Attached files

file filename
EX-23 - WORLD ACCEPTANCE CORPv187490_ex23.htm
EX-21 - WORLD ACCEPTANCE CORPv187490_ex21.htm
EX-31.2 - WORLD ACCEPTANCE CORPv187490_ex31-2.htm
EX-31.1 - WORLD ACCEPTANCE CORPv187490_ex31-1.htm
EX-32.1 - WORLD ACCEPTANCE CORPv187490_ex32-1.htm
EX-32.2 - WORLD ACCEPTANCE CORPv187490_ex32-2.htm
 
  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

Form 10-K

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended March 31, 2010
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
 
570425114
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
108 Frederick Street
   
Greenville, South Carolina
 
29607
(Address of principal executive offices)
  
(Zip Code)
 
 
(864) 298-9800
 
(Registrant's telephone number, including area code)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, no par value
 
The NASDAQ Stock Market LLC
 
  
(NASDAQ Global Select Market)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.   Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 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 ¨

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 ¨   
Smaller reporting company ¨
 
(Do not check if 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 aggregate market value of voting stock held by non-affiliates of the registrant as of September 30, 2009, computed by reference to the closing sale price on such date, was $25.21.  (For purposes of calculating this amount only, all directors and executive officers are treated as affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.)  As of June 8, 2010, 15,765,054 shares of the registrant’s Common Stock, no par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement pertaining to the 2010 Annual Meeting of Shareholders ("the Proxy Statement") and filed pursuant to Regulation 14A are incorporated herein by reference into Part III hereof.
  

 
 

 
 
 
WORLD ACCEPTANCE CORPORATION
Form 10-K Report
Table of Contents

Item No.
 
Page
     
PART I
 
     
1.
Business
2
     
1A.
Risk Factors
12
     
1B.
Unresolved Staff Comments
17
     
2.
Properties
17
     
3.
Legal Proceedings
18
     
4.
Reserved
18
     
PART II
 
     
5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
18
     
6.
Selected Financial Data
20
     
7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
21
     
7A.
Quantitative and Qualitative Disclosures About Market Risk
31
     
8.
Financial Statements and Supplementary Data
32
     
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
65
     
9A.
Controls and Procedures
65
     
9B.
Other Information
66
     
PART III
 
     
10.
Directors, Executive Officers and Corporate Governance
67
     
11.
Executive Compensation
67
     
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
67
     
13.
Certain Relationships and Related Transactions, and Director Independence
67
     
14.
Principal Accountant Fees and Services
67
     
PART IV
 
     
15.
Exhibits and Financial Statement Schedules
67
 
 
1

 

Introduction

World Acceptance Corporation, a South Carolina corporation, operates a small-loan consumer finance business in eleven states and Mexico.  As used herein, the "Company,” “we,” “our,” “us,” or similar formulations include World Acceptance Corporation and each of its subsidiaries, except that when used with reference to the Common Stock or other securities described herein and in describing the positions held by management or agreements of the Company, it includes only World Acceptance Corporation.  All references in this report to "fiscal 2010" are to the Company's fiscal year ended March 31, 2010.

The Company maintains an Internet website, “www.worldacceptance.com,” where interested persons will be able to access free of charge, among other information, the Company’s annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K, as well as amendments to these filings, via a link to a third party website.  These documents are available for access as soon as reasonably practicable after we electronically file these documents with the Securities and Exchange Commission (“SEC”).  The Company files these reports with the SEC via the SEC’s EDGAR filing system, and such reports also may be accessed via the SEC’s EDGAR database at www.sec.gov.  The Company will also provide either electronic or paper copies free of charge upon written request to P.O. Box 6429, Greenville, SC 29606-6429.

PART I.

Item 1.   Description of Business

General.  The Company is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals.  The Company generally offers standardized installment loans of between $300 and $4,000 through 990 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama and Mexico as of March 31, 2010.  The Company generally serves individuals with limited access to consumer credit from banks, savings and loans, other consumer finance businesses and credit card lenders.  In the U.S. offices, the Company also offers income tax return preparation services and access to refund anticipation loans through a third party bank to its customers and others.

Small-loan consumer finance companies operate in a highly structured regulatory environment.  Consumer loan offices are individually licensed under state laws, which, in many states, establish allowable interest rates, fees and other charges on small loans made to consumers and maximum principal amounts and maturities of these loans.  The Company believes that virtually all participants in the small-loan consumer finance industry charge the maximum rates permitted under applicable state laws in those states with interest rate limitations.

The small-loan consumer finance industry is a highly fragmented segment of the consumer lending industry.  Small-loan consumer finance companies generally make loans to individuals of up to $1,000 with maturities of one year or less.  These companies approve loans on the basis of the personal creditworthiness of their customers and maintain close contact with borrowers to encourage the repayment or refinancing of loans.  By contrast, commercial banks, savings and loans and other consumer finance businesses typically make loans of more than $5,000 with maturities of more than one year.  Those financial institutions generally approve consumer loans on the security of qualifying personal property pledged as collateral or impose more stringent credit requirements than those of small-loan consumer finance companies.  As a result of their higher credit standards and specific collateral requirements, commercial banks, savings and loans and other consumer finance businesses typically charge lower interest rates and fees and experience lower delinquency and charge-off rates than do small-loan consumer finance companies.  Small-loan consumer finance companies generally charge higher interest rates and fees to compensate for the greater credit risk of delinquencies and charge-offs and increased loan administration and collection costs.

Expansion.  During fiscal 2010, the Company opened 48 new offices.  One office was purchased and three offices were merged into existing offices due to their inability to grow to profitable levels.  In fiscal 2011, the Company plans to open or acquire at least 55 new offices in the United States by increasing the number of offices in its existing market areas or commencing operations in new states where it believes demographic profiles and state regulations are attractive.  In addition, the Company plans to open approximately 15 new offices in Mexico in fiscal 2011.  The Company's ability to continue existing operations and expand its operations in existing or new states is dependent upon, among other things, laws and regulations that permit the Company to operate its business profitably and its ability to obtain necessary regulatory approvals and licenses; however, there can be no assurance that such laws and regulations will not change in ways that adversely affect the Company or that the Company will be able to obtain any such approvals or consents.  See Part 1, Item 1A, “Risk Factors” for a further discussion of risks to our business and plans for expansion.
 
 
2

 

The Company's expansion is also dependent upon its ability to identify attractive locations for new offices and to hire suitable personnel to staff, manage and supervise new offices.  In evaluating a particular community, the Company examines several factors, including the demographic profile of the community, the existence of an established small-loan consumer finance market and the availability of suitable personnel to staff, manage and supervise the new offices.  The Company generally locates new offices in communities already served by at least one other small-loan consumer finance company.

The small-loan consumer finance industry is highly fragmented in the eleven states in which the Company currently operates.  The Company believes that its competitors in these markets are principally independent operators with generally less than 100 offices.  The Company also believes that attractive opportunities to acquire offices from competitors in its existing markets and to acquire offices in communities not currently served by the Company will become available as conditions in the local economies and the financial circumstances of the owners change.

The following table sets forth the number of offices of the Company at the dates indicated:

   
At March 31,
 
State
 
2001
   
2002
   
2003
   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
   
2010
 
                                                             
South Carolina
    62       62       65       65       65       68       89       92       93       95  
Georgia
    48       52       52       74       76       74       96       97       100       101  
Texas
    135       136       142       150       164       168       183       204       223       229  
Oklahoma
    43       46       45       47       51       58       62       70       80       82  
Louisiana
    20       20       20       20       20       24       28       34       38       38  
Tennessee
    38       40       45       51       55       61       72       80       92       95  
Illinois
    30       29       28       30       33       37       40       58       61       64  
Missouri
    22       22       22       26       36       38       44       49       57       62  
New Mexico
    12       12       16       19       20       22       27       32       37       39  
Kentucky
    10       22       30       30       36       41       45       52       58       61  
Alabama (1)
    -       -       5       14       21       26       31       35       42       44  
Colorado (2)
    -       -       -       -       2       -       -       -       -       -  
Mexico (3)
    -       -       -       -       -       3       15       35       63       80  
Total
    420       441       470       526       579       620       732       838       944       990  
 

(1)
The Company commenced operations in Alabama in January 2003.
(2)
The Company commenced operations in Colorado in August 2004 and ceased operations in April 2005.
(3)
The Company commenced operations in Mexico in September 2005.

