Codification

In June 2009, the FASB issued ASC 105 (“SFAS  168”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” ASC 105 replaces SFAS 162 and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.   ASC 105  is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did have an impact to the Company’s financial statement disclosures, as all references to authoritative accounting literature have been referenced in accordance with the Codification.
 
8

 
Business Combinations

In December 2007, the FASB issued FASB ASC 805-10 (Prior authoritative literature: FASB Statement 141 (R), “Business Combinations,” which replaces FASB Statement No. 141). FASB ASC 805-10 is effective for the Company April 1, 2009 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FASB ASC 805-10 will change how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. The adoption of FASB ASC 805-10 did not have an impact on the Company’s financial position and results of operations, although it may have a material impact on accounting for business combinations in the future which cannot currently be determined.

In April 2009, the FASB issued FASB ASC 805-10-05 (Prior authoritative literature: FSP 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies”). For business combinations, the standard requires the acquirer to recognize at fair value an asset acquired or liability assumed from a contingency if the acquisition date fair value can be determined during the measurement period. FASB ASC 805-10-05 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The Company adopted these provisions as of April 1, 2009. FASB ASC 805-10-05 will be applied prospectively for acquisitions in fiscal 2010 or thereafter.

Subsequent Events

In May 2009, the FASB issued ASC Topic 855 (Prior authoritative literature: “SFAS No. 165”), “Subsequent Events,” which establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. ASC 855 provides largely the same guidance on subsequent events that previously existed only in auditing literature. The disclosure is required in financial statements for interim and annual periods ending after June 15, 2009. The Company has performed an evaluation of subsequent events through February 1, 2010, which is the date these Consolidated Financial Statements are filed and no events required disclosure.

Useful Life of Intangible Assets

In April 2008, the FASB issued FASB ASC 350-30-55-1c (Prior authoritative literature: FASB Staff Position No. FAS 142-3), “Determination of the Useful Life of Intangible Assets.”  FASB ASC 350-30-55-1c applies to all recognized intangible assets and its guidance is restricted to estimating the useful life of recognized intangible assets.  FASB ASC 350-30-55-1c is effective for the first fiscal period beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date.  The Company adopted FASB ASC 350-30-55-1c effective April 1, 2009 with no significant impact to the Consolidated Financial Statements.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly
 
FASB ASC 820-10-65-4 (Prior authoritative literature: FASB Staff Position No. FAS 157-4), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly,” provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. FASB ASC 820-10-65-4 also provides guidance for determining when a transaction is an orderly one.  The Company adopted FASB ASC 820-10-65-4 during the quarter ended June 30, 2009 and the adoption did not have a significant impact on the Company’s Consolidated Financial Statements.
 
Recognition and Presentation of Other-Than-Temporary Impairments
 
FASB ASC 320-10-65 (Prior authoritative literature: FASB Staff Position FAS 115-2 and FAS 124-2), “Recognition and Presentation of Other-Than-Temporary Impairments,” amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FASB ASC 320-10-65 was effective June 30, 2009, and did not have a significant impact on the Company’s Consolidated Financial Statements.
 
9


Instruments Indexed to an Entity’s Own Stock

In June 2008, the FASB ratified FASB ASC 815-40 (Prior authoritative literature: EITF Issue 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” ). FASB ASC 815-40 provides a new two-step model to be applied to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative in FASB ASC 815-10-15 (Prior authoritative literature: FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities,”) in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for scope exception. It also adds clarity on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. FASB ASC 815-40 also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative in FASB ASC 815-10-15.  The Company adopted FASB ASC 815-40 during the quarter ended June 30, 2009 and the adoption did not have a material impact on the Company’s Consolidated Financial Statements.