Loan and Other Products.  In each state in which it operates and in Mexico, the Company offers consumer installment loans that are standardized by amount and maturity in an effort to reduce documentation and related processing costs.  The Company's loans are consumer installment loans that are payable in fully amortizing monthly installments with terms generally of 4 to 36 months, and all loans are prepayable at any time without penalty.  In fiscal 2010, the Company's average originated gross loan size and term were approximately $1,067 and 11 months, respectively.  Several state laws regulate lending terms, including the maximum loan amounts and interest rates and the types and maximum amounts of fees, insurance premiums and other costs that may be charged.  As of March 31, 2010, the annual percentage rates on loans offered by the Company, which include interest, fees and other charges as calculated for the purposes of the requirements of the federal Truth in Lending Act, ranged from 25% to 204% depending on the loan size, maturity and the state in which the loan is made.  In addition, in certain states, the Company sells credit insurance in connection with its loans as agent for an unaffiliated insurance company, which may increase its returns on loans originated in those states.

Specific allowable charges vary by state and, consistent with industry practice, the Company generally charges at or close to the maximum rates allowable under applicable state law in those states that limit loan rates.  Statutes in Texas and Oklahoma allow for indexing the maximum loan amounts to the Consumer Price Index.  The Company’s loan products are pre-computed loans in which the finance charge is a combination of origination or acquisition fees, account maintenance fees, monthly account handling fee and other charges permitted by the relevant state laws.
 
 
3

 

As of March 31, 2010, annual percentage rates applicable to our gross loans receivable, as defined by the Truth in Lending Act were as follows:

Low
 
High
   
US
   
Mexico
   
Total
       
0
  36 %   $ 180,360,272     $ -     $ 180,360,272       23.42 %
36
  50 %     168,091,098       -       168,091,098       21.82 %
51
  80 %     154,799,458       -       154,799,458       20.10 %
81
  99 %     194,585,463       187,625       194,773,088       25.29 %
99
  149 %     30,471,982       32,936,005       63,407,987       8.23 %
149
  204 %     8,819,929       13,375       8,833,304       1.15 %
                                         
            $ 737,128,202     $ 33,137,005     $ 770,265,207          

The Company, as an agent for an unaffiliated insurance company, markets and sells credit life, credit accident and health, credit property, and unemployment insurance in connection with its loans in selected states where the sale of such insurance is permitted by law.  Credit life insurance provides for the payment in full of the borrower's credit obligation to the lender in the event of death.  Credit accident and health insurance provides for repayment of loan installments to the lender that come due during the insured's period of income interruption resulting from disability from illness or injury.  Credit property insurance insures payment of the borrower's credit obligation to the lender in the event that the personal property pledged as security by the borrower is damaged or destroyed by a covered event.  Unemployment insurance provides for repayment of loan installments to the lender that come due during the insured’s period of involuntary unemployment.  The Company requires each customer to obtain certain specific credit insurance in the amount of the loan for all loans originated in Georgia, and encourages customers to obtain credit insurance for loans originated in South Carolina, Louisiana, Alabama and Kentucky and on a limited basis in Tennessee, Oklahoma, and New Mexico.  Customers in those states typically obtain such credit insurance through the Company.  Charges for such credit insurance are made at maximum authorized rates and are stated separately in the Company's disclosure to customers, as required by the Truth-in-Lending Act and by various applicable state laws.  In South Carolina, Georgia, Louisiana, Kentucky and Alabama, the Company also charges non-file premiums in connection with certain loans in lieu of recording and perfecting the Company’s security interest in the asset pledged.  The premiums are remitted to a third party insurance company for non-file insurance coverage. In the sale of insurance policies, the Company, as agent, writes policies only within limitations established by its agency contracts with the insurer.  The Company does not sell credit insurance to non-borrowers.

The Company also markets automobile club memberships to its borrowers in Georgia, Tennessee, New Mexico, Alabama and Kentucky as an agent for an unaffiliated automobile club.  Club memberships entitle members to automobile breakdown and towing reimbursement and related services.  The Company is paid a commission on each membership sold, but has no responsibility for administering the club, paying benefits or providing services to club members.  The Company does not market automobile club memberships to non-borrowers.

In fiscal 1995 the Company implemented its World Class Buying Club and began marketing certain electronic products and appliances to its Texas borrowers.  Since implementation, the Company has expanded this program to Georgia, Tennessee, New Mexico, Alabama and Missouri.  The program is not offered in the other states where the Company operates, as it is not permitted by the state regulations in those states.  Borrowers participating in this program can purchase a product from a limited inventory of items maintained in the branch offices, a catalog available at a branch office or by direct mail and can finance the purchase with a retail installment sales contract provided by the Company.  Other than the limited product samples maintained in the branch offices, products sold through this program are shipped directly by the suppliers to the Company's customers and, accordingly, the Company is not required to maintain any inventory to support the program.  The Company believes that maintaining a limited number of items on hand in each of its participating offices has enhanced sales under this program and plans to continue this practice in the future.
 
 
4

 

Another service offered by the Company is income tax return preparation, electronic filing and access to refund anticipation loans.  This program is provided in all but a few of the Company’s offices.  The Company prepared 62,000, 61,000 and 65,000 returns in each of the fiscal years 2010, 2009 and 2008, respectively.   Net revenue generated by the Company from this program during fiscal 2010, 2009 and 2008 amounted to approximately $10.9 million, $9.9 million and $9.7 million, respectively.  The Company believes that this is a beneficial service for its existing customer base, as well as non-loan customers, and it plans to continue to promote and expand the program.

Loan Activity.  The following table sets forth the composition of the Company's gross loans receivable by state at March 31 of each year from 2001 through 2010:

   
At March 31,
 
State
 
2001
   
2002
   
2003
   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
   
2010
 
                                                             
South Carolina
    21 %     19 %     15 %     14 %     12 %     11 %     13 %     12 %     11 %     12 %
Georgia
    12       12       12       13       13       13       14       15       14       14  
Texas
    25       24       23       21       20       24       23       22       21       20  
Oklahoma
    6       5       5       5       5       6       5       5       6       6  
Louisiana
    3       3       3       3       3       3       3       3       3       2  
Tennessee
    11       12       14       15       18       15       15       14       14       14  
Illinois
    5       5       5       5       5       5       6       6       6       6  
Missouri
    4       5       5       6       6       6       5       6       6       6  
New Mexico
    3       3       3       3       3       3       3       3       3       3  
Kentucky
    10       12       13       12       12       11       9       9       9       9  
Alabama (1)
    -       -       2       3       3       3       3       3       4       4  
Mexico (2)
    -       -       -       -       -       -       1       2       3       4  
                                                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %
 

(1)
The Company commenced operations in Alabama in January 2003.
(2)
The Company commenced operations in Mexico in September 2005.

The following table sets forth the total number of loans, the average loan balance and the gross loan balance by state at March 31, 2010:

               
Gross Loan
 
   
Total Number
   
Average Gross Loan
   
Balance
 
   
of Loans
   
Balance
   
(thousands)
 
                   
South Carolina
    80,178     $ 1,120     $ 89,766  
Georgia
    84,971       1,269       107,839  
Texas
    201,047       754       151,595  
Oklahoma
    50,886       940       47,840  
Louisiana
    24,156       743       17,947  
Tennessee
    91,714       1,174       107,684  
Illinois
    40,672       1,218       49,548  
Missouri
    37,768       1,201       45,367  
New Mexico
    24,454       775       18,954  
Kentucky
    47,561       1,471       69,944  
Alabama
    32,584       940       30,644  
Mexico
    77,225       429       33,137  
Total
    793,216     $ 971     $ 770,265  

For fiscal 2010, 2009 and 2008, 95.9%, 96.9% and 98.2%, respectively, of the Company’s revenues were attributable to U.S. customers and 4.1%, 3.1% and 1.8%, respectively, were attributable to customers in Mexico.  For further information regarding potential risks associated with the Company’s operations in Mexico, see Part I, Item 1A, “Risk Factors - Our use of derivatives exposes us to credit and market risk” and “- Our continued expansion into Mexico may increase the risks inherent in conducting international operations, contribute materially to increased costs and negatively affect our business, prospects, results of operations and financial condition,” as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Exchange Rate Risk.”
 
 
5

 

Seasonality.  The Company's highest loan demand occurs generally from October through December, its third fiscal quarter.  Loan demand is generally lowest and loan repayment highest from January to March, its fourth fiscal quarter.  Consequently, the Company experiences significant seasonal fluctuations in its operating results and cash needs.  Operating results from the Company's third fiscal quarter are generally lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters.

Lending and Collection Operations.  The Company seeks to provide short-term loans to the segment of the population that has limited access to other sources of credit.  In evaluating the creditworthiness of potential customers, the Company primarily examines the individual's discretionary income, length of current employment, duration of residence and prior credit experience.  Loans are made to individuals on the basis of the customer's discretionary income and other factors and are limited to amounts that the customer can reasonably be expected to repay from that income.  All of the Company's new customers are required to complete standardized credit applications in person or by telephone at local Company offices.  Each of the Company's local offices is equipped to perform immediate background, employment and credit checks and approve loan applications promptly, often while the customer waits. The Company's employees verify the applicant's employment and credit histories through telephone checks with employers, other employment references and a variety of credit services.  Substantially all new customers are required to submit a listing of personal property that will be pledged as collateral to secure the loan, but the Company does not rely on the value of such collateral in the loan approval process and generally does not perfect its security interest in that collateral.  Accordingly, if the customer were to default in the repayment of the loan, the Company may not be able to recover the outstanding loan balance by resorting to the sale of collateral.  The Company generally approves less than 50% of applications for loans to new customers.

The Company believes that the development and continual reinforcement of personal relationships with customers improve the Company's ability to monitor their creditworthiness, reduce credit risk and generate repeat loans.  It is not unusual for the Company to have made a number of loans to the same customer over the course of several years, many of which were refinanced with a new loan after two or three payments.  In determining whether to refinance existing loans, the Company typically requires loans to be current on a recency basis, and repeat customers are generally required to complete a new credit application if they have not completed one within the prior two years.

In fiscal 2010, approximately 84.7% of the Company's loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers.  A refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer.  The Company actively markets the opportunity to refinance existing loans prior to maturity, thereby increasing the amount borrowed and increasing the fees and other income realized.  For fiscal 2010, 2009 and 2008, the percentages of the Company's loan originations that were refinancings of existing loans were 76.4%, 75.0% and 73.3%, respectively.

The Company allows refinancing of delinquent loans on a case-by-case basis for those customers who otherwise satisfy the Company's credit standards.  Each such refinancing is carefully examined before approval in an effort to avoid increasing credit risk.  A delinquent loan may generally be refinanced only if the customer has made payments which, together with any credits of insurance premiums or other charges to which the customer is entitled in connection with the refinancing, reduce the balance due on the loan to an amount equal to or less than the original cash advance made in connection with the loan.  The Company does not allow the amount of the new loan to exceed the original amount of the existing loan.  The Company believes that refinancing delinquent loans for certain customers who have made periodic payments allows the Company to increase its average loans outstanding and its interest, fee and other income without experiencing a significant increase in loan losses.  These refinancings also provide a resolution to temporary financial setbacks for these borrowers and sustain their credit rating.  While allowed on a selective basis, refinancings of delinquent loans amounted to less than 2% of the Company’s loan volume in fiscal 2010.

To reduce late payment risk, local office staff encourage customers to inform the Company in advance of expected payment problems.  Local office staff also promptly contact delinquent customers following any payment due date and thereafter remain in close contact with such customers through phone calls, letters or personal visits to the customer's residence or place of employment until payment is received or some other resolution is reached.  When representatives of the Company make personal visits to delinquent customers, the Company's policy is to encourage the customers to return to the Company's office to make payment.  Company employees are instructed not to accept payment outside of the Company's offices except in unusual circumstances.  In Georgia, Oklahoma, and Illinois, the Company is permitted under state laws to garnish customers' wages for repayment of loans, but the Company does not otherwise generally resort to litigation for collection purposes, and rarely attempts to foreclose on collateral.
 
 
6

 

Insurance-related Operations.  In Georgia, Louisiana, South Carolina, Kentucky, and on a limited basis, Alabama, New Mexico, Oklahoma, and Tennessee, the Company sells credit insurance to customers in connection with its loans as an agent for an unaffiliated insurance company.  These insurance policies provide for the payment of the outstanding balance of the Company's loan upon the occurrence of an insured event.  The Company earns a commission on the sale of such credit insurance, which is based in part on the claims experience of the insurance company on policies sold on its behalf by the Company.

The Company has a wholly-owned, captive insurance subsidiary that reinsures a portion of the credit insurance sold in connection with loans made by the Company.  Certain coverages currently sold by the Company on behalf of the unaffiliated insurance carrier are ceded by the carrier to the captive insurance subsidiary, providing the Company with an additional source of income derived from the earned reinsurance premiums.  In fiscal 2010, the captive insurance subsidiary reinsured approximately 1.5% of the credit insurance sold by the Company and contributed approximately $1.1 million to the Company's total revenues.

The Company typically does not perfect its security interest in collateral securing its smaller loans by filing Uniform Commercial Code (“UCC”) financing statements.  Statutes in Georgia, Louisiana, South Carolina, Tennessee, Missouri, Kentucky and Alabama permit the Company to charge a non-file or non-recording insurance premium in connection with certain loans originated in these states.  These premiums are equal in aggregate amount to the premiums paid by the Company to purchase non-file insurance coverage from an unaffiliated insurance company.  Under its non-file insurance coverage, the Company is reimbursed for losses on loans resulting from its policy not to perfect its security interest in collateral pledged to secure the loans.  The Company generally perfects its security interest in collateral on larger loan transactions (typically greater than $1,000) by filing UCC financing statements.

Information Technology. Paradata Financial Systems, a wholly owned subsidiary, is a financial services software company headquartered near St. Louis, Missouri. Using the proprietary data processing software package developed by Paradata, the Company is able to fully automate all of its loan account processing and collection reporting.  The system provides thorough management information and control capabilities.  Paradata markets its financial services data processing system to other financial services companies, but experiences significant fluctuations from year to year in the amount of revenues generated from sales of the system to third parties.  Such revenues are not expected  to be material to the Company.

Monitoring and Supervision.  The Company's loan operations are organized into Southern, Central, and Western Divisions, and Mexico.  The Southern Division consists of South Carolina, Georgia, Louisiana and Alabama; the Central Division consists of Tennessee, Illinois, Missouri, and Kentucky; and the Western Division consists of Texas, Oklahoma, and New Mexico.  Several levels of management monitor and supervise the operations of each of the Company's offices.  Branch managers are directly responsible for the performance of their respective offices.  District supervisors are responsible for the performance of 8 to 11 offices in their districts, typically communicate with the branch managers of each of their offices at least weekly and visit the offices at least monthly.  The Vice Presidents of Operations monitor the performance of all offices within their states (or partial state in the case of Texas), primarily through communication with district supervisors.  These Vice Presidents of Operations typically communicate with the district supervisors of each of their districts weekly and visit each of their offices quarterly.