Interim Disclosures about Fair Value of Financial Instruments

In April 2009, the FASB issued FASB ASC 825-10-65 (Prior authoritative literature: FASB Staff Position No. FAS 107-1, “Disclosures about Fair Value of Financial Instruments” and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”), which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This Standard is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted FASB ASC 825-10-65 during the first quarter ended June 30, 2009.  See Note 3.

NOTE 3 – FAIR VALUE

Effective April 1, 2008, the first day of fiscal 2009, the Company adopted the provisions of FASB ASC 820 (Prior authoritative literature: SFAS No. 157, “Fair Value Measurements”) for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. FASB ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  FASB ASC 820 applies under other accounting pronouncements in which the FASB has previously concluded that fair value is the relevant measurement attribute.    Accordingly, FASB ASC 820 does not require any new fair value measurements.  Effective April 1, 2009, the Company adopted the provisions of FASB ASC 820 for nonfinancial assets and liabilities which were previously deferred under the provisions of FASB ASC 820-10-65 (Prior authoritative literature: FSP FAS 157-2).

Financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities.  These levels are:

 
o
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
o
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active.
 
o
Level 3 – Unobservable inputs for assets or liabilities reflecting the reporting entity’s own assumptions.

The following financial liabilities were measured at fair value on a recurring basis at December 31, 2009:

   
Fair Value Measurements Using
 
         
Quoted Prices
             
         
In Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
   
December 31,
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Interest rate swaps
                       
2009
  $ 1,552,598     $ -     $ 1,552,598     $ -  
2008
  $ 2,539,741     $ -     $ 2,539,741     $ -  

 
10

 

The Company’s interest rate swap was valued using the “income approach” valuation technique.  This method used valuation techniques to convert future amounts to a single present amount.  The measurement was based on the value indicated by current market expectations about those future amounts.

There were no assets or liabilities measured at fair value on a non recurring basis during the first nine months of fiscal 2010.

Fair Value of Long-Term Debt

The book value and estimated fair value of our long-term debt was as follows (in thousands):

   
December 31,
   
March 31,
   
December 31,
 
   
2009
   
2009
   
2008
 
                   
Book value:
                 
Senior Notes Payable
  $ 185,560       113,310       185,350  
Convertible Notes, net of discount
    76,934       83,732       91,384  
    $ 262,494       197,042       276,734  
                         
Estimated fair value:
                       
Senior Notes Payable
  $ 185,560       113,310       185,350  
Convertible Notes
    78,598       61,702       60,575  
    $ 264,158       175,012       245,925  

The difference between the estimated fair value of long-term debt compared with its historical cost reported in our Condensed Consolidated Balance Sheets at December 31, 2009 and March 31, 2009 relates primarily to market quotations for the Company’s 3.0% Convertible Senior Subordinated Notes due October 1, 2011.

NOTE 4 – COMPREHENSIVE INCOME (LOSS)

The Company applies the provisions of FASB ASC 220-10 (Prior authoritative literature: SFAS No. 130 “Reporting Comprehensive Income”).  The following summarizes accumulated other comprehensive income (loss) as of:

   
Three months
   
Nine months
 
   
ended December 31,
   
ended December 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Balance at beginning of period
  $ (3,249,866 )     (400,811 )     (4,229,663 )     169,503  
                                 
Unrealized income (loss) from foreign Exchange translation adjustment
    813,459       (3,125,457 )     1,793,256       (3,695,771 )
                                 
Balance at end of period
  $ (2,436,407 )     (3,526,268 )     (2,436,407 )     (3,526,268 )

 
11

 

NOTE 5 – ALLOWANCE FOR LOAN LOSSES

The following is a summary of the changes in the allowance for loan losses for the periods indicated (unaudited):

   
Three months
   
Nine months
 
   
ended December 31,
   
ended December 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Balance at beginning of period
  $ 43,682,344       38,120,647       38,020,770       33,526,147  
                                 