Senior management receives daily delinquency, loan volume, charge-off, and other statistical reports consolidated by state and has access to these daily reports for each branch office.  At least six times per fiscal year, district supervisors audit the operations of each office in their geographic area and submit standardized reports detailing their findings to the Company's senior management.  At least once per year, each office undergoes an audit by the Company's internal auditors.  These audits include an examination of cash balances and compliance with Company loan approval, review and collection procedures and compliance with federal and state laws and regulations.

Staff and Training.  Local offices are generally staffed with three to four employees.  The branch manager supervises operations of the office and is responsible for approving all loan applications.  Each office generally has one or two assistant managers who contact delinquent customers, review loan applications and prepare operational reports.  Each office also generally has a customer service representative who takes loan applications, processes loan applications, processes payments, assists in the preparation of operational reports, assists in collection efforts, and assists in marketing activities.  Larger offices may employ additional assistant managers and customer service representatives.
 
 
7

 

New employees are required to review a detailed training manual that outlines the Company's operating policies and procedures.  The Company tests each employee on the training manual during the first year of employment.  In addition, each branch provides in-office training sessions once every week and periodic training sessions outside the office.  The Company has also implemented an enhanced training tool known as World University which provides continuous, real-time, effective online training to all locations.  This allows for more training opportunities to be available to all employees throughout the course of their career with the Company.

Advertising.  The Company actively advertises through direct mail, targeting both its present and former customers and potential customers who have used other sources of consumer credit.  The Company obtains or acquires mailing lists from third party sources.  In addition to the general promotion of its loans for vacations, back-to-school needs and other uses, the Company advertises extensively during the October through December holiday season and in connection with new office openings.  The Company believes its advertising contributes significantly to its ability to compete effectively with other providers of small-loan consumer credit.  Advertising expenses were approximately 2.9% of total revenues in fiscal 2010, 3.3% in fiscal 2009 and 3.7% in fiscal 2008.

Competition.  The small-loan consumer finance industry is highly fragmented, with numerous competitors.  The majority of the Company's competitors are independent operators with generally less than 100 offices.  Competition from nationwide consumer finance businesses is limited because these companies typically do not make loans of less than $2,500.

The Company believes that competition between small-loan consumer finance companies occurs primarily on the basis of the strength of customer relationships, customer service and reputation in the local community, rather than pricing, as participants in this industry generally charge comparable interest rates and fees.  The Company believes that its relatively larger size affords it a competitive advantage over smaller companies by increasing its access to, and reducing its cost of, capital.  In addition the Company’s in-house integrated computer system provides data processing and the Company’s in-house print shop provides direct mail and other printed items at a substantially reduced cost to the Company.

Several of the states in which the Company currently operates limit the size of loans made by small-loan consumer finance companies and prohibit the extension of more than one loan to a customer by any one company.  As a result, many customers borrow from more than one finance company, enabling the Company, subject to the limitations of various consumer protection and privacy statutes including, but not limited to the federal Fair Credit Reporting Act and the Gramm-Leach-Bliley Act, to obtain information on the credit history of specific customers from other consumer finance companies.

Government Regulation.

U. S. Operations.  Small-loan consumer finance companies are subject to extensive regulation, supervision and licensing under various federal and state statutes, ordinances and regulations.  In general, these statutes establish maximum loan amounts and interest rates and the types and maximum amounts of fees, insurance premiums and other fees that may be charged.  In addition, state laws regulate collection procedures, the keeping of books and records and other aspects of the operation of small-loan consumer finance companies.  Generally, state regulations also establish minimum capital requirements for each local office.  State agency approval is required to open new branch offices.  Accordingly, the ability of the Company to expand by acquiring existing offices and opening new offices will depend in part on obtaining the necessary regulatory approvals.

A Texas regulation requires the approval of the Texas Consumer Credit Commissioner for the acquisition, directly or indirectly, of more than 10% of the voting or common stock of a consumer finance company.  A Louisiana statute prohibits any person from acquiring control of 50% or more of the shares of stock of a licensed consumer lender, such as the Company, without first obtaining a license as a consumer lender.  The overall effect of these laws, and similar laws in other states, is to make it more difficult to acquire a consumer finance company than it might be to acquire control of a nonregulated corporation.

Each of the Company's branch offices is separately licensed under the laws of the state in which the office is located.   Licenses granted by the regulatory agencies in these states are subject to renewal every year and may be revoked for failure to comply with applicable state and federal laws and regulations.  In the states in which the Company currently operates, licenses may be revoked only after an administrative hearing.
 
 
8

 

The Company and its operations are regulated by several state agencies, including the Industrial Loan Division of the Office of the Georgia Insurance Commissioner, the Consumer Finance Division of the South Carolina Board of Financial Institutions, the South Carolina Department of Consumer Affairs, the Texas Office of the Consumer Credit Commissioner, the Oklahoma Department of Consumer Credit, the Louisiana Office of Financial Institutions, the Tennessee Department of Financial Institutions, the Missouri Division of Finance, the Consumer Credit Division of the Illinois Department of Financial Institutions, the Consumer Credit Bureau of the New Mexico Financial Institutions Division, the  Kentucky  Department  of  Financial  Institutions, and the  Alabama  State Banking Department.  These state regulatory agencies audit the Company's local offices from time to time, and each state agency performs an annual compliance audit of the Company's operations in that state.

Insurance. The Company is also subject to state regulations governing insurance agents in the states in which it sells credit insurance.  State insurance regulations require that insurance agents be licensed, govern the commissions that may be paid to agents in connection with the sale of credit insurance and limit the premium amount charged for such insurance.  The Company's captive insurance subsidiary is regulated by the insurance authorities of the Turks and Caicos Islands of the British West Indies, where the subsidiary is organized and domiciled.

Consumer finance companies are affected by changes in state and federal statutes and regulations. The Company actively participates in trade associations and in lobbying efforts in the states in which it operates and at the federal level.  There have been, and the Company expects that there will continue to be, media attention, initiatives, discussions and proposals regarding the entire consumer credit industry, as well as our particular business, and possible significant changes to the laws and regulations that govern our business.  In some cases, proposed or pending legislative or regulatory changes have been introduced that would, if enacted,  have a material adverse effect on, or possibly even eliminate, our ability to continue our current business.  We can give no assurance that the laws and regulations that govern our business will remain unchanged or that any such future changes will not materially and adversely affect or in the worst case, eliminate, the Company’s lending practices, operations, profitability or prospects.   See Part I, Item 1A, “Risk Factors,” for a further discussion of the potential impact of regulatory changes on our business.

State legislation.  We are subject to numerous state laws and regulations that affect our lending activities.  Many of these regulations impose detailed and complex constraints on the terms of our loans, lending forms and operations.  Failure to comply with applicable laws and regulations could subject us to regulatory enforcement action that could result in the assessment against us of civil, monetary or other penalties.

During the past year, several state legislative and regulatory proposals were introduced which, had they become law, would have had a material adverse impact on our operations and ability to continue to conduct business in the relevant state.  Although to date none of these state initiatives have been successful, state legislatures continue to receive pressure to adopt similar legislation that would affect our lending operations.  In particular, a legislative initiative to limit the accessibility of installment credit to consumers in Illinois and to curb perceived abuses prevalent in some forms of consumer lending has been passed by the Illinois Senate and concurred on by the Illinois House.  The Illinois General Assembly now has until June 25, 2010, to forward the legislation to the Illinois Governor who can either sign it into law, veto it or amendatorily veto it.  If the Governor takes no action on the legislation within 60 days of receiving it, it automatically becomes law.  The legislation, as passed by the Illinois legislature, places minimal limitations on our current operations and its impact is not expected to be material, however, should the Governor exercise his amendatory veto power, that could substantially change.

In addition, any adverse change in existing laws or regulations, or any adverse interpretation or litigation relating to existing laws and regulations in any state in which we operate, could subject us to liability for prior operating activities or could lower or eliminate the profitability of our operations going forward by, among other things, reducing the amount of interest and fees we can charge in connection with our loans.  If these or other factors lead us to close our offices in a state, then in addition to the loss of net revenues attributable to that closing, we would also incur closing costs such as lease cancellation payments and we would have to write off assets that we could no longer use.  If we were to suspend rather than permanently cease our operations in a state, we may also have continuing costs associated with maintaining our offices and our employees in that state, with little or no revenues to offset those costs.
 
 
9

 

Federal legislation.  In addition to state and local laws and regulations, we are subject to numerous federal laws and regulations that affect our lending operations.  These laws include the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the regulations thereunder and the Federal Trade Commission's Credit Practices Rule.  These laws require the Company to provide complete disclosure of the principal terms of each loan to the borrower, prior to the consummation of the loan transaction, prohibit misleading advertising, protect against discriminatory lending practices and proscribe unfair credit practices.  Among the principal disclosure items under the Truth-in-Lending Act are the terms of repayment, the final maturity, the total finance charge and the annual percentage rate charged on each loan.  The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status.  Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection.  The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. The Credit Practices Rule limits the types of property a creditor may accept as collateral to secure a consumer loan.  Violations of the statutes and regulations described above may result in actions for damages, claims for refund of payments made, certain fines and penalties, injunctions against certain practices and the potential forfeiture of rights to repayment of loans.

Although these laws and regulations have remained substantially unchanged for many years, the laws and regulations directly affecting our lending activities are under review and are subject to change as a result of current economic conditions, changes in the make-up of the current executive and legislative branches, and the political and media focus on issues of consumer and borrower protection.  See Part I, Item 1A, “Risk Factors - Media reports and public perception of consumer installment loans as being predatory or abusive could materially adversely affect our business, prospects, results of operations and financial condition” below.  Any changes in such laws and regulations could force us to modify, suspend or cease part or, in the worst case, all of our existing operations.  It is also possible that the scope of federal regulations could change or expand in such a way as to preempt what has traditionally been state law regulation of our business activities.  The enactment of one or more of such regulatory changes could materially and adversely affect our business, results of operations and prospects.

Various legislative proposals addressing consumer credit transactions are currently pending in the U.S. Congress. During the past 18 months Congress has passed laws affecting credit cards, home mortgage lending, auto finance, retail sales finance and other areas of consumer finance. Congressional members continue to receive pressure from consumer advocates and other industry opposition groups to adopt legislation to address various aspects of consumer credit transactions.  As part of a sweeping package of financial industry reform regulations, the U.S. Senate recently passed Senate bill S. 3217 entitled the “Restoring American Financial Stability Act of 2010.” This bill is the companion to H.R. 4173 entitled “The Wall Street Reform and Consumer Protection Act of 2009” which was passed by the house of Representatives in November 2009.  Both bills, which now go to a House-Senate conference committee to resolve their differences, would create a new federal regulatory entity with virtually unlimited power to regulate the form and content of all consumer financial transactions.  Although the form and organizational structure of the new entity differ in some respects under the two bills (the House bill would create an independent agency known as the Consumer Financial Protection Agency and the Senate bill would establish a Consumer Financial Protection Bureau within the Federal Reserve), we believe it highly likely that a new federal regulatory entity in one form or another or some combination of the two will be part of the reconciled legislation and that the legislation will be signed into law by the President.  It is impossible to predict the effect that the creation of such an unprecedented federal regulator will have on the Company’s operations and on access to consumer credit in general; however, there can be no assurance that any such regulatory entity would not exercise its powers in a manner that will, either directly or indirectly, have a material and adverse effect on, or eliminate altogether, the Company’s ability to operate its business profitably or on terms substantially similar to those on which it currently operates.   Although neither S. 3217 nor H.R. 4173 authorize the new federal regulator to set interest rates on consumer loans, bills that would create a federal usury cap, applicable to all consumer credit transactions and substantially below rates at which the Company could continue to operate profitably, are still pending in both houses of Congress.  Any federal legislative or regulatory action that severely restricts or prohibits the provision of small-loan consumer credit and similar services on terms substantially similar to those we currently provide would, if enacted, have a material adverse impact on our business, prospects, results of operations and financial condition.  Any federal law that would impose a national 36% or similar annualized credit rate cap on our services, such as those currently pending in Congress or in similar congressional bills, would, if enacted, almost certainly eliminate our ability to continue our current operations.  See Part I, Item 1A, “Risk Factors – Federal legislative or regulatory proposals, initiatives, actions or changes that are adverse to our operations or result in adverse regulatory proceedings, or our failure to comply with existing or future federal laws and regulations, could force us to modify, suspend or cease part or all of our nationwide operations,” for further information regarding the potential impact of adverse legislative and regulatory changes.
 
 
10

 

Mexico Operations.  Effective May 1, 2008, World Acceptance Corporation de Mexico, S. de R.L. de C.V. was converted to WAC de Mexico, S.A. de C.V., SOFOM, E.N.R. (“WAC de Mexico SOFOM”), and due to such conversion, this entity is now organized as a Sociedad Financiera de Objeto Múltiple, Entidad No Regulada (Multiple Purpose Financial Company, Non-Regulated Entity or “SOFOM, ENR”). Mexico law provides for administrative regulation of companies which are organized as SOFOM, ENRs. As such, WAC de Mexico SOFOM is mainly governed by different federal statutes, including the General Law of Auxiliary Credit Activities and Organizations, the Law for the Transparency and Order of Financial Services, the General Law of Credit Instruments and Operations, and the Law of Protection and Defense to the User of Financial Services. SOFOM, ENRs are also subject to regulation by and surveillance of the National Commission for the Protection and Defense of Users of Financial Services (“CONDUSEF”).  CONDUSEF, among others, acts as mediator and arbitrator in disputes between financial lenders and customers, and resolves claims filed by loan customers. CONDUSEF also prevents unfair and discriminatory lending practices, and regulates, among others, the form of loan contracts, consumer disclosures, advertisement, and certain operating procedures of SOFOM, ENRs, with such regulations pertaining primarily to consumer protection and adequate disclosure and transparency in the terms of borrowing.  Neither CONDUSEF nor federal statutes impose interest rate caps on loans granted by SOFOM, ENRs.  The consumer loan industry, as with most businesses in Mexico, is also subject to other various regulations in the areas of tax compliance, anti-money laundering, and employment matters, among others, by various federal, state and local governmental agencies. Generally, federal regulations control over the state statutes with respect to the consumer loan operations of  SOFOM, ENRs.

Employees.  As of March 31, 2010, the Company had 3,029 U.S. employees, none of whom were represented by labor unions and 602 employees in Mexico, all of whom were represented by a Mexican based labor union.  The Company considers its relations with its personnel to be good.  The Company seeks to hire people who will become long-term employees.  The Company experiences a high level of turnover among its entry-level personnel, which the Company believes is typical of the small-loan consumer finance industry.

Executive Officers.  The names and ages, positions, terms of office and periods of service of each of the Company's executive officers (and other business experience for executive officers who have served as such for less than five years) are set forth below.  The term of office for each executive officer expires upon the earlier of the appointment and qualification of a successor or such officers' death, resignation, retirement or removal.

       
Period of Service as Executive Officer and
       
Pre-executive Officer Experience (if an
Name and Age
 
Position
 
Executive Officer for Less Than Five Years)
         
A. Alexander McLean, III (58)
 
Chief Executive Officer;
Chairman and Director
 
Chief Executive Officer since March 2006; Executive Vice President from August 1996 until March 2006; Senior Vice President from July 1992 until August 1996; CFO from June 1989 until March 2006; Director since June 1989; and Chairman since August 2007.
         