Provision for loan losses
    29,632,781       29,490,333       75,217,079       70,654,378  
Loan losses
    (27,768,448 )     (26,558,525 )     (71,711,810 )     (66,846,813 )
Recoveries
    2,067,228       1,694,403       6,025,614       5,069,652  
Translation adjustment
    65,437       (210,502 )     127,689       (255,217 )
Allowance on acquired loans
    -       39,169       -       427,378  
Balance at end of period
  $ 47,679,342       42,575,525       47,679,342       42,575,525  

The Company adopted FASB ASC 310 (Prior authoritative literature: Statement of Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer"), which prohibits carry over or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this ASC.  The Company believes that a loan has shown deterioration if it is over 60 days delinquent.  The Company believes that loans acquired since the adoption of FASB ASC 310 have not shown evidence of deterioration of credit quality  since origination, and therefore, are not within the scope of FASB ASC 310 because the Company did not allocate consideration for, or record, acquired loans over 60 days delinquent.  Loans acquired that are more than 60 days past due are included in the scope of FASB ASC 310 and therefore, subsequent refinances or restructures of these loans would not be accounted for as a new loan.

For the three months ended and nine months ended December 31, 2008, the Company recorded adjustments of approximately $39,000 and $427,000, respectively, to the allowance for loan losses in connection with acquisitions in accordance with generally accepted accounting principles. No adjustments were recorded for the three months ended or the nine months ended December 31, 2009.  These adjustments represent the allowance for loan losses on acquired loans which do not meet the scope of FASB ASC 310.

NOTE 6 – AVERAGE SHARE INFORMATION

The following is a summary of the basic and diluted average common shares outstanding:

   
Three months ended December 31,
   
Nine months ended December 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Basic:
                       
Weighted average common shares outstanding (denominator)
    16,298,477       16,203,282       16,253,140       16,289,319  
                                 
Diluted:
                               
Weighted average common shares outstanding
    16,298,477       16,203,282       16,253,140       16,289,319  
Dilutive potential common shares
    277,364       138,254       181,240       253,724  
Weighted average diluted shares outstanding (denominator)
    16,575,841       16,341,536       16,434,380       16,543,043  

Options to purchase 159,370 and 309,055 shares of common stock at various prices were outstanding during the three months ended December 31, 2009 and 2008, respectively, but were not included in the computation of diluted EPS because the options are anti-dilutive.  Options to purchase 134,172 and 86,584 shares of common stock at various prices were outstanding during the nine months ended December 31, 2009 and 2008, respectively, but were not included in the computation of diluted EPS because the options were anti-dilutive.  The shares related to the convertible senior notes payable (1,762,519) and related warrants were also not included in the computation of diluted EPS because the effect of such instruments was anti-dilutive.

 
12

 

NOTE 7 – STOCK-BASED COMPENSATION

Stock Option Plans

The Company has a 1994 Stock Option Plan, a 2002 Stock Option Plan, a 2005 Stock Option Plan and a 2008 Stock Option Plan for the benefit of certain directors, officers, and key employees.  Under these plans, 4,850,000 shares of authorized common stock have been reserved for issuance pursuant to grants approved by the Compensation and Stock Option Committee of the Board of Directors.  Stock options granted under these plans have a maximum duration of 10 years, may be subject to certain vesting requirements, which are generally one year for directors and between two and five years for officers and key employees, and are priced at the market value of the Company's common stock on the date of grant of the option.  At December 31, 2009, there were 505,095 shares available for grant under the plans.

Stock based compensation is recognized as provided under FASB ASC 718-10 and FASB ASC 505-50 (Prior authoritative literature: FASB Statement 123(R), “Share Based Payment”).  FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the financial statements based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.  The Company elected to use the modified prospective transition method, and did not retroactively adjust results from prior periods.  Under this transition method, stock option compensation is recognized as an expense over the remaining unvested portion of all stock option awards granted prior to April 1, 2006, based on the fair values estimated at grant date in accordance with the provisions of FASB ASC 718-10.  The Company has applied the Black-Scholes valuation model in determining the fair value of the stock option awards.  Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on historical experience and future expectations.

The weighted-average fair values at the grant date for options issued during the nine months ended December 31, 2009 and 2008 were $15.32 and $8.51, respectively. This fair value was estimated at grant date using the weighted-average assumptions listed below.

   
Three months ended December 31,
   
Nine months ended December 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Dividend yield
    0 %     0 %     0 %     0 %
Expected volatility
    56.69 %     50.67 %     56.69 %     50.67 %
Average risk-free interest rate
    2.69 %     2.75 %     2.69 %     2.75 %
Expected life
 
6.6 years
   
5.9 years
   
6.6 years
   
5.9 years
 
Vesting period
 
5 years
   
5 years
   
5 years
   
5 years
 

The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life.  The expected life represents the period of time that options are expected to be outstanding after their grant date.  The risk-free interest rate reflects the interest rate at grant date on zero-coupon U.S. governmental bonds having a remaining life similar to the expected option term.

Option activity for the nine months ended December 31, 2009 was as follows:

         
Weighted
   
Weighted
       
         
Average
   
Average
       
         
Exercise
   
Remaining
   
Aggregated
 
   
Shares
   
Price
   
Contractual Term
   
Intrinsic Value
 
                         
Options outstanding, beginning of year
    1,390,900     $ 25.00                
Granted
    295,750       26.73                
Exercised
    (96,850 )     16.68                
Forfeited
    (1,150 )     46.29                
Options outstanding, end of period
    1,588,650     $ 25.81       7.16  
$
 18,570,500
 
Options exercisable, end of period
    712,700     $ 25.23       5.47  
$
9,141,483
 

 
13

 

The aggregate intrinsic value reflected in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on December 31, 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by option holders had all option holders exercised their options.  The total intrinsic value of options exercised during the periods ended December 31, 2009 and 2008 were as follows:

   
2009
   
2008
 
Three months ended
  $ 1,069,769       21,311  
Nine months ended
  $ 1,358,666       2,307,894  

As of December 31, 2009, total unrecognized stock-based compensation expense related to non-vested stock options amounted to approximately $8.4 million, which is expected to be recognized over a weighted-average period of approximately 3.85 years.

Restricted Stock

On November 9, 2009, the Company granted 41,346 shares of restricted stock (which are equity classified), with a grant date fair value of $26.73 per share, to certain executive officers and other officers of the Company.  One-third of the restricted stock vested immediately and one-third will vest on the first and second anniversary of the grant.  On that same date, the Company granted an additional 23,159 shares of restricted stock (which are equity classified), with a grant date fair value of $26.73 per share, to the same executive officers.  The 23,159 shares will vest on April 30, 2012 based on the Company’s compounded annual EPS growth according to the following schedule:

   
Compounded
 
Vesting
 
Annual
 
Percentage
 
EPS Growth
 
100 %
15% or higher
 
67 % 12% - 14.99%  
33 % 10% - 11.99%  
0 %
Below 10%
 

On April 30, 2009 and May 11, 2009 the Company granted 15,000 shares and 3,000 shares of restricted stock (which are equity classified), respectively, with a grant date fair value of $29.68 and $20.41, respectively, per share to independent directors and a certain officer.  All of these grants vested immediately.

On November 10, 2008, the Company granted 50,000 shares of restricted stock (which are equity classified), with a grant date fair value of $16.85 per share, to certain executive officers.  One-third of the restricted stock vested immediately and one-third will vest on the first and second anniversary of the grant.  On that same date, the Company granted an additional 29,100 shares of restricted stock (which are equity classified), with a grant date fair value of $16.85 per share, to the same executive officers.  The 29,100 shares will vest in three years based on the Company’s compounded annual EPS growth according to the following schedule:

   
Compounded
 
Vesting
 
Annual
 
Percentage
 
EPS Growth
 
100 %
15% or higher
 
67 % 12% - 14.99%  
33 % 10% - 11.99%  
0 %
Below 10%
 

On May 19, 2008 the Company granted 12,000 shares of restricted stock (which are equity classified) with a grant date fair value of $43.67 per share to its independent directors and a certain officer.  One-half of the restricted stock vested immediately and the other half vested on the first anniversary of the grant.