Kelly M. Malson (39)
 
Senior Vice President and
Chief Financial Officer
 
Senior Vice President and Chief Financial Officer since May 2009; Vice President and CFO from March 2006 to May 2009; Vice President of Internal Audit from September 2005 to March 2006; Financial Compliance Manager, Itron Inc., from July 2004 to August 2005; Senior Manager, KPMG LLP from April 2002 until July 2004.
 
 
11

 

Mark C. Roland (53)
 
President and Chief Operating Officer
and Director
 
President since March 2006; Chief Operating Officer since April 2005; Executive Vice President from April 2002 to March 2006; Senior Vice President from January 1996 to April 2002; Director since August 2007.
         
Jeff L. Tinney (47)
 
Senior Vice President,
Western Division
 
Senior Vice President, Western Division, since June 2007; Vice President, Operations – Texas  and New Mexico from June 2001 to June 2007; Vice President, Operations – Texas and Louisiana from April 1998 to June 2001; Vice President, Operations - Louisiana from January 1997 to April 1998.
         
D. Clinton Dyer (37)
 
Senior Vice President,
Central Division
 
Senior Vice President, Central Division since June 2005; Vice President, Operations – Tennessee and Kentucky from April 2002 to June 2005; Supervisor of Nashville District from September 2001 to March 2002; Manager in Nashville from January 1997 to August 2001.
         
James D. Walters (42)
 
Senior Vice President,
Southern Division
 
Senior Vice President, Southern Division since April 2005; Vice President, Operations – South Carolina and Alabama from August 1998 to March 2005.
         
Francisco Javier Sauza Del Pozo (55)
 
Senior Vice President,
Mexico
 
Senior Vice President, Mexico since May 2008; Vice President of Operations from April 2005 to May 2008; President of Border Consulting Group from July 2004 to March 2005; Senior Manager of KPMG and BearingPoint Consulting from January 2000 to June 2004; Partner of Atlanta Consulting Group from February 1998 to January 2000.

Available Information. The information regarding our website and availability of our filings with the SEC as described in the second paragraph under “Introduction” above is incorporated by reference into this Item 1 of Part I.

Item 1A.  Risk Factors

Forward-Looking Statements

This annual report contains various “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on management’s beliefs and assumptions, as well as information currently available to management.  Statements other than those of historical fact, as well as those identified by the use of words such as “anticipate,” “estimate,” “plan,” “expect,” “believe,” “may,” “will,” “should,” and similar expressions, are forward-looking statements.  Although we believe that the expectations reflected in any such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Any such statements are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected.  Among the key factors that could cause our actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: recently or future enacted or proposed legislation; changes in interest rates; risks inherent in making loans, including repayment risks and value of collateral; the timing and amount of revenues that may be recognized by the Company; changes in current revenue and expense trends (including trends affecting charge-offs); changes in the Company’s markets and general changes in the economy (particularly in the markets served by the Company); and the unpredictable nature of litigation.  These and other risks are discussed below in more detail below in this “Risk Factors” section and in the Company’s other filings made from time to time with the SEC.  The Company does not undertake any obligation to update any forward-looking statements it may make.
 
 
12

 

Investors should consider the following risk factors, in addition to the other information presented in this annual report and the other reports and registration statements we file from time to time with the SEC, in evaluating us, our business and an investment in our securities.   Any of the following risks, as well as other risks, uncertainties, and possibly inaccurate assumptions underlying our plans and expectations, could result in harm to our business, results of operations and financial condition and cause the value of our securities to decline, which in turn could cause investors to lose all or part of their investment in our Company. These factors, among others, could also cause actual results to differ from those we have experienced in the past or those we may express or imply from time to time in any forward-looking statements we make.  Investors are advised that it is impossible to identify or predict all risks, and that risks not currently known to us or that we currently deem immaterial also could affect us in the future.

Unfavorable state legislative or regulatory actions or changes, adverse outcomes in litigation or regulatory proceedings or failure to comply with existing laws and regulations could force us to cease, suspend or modify our operations in a state, potentially resulting in a material adverse effect on our business, results of operations and financial condition.

We are subject to numerous state laws and regulations that affect our lending activities.  Many of these regulations impose detailed and complex constraints on the terms of our loans, lending forms and operations.  Failure to comply with applicable laws and regulations could subject us to regulatory enforcement action that could result in the assessment against us of civil, monetary or other penalties including the suspension or revocation of our licenses to lend in one or more jurisdictions.

Changes in the laws under which we currently operate or the enactment of new laws governing our operations resulting from state political activities and legislative or regulatory initiatives could have a material adverse effect on all aspects of our business in a particular state.  See Part 1, Item 1, “Description of Business, Government Regulation” for further discussion of such current state activities and initiatives.

Federal legislative or regulatory proposals, initiatives, actions or changes that are adverse to our operations or result in adverse regulatory proceedings, or our failure to comply with existing or future federal laws and regulations, could force us to modify, suspend or cease part or all of our nationwide operations.

In addition to state and local laws and regulations, we are subject to numerous federal laws and regulations that affect our lending operations.  Although these laws and regulations have remained substantially unchanged for many years, the laws and regulations directly affecting our lending activities are under review and are subject to change as a result of current economic conditions, changes in the make-up of the current executive and legislative branches, and the political and media focus on issues of consumer and borrower protection.  Any changes in such laws and regulations could force us to modify, suspend or cease part, or, in the worst case, all of our existing operations.  It is also possible that the scope of federal regulations could change or expand in such a way as to preempt what has traditionally been state law regulation of our business activities.  The enactment of one or more of such regulatory changes could materially and adversely affect our business, results of operations and prospects.

Changes in the laws under which we currently operate or the enactment of new laws governing our operations resulting from federal political activities and legislative or regulatory initiatives could have a material adverse effect on all aspects of our operations.  See Part 1, Item 1, “Description of Business Government, Regulation” for further discussion of such current federal activities and initiatives.

Media and public perception of consumer installment loans as being predatory or abusive could materially adversely affect our business, prospects, results of operations and financial condition.

Consumer advocacy groups and various other media sources continue to advocate for governmental and regulatory action to prohibit or severely restrict our products and services.  These critics frequently characterize our products and services as predatory or abusive toward consumers.  If this negative characterization of the consumer installment loans we make and/or ancillary services we provide becomes widely accepted by government policy makers or is embodied in legislative, regulatory, policy or litigation developments that adversely affect our ability to continue offering our products and services or the profitability of these products and services, our business, results of operations and financial condition would be materially and adversely affected.
 
 
13

 

Our continued expansion into Mexico may increase the risks inherent in conducting international operations, contribute materially to increased costs and negatively affect our business, prospects, results of operations and financial condition.

Although our operations in Mexico accounted for only 4.1% of our revenues during fiscal 2010 and 4.3% of our gross loans receivable at March 31, 2010, we intend to continue opening offices and expanding our presence in Mexico.  In addition, if to the extent that the state and federal regulatory climate in the U.S. changes in ways that adversely affect our ability to continue profitable operations in one or more U.S. states, we could become increasingly dependent on our operations in Mexico as our only viable expansion or growth strategy.  In doing so, we may expose an increasing portion of our business to risks inherent in conducting international operations, including currency fluctuations and devaluations, unsettled political conditions, communication and translation errors due to language barriers, compliance with differing legal and regulatory regimes and differing cultural attitudes toward regulation and compliance.

We are subject to interest rate risk resulting from general economic conditions and policies of various governmental and regulatory agencies.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board.  Changes in monetary policy, including changes in interest rates, could influence the amount of interest we pay on our revolving credit facility or any other floating interest rate obligations we may incur, which would increase our operating costs and decrease our operating margins.  See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk” for additional information regarding our interest rate risk.