On November 28, 2007, the Company granted 20,800 shares of restricted stock (which are equity classified), with a grant date fair value of $30.94 per share, to certain executive officers.  One-third of the restricted stock vested immediately and one-third will vest on the first and second anniversary of grant.   On that same date, the Company granted an additional 15,150 shares of restricted stock (which are equity classified), with a grant date fair value of $30.94 per share, to the same executive officers.  The 15,150 shares will vest in three years based on the Company’s compounded annual EPS growth according to the following schedule:

 
14

 

   
Compounded
 
Vesting
 
Annual
 
Percentage
 
EPS Growth
 
100
%
15% or higher
 
67
%
12% - 14.99%
 
33
%
10% - 11.99%
 
0
%
Below 10%
 

On November 12, 2007, the Company granted 8,000 shares of restricted stock (which are equity classified), with a grant date fair value of $28.19 per share, to certain officers.  One-third of the restricted stock vested immediately and one-third will vest on the first and second anniversary of grant.

Compensation expense related to restricted stock is based on the number of shares expected to vest and the fair market value of the common stock on the grant date.  The Company recognized $651,000 and $593,000, respectively, of compensation expense for the quarters ended December 31, 2009 and 2008 and recognized $1.6 million and $1.4 million, respectively, for the nine months ended December 31, 2009 and 2008 related to restricted stock. Compensation expense related to restricted stock is included as a component of general and administrative expenses in the Company’s Consolidated Statements of Operations.  All shares are expected to vest.

As of December 31, 2009, there was approximately $1.8 million of unrecognized compensation cost related to unvested restricted stock awards granted, which is expected to be recognized over the next 2 years.

A summary of the status of the Company’s restricted stock as of December 31, 2009, and changes during the nine months ended December 31, 2009, is presented below:

   
Number of
Shares
   
Weighted Average Fair Value
at Grant Date
 
Outstanding at March 31, 2009
    80,246     $ 22.94  
Granted during the period
    82,505       27.04  
Vested during the period
    (64,063 )     25.87  
Cancelled during the period
    (14,461 )     26.41  
Outstanding at December 31, 2009
    84,227     $ 23.52  

Total share-based compensation included as a component of net income during the three months ended and nine months ended December 31, 2009 and 2008 was as follows:
 
   
Three months ended
   
Nine months ended
 
   
2009
   
2008
   
2009
   
2008
 
Share-based compensation related to equity classified units:
                       
Share-based compensation related to stock options
  $ 940,728       711,647     $ 2,427,228       2,603,852  
Share-based compensation related to restricted stock units
    650,994       592,900       1,632,881       1,382,818  
                                 
Total share-based compensation related to equity classified awards
  $ 1,591,722       1,304,547     $ 4,060,109       3,986,670  

 
15

 

NOTE 8 – ACQUISITIONS

The following table sets forth the acquisition activity of the Company for the nine months ended December 31, 2009 and 2008:

   
2009
   
2008
 
             
Number of offices purchased
    4       21  
Merged into existing offices
    4       10  
                 
Purchase Price
  $ 1,014,858     $ 10,193,541  
Tangible assets:
               
Net loans
    765,550       8,550,656  
Furniture, fixtures & equipment
    -       48,500  
Other
    -       2,450  
      765,550       8,601,606  
                 
Excess of purchase prices over carrying value of
               
net tangible assets
  $ 249,308     $ 1,591,935  
                 
Customer lists
    232,308       1,280,746  
Non-compete agreements
    17,000       80,000  
Goodwill