Our use of derivatives exposes us to credit and market risk.

We use derivatives to manage our exposure to interest rate risk and foreign currency fluctuations.  By using derivative instruments, the Company is exposed to credit and market risk.  Additional information regarding our exposure to credit and market risk is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk.”

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

We have an existing revolving credit agreement committed through July 2011 that allows us to borrow up to $238.3 million, assuming we are in compliance with a number of covenants and conditions.   If our existing sources of liquidity become insufficient to satisfy our financial needs or our access to these sources becomes unexpectedly restricted, we may need to try to raise additional debt or equity in the future.  If such an event were to occur, we can give no assurance that such alternate sources of liquidity would be available to us at all or on favorable terms.  Additional information regarding our liquidity risk is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.

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

Our revolving credit agreement contains a number of covenants that could adversely affect our business and the flexibility to respond to changing business and economic conditions or opportunities.  Among other things, these covenants limit our ability to declare or pay dividends, redeem our subordinated debt, incur additional debt or enter into a merger, consolidation or sale of substantial assets.  In addition, if we were to breach any covenants or obligations under our revolving credit agreement and such breaches were to result in an event of default, our lenders could cause all amounts outstanding to become due and payable, subject to applicable grace periods.  This could trigger cross-defaults under our other existing or future debt instruments and materially and adversely affect our financial condition and ability to continue operating our business as a going concern.  Additional information regarding our revolving credit facility and other indebtedness is included in the section caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
 
 
14

 

Adverse conditions in the capital and credit markets generally, any particular liquidity problems affecting one or more members of the syndicate of banks that are members of the Company’s credit facility or other factors outside our control, could affect the Company’s ability to meet its liquidity needs and its cost of capital.

The severe turmoil that has persisted in the domestic and global credit and capital markets and broader economy since 2008 has negatively affected corporate liquidity, equity values, credit agency ratings and confidence in financial institutions in general.  In addition to cash generated from operations, the Company depends on borrowings from institutional lenders to finance its operations, acquisitions and office expansion plans.  The Company is not insulated from the pressures and potentially negative consequences of the recent financial crisis and similar risks beyond our control that have and may continue to affect the capital and credit markets, the broader economy, the financial services industry or the segment of that industry in which we operate. Additional information regarding our liquidity and related risks is included in the section caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

We are exposed to credit risk in our lending activities.

Our ability to collect on loans to individuals, our single largest asset group, depends on the willingness and repayment ability of our borrowers.  Any material adverse change in the ability or willingness of a significant portion of our borrowers to meet their obligations to us, whether due to changes in economic conditions, the cost of consumer goods, interest rates, natural disasters, acts of war or terrorism, or other causes over which we have no control, would have a material adverse impact on our earnings and financial condition. Additional information regarding our credit risk is included in the section caption “Management’s Discussion and Analysis of Financial Condition and Reports of Operation — Liquidity and Capital Resources”.

If our estimates of loan losses are not adequate to absorb actual losses, our provision for loan losses would increase.  This would result in a decline in our future revenues and earnings.

We maintain an allowance for loan losses for loans we make directly to consumers.  This allowance is an estimate. If our actual loan losses exceed the assumption used to establish the allowance, , our provision for loan losses would increase, which would result in a decline in our future revenues and earnings. Additional information regarding our allowance for loan losses is included in the section caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Credit Quality.”

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

We currently operate consumer installment loan offices in 11 states in the United States.  Any adverse legislative or regulatory change in any one of our states but particularly in any of our larger states could have a material adverse effect on our business, prospects, results of operation or financial condition.

We have a significant amount of goodwill, which is subject to periodic review and testing for impairment.

A portion of our total assets at March 31, 2010 is comprised of goodwill.  Under generally accepted accounting principles, goodwill is subject to periodic review and testing to determine if it is impaired.  Unfavorable trends in our industry and unfavorable events or disruptions to our operations resulting from adverse legislative or regulatory actions or from other unpredictable causes could result in significant goodwill impairment charges.

Controls and procedures may fail or be circumvented.

Controls and procedures are particularly important for small-loan consumer finance companies. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
 
 
15

 

If we lose the services of any of our key management personnel, our business could suffer.

Our future success significantly depends on the continued services and performance of our key management personnel. Competition for these employees is intense.  The loss of the services of members of our senior management or key team members or the inability to attract additional qualified personnel as needed could materially harm our business.

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

The annual turnover as of March 31, 2010 among our office employees was approximately 31.2%.  This turnover increases our cost of operations and makes it more difficult to operate our offices.  If we are unable to keep our employee turnover rates consistent with historical levels or if unanticipated problems arise from our high employee turnover, our business, results of operations and financial condition could be adversely affected.

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

We have experienced substantial growth in recent years.  Our growth strategy, which is based on opening and acquiring offices in existing and new markets, is subject to significant risks, some of which are beyond our control, including:

 
·
the prevailing laws and regulatory environment of each state in which we operate or seek to operate, and, to the extent applicable, federal laws and regulations, which are subject to change at any time;
 
·
our ability to obtain and maintain any regulatory approvals, government permits or licenses that may be required;
·      the degree of competition in new markets and its effect on our ability to attract new customers;
·      our ability to recruit, train and retain qualified personnel;
·      our ability to adapt our infrastructure and systems to accommodate our growth; and
·      our ability to obtain adequate financing for our expansion plans.

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

Our primary business activity is offering small consumer installment loans together with, in some states in which we operate, related ancillary products. Thus, any developments, whether regulatory, economic or otherwise, that would hinder, reduce the profitability of or limit our ability to operate our small consumer installment loan business on the terms currently conducted would have a direct and adverse impact on our business, profitability and perhaps even our viability.  Our current lack of product and business diversification could inhibit our opportunities for growth, reduce our revenues and profits and make us more susceptible to earnings fluctuations than many other financial institutions whose operations are more diversified.

Interruption of, or a breach in security relating to, our information systems could adversely affect us.

We rely heavily on communications and information systems to conduct our business.  Each office is part of an information network that is designed to permit us to maintain adequate cash inventory, reconcile cash balances on a daily basis and report revenues and expenses to our headquarters.  Any failure, interruption or breach in security of these systems, including any failure of our back-up systems, could result in failures or disruptions in our customer relationship management, general ledger, loan and other systems and could result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
 
 
16

 

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

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

Absence of dividends could reduce our attractiveness to investors.

Since 1989, we have not declared or paid cash dividends on our common stock and may not pay cash dividends in the foreseeable future.  As a result, our common stock may be less attractive to certain investors than the stock of dividend-paying companies.

Various provisions of our charter documents and applicable laws could delay or prevent a change of control that shareholders may favor.

Provisions of our articles of incorporation, South Carolina law, and the laws in several of the states in which our operating subsidiaries are incorporated could delay or prevent a change of control that the holders of our common stock may favor or may impede the ability of our shareholders to change our management.  In particular, our articles of incorporation and South Carolina law, among other things, authorize our board of directors to issue preferred stock in one or more series, without shareholder approval, and will require the affirmative vote of holders of two-thirds of our outstanding shares of voting stock to approve our merger or consolidation with another corporation.  Additional information regarding the similar effect of lows in certain states in which we operate is described in Part 1, Item 1, “Description of Business – Government Regulation.”

Overall stock market volatility may materially and adversely affect the market price of our common stock.

The Company’s common stock price has been and is likely to continue to be subject to significant volatility.  A variety of factors could cause the price of the common stock to fluctuate, perhaps substantially, including: general market fluctuations resulting from factors not directly related to the Company’s operations or the inherent value of its common stock; state or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be, adverse to our operations; announcements of developments related to our business; fluctuations in our operating results and the provision for loan losses; low trading volume in our common stock; general conditions in the financial service industry, the domestic or global economy or the domestic or global credit or capital markets; changes in financial estimates by securities analysts; our failure to meet the expectations of securities analysts or investors; negative commentary regarding our Company and corresponding short-selling market behavior; adverse developments in our relationships with our customers; legal proceedings brought against the Company or its officers; or significant changes in our senior management team.

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

The Company owns its headquarters facility of approximately 21,000 square feet and a printing and mailing facility of approximately 13,000 square feet in Greenville, South Carolina, and all of the furniture, fixtures and computer terminals located in each branch office.  As of March 31, 2010, the Company had 990 branch offices, most of which are leased pursuant to short-term operating leases.  During the fiscal year ended March 31, 2010, total lease expense was approximately $15.9 million, or an average of approximately $16,500 per office.  The Company's leases generally provide for an initial three- to five-year term with renewal options.  The Company's branch offices are typically located in shopping centers, malls and the first floors of downtown buildings.  Branches in the U.S. offices generally have a uniform physical layout with an average size of 1,500 square feet and in Mexico with an average size of 1,600 square feet.

 
17

 

Item 3.   Legal Proceedings

From time to time the Company is involved in routine litigation relating to claims arising out of its operations in the normal course of business in which damages in various amounts are claimed.  The Company believes that it is not currently a party to any pending legal proceedings that would have a material adverse effect on its financial condition or results of operations.

Item 4.   Reserved

PART II.

Item 5. 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Since November 26, 1991, the Company's common stock has traded on NASDAQ, currently on the NASDAQ Global Select Market ("NASDAQ"), under the symbol WRLD.   As of June 8, 2010, there were 63 holders of record of Common Stock and a significant number of persons or entities who hold their stock in nominee or “street” names through various brokerage firms.


On May 11, 2010, the Board of Directors authorized the Company to repurchase up to $20 million of the Company’s common stock.  This repurchase authorization follows, and is in addition to, a similar repurchase authorization of $15 million announced May 11, 2009.  After taking into account all shares repurchased through June 8, 2010, the Company has $6.2 million in aggregate remaining repurchase capacity under all of the company’s outstanding repurchase authorizations.  The timing and actual number of shares repurchased will depend on a variety of factors, including the stock price, corporate and regulatory requirements and other market and economic conditions.  Although the repurchase authorizations above have no stated expiration date, the Company’s stock repurchase program may be suspended or discontinued at any time.  The following table provides information with respect to purchases made by the Company of shares of the Company’s common stock during the three month period ended March 31, 2010:

Issuer Purchases of Equity Securities
                     
Approximate
 
               
Total
   
Dollar
 
               
Number
   
Value of
 
               
of Shares
   
Shares
 
               
Purchased
   
That May Yet
 
               
as part of
   
be
 
   
Total
   
Average
   
Publicly
   
Purchased
 
   
Number of
   
Price Paid
   
Announced
   
Under the
 
   
Shares
   
per
   
Plans
   
Plans or
 
   
Purchased
   
Share
   
or Programs
   
Programs
 
                         
January 1 through
                       
January 31, 2010
    -       -       -       15,000,000
(1)
                                 
February 1 through
                               
February 28, 2010
    38,500       37.26       38,500       13,565,343  
                                 
March 1 through
                               
March 31, 2010
    -       -       -       13,565,343  
                                 
Total for the quarter
    38,500       37.26       38,500          
 
 
18

 

(1)
In May 2009, the Board of Directors authorized the Company to repurchase up to $15 million of common stock.  In addition, as previously announced, subsequent to the end of fiscal 2010, on May 11, 2010, the Board of Directors authorized the Company to repurchase up to $20 million of additional common stock.  After taking into account all shares repurchased through May 11, 2010, the Company had approximately $23.3 million in aggregate remaining repurchase capacity under all outstanding repurchase authorizations.

The timing and actual number of shares repurchased will depend on a variety of factors, including the stock price, corporate and regulatory requirements and other market and economic conditions.  The Company’s stock repurchase program is not subject to specific targets or any expiration date, but may be suspended or discontinued at any time.

The table below reflects the stock prices published by NASDAQ by quarter for the last two fiscal years.  The last reported sale price on June 7, 2010 was $34.15.

Market Price of Common Stock
 
             
Fiscal 2010
 
Quarter
 
High
   
Low
 
             
First
  $ 30.87     $ 16.09  
Second
    28.16       18.12  
Third
    37.42       23.25  
Fourth
    44.10       35.67  

Fiscal 2009
 
Quarter
 
High
   
Low
 
             
First
  $ 45.99     $ 31.91  
Second
    43.50       31.00  
Third
    36.25       13.44  
Fourth
    22.90       10.31  
 
 
19

 

Item 6.   Selected Financial Data

Selected Consolidated Financial and Other Data

(Amounts in thousands, except per share amounts)
   
Years Ended March 31,
 
       
   
2010
     
2009*
     
2008*
     
2007*
   
2006
 
                                     
Statement of Operations Data:
                                   
Interest and fee income
  $ 375,031     $ 331,454     $ 292,457     $ 247,007     $ 204,450  
Insurance commissions and other income
    65,605       60,698       53,590       45,311       38,822  
Total revenues
    440,636       392,152       346,047       292,318       243,272  
Provision for loan losses
    90,299       85,476       67,542       51,925       46,026  
General and administrative expenses
    217,012       200,216       179,218       153,627       128,514  
Interest expense
    13,881       14,886       15,938       11,696       7,137  
Total expenses
    321,192       300,578       262,698       217,248       181,677  
                                         
Income before income taxes
    119,444       91,574       83,349       75,070       61,595  
Income taxes
    45,783       35,081       33,096       28,897       23,080  
Net income
  $ 73,661     $ 56,493     $ 50,253     $ 46,173     $ 38,515  
Net income per common share (diluted)
  $ 4.45     $ 3.43     $ 2.89     $ 2.51     $ 2.02  
Diluted weighted average shares
    16,546       16,464       17,375       18,394       19,098  
Balance Sheet Data (end of period):
                                       
Loans receivable, net of unearned and deferred fees
  $ 571,086     $ 498,433     $ 445,091     $ 378,038     $ 312,746  
Allowance for loan losses
    (42,897 )     (38,021 )     (33,526 )     (27,840 )     (22,717 )
Loans receivable, net
    528,189       460,412       411,565       350,198       290,029  
Total assets
    593,052       526,094       478,881       402,026       332,784  
Total debt
    170,642       197,042       197,078       148,840       100,600  
Shareholders' equity
    382,948       296,335       244,801       228,731       210,430  
Other Operating Data:
                                       
As a percentage of average loans receivable:
                                       
Provision for loan losses
    16.3 %     17.6 %     15.8 %     14.5 %     15.4 %
Net charge-offs
    15.5 %     16.7 %     14.5 %     13.3 %     14.8 %
Number of offices open at year-end
    990       944       838       732       620  
 

*
Fiscal year 2007 through 2009 have been adjusted to reflect the adoption of ASC 470-20.  See Note 2 to the Consolidated Financial Statements.
 
 
20

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Company's financial performance continues to be dependent in large part upon the growth in its outstanding loans receivable, the ongoing introduction of new products and services for marketing to its customer base, the maintenance of loan quality and acceptable levels of operating expenses.  Since March 31, 2005, gross loans receivable have increased at a 16.9% annual compounded rate from $352.0 million to $770.3 million at March 31, 2010.  The increase reflects both the higher volume of loans generated through the Company's existing offices and the contribution of loans generated from new offices opened or acquired over the period.  During this same five-year period, the Company has grown from 579 offices to 990 offices as of March 31, 2010.  During fiscal 2011, the Company plans to open approximately 55 new offices in the United States, 15 new offices in Mexico and evaluate acquisition opportunities.

The Company attempts to identify new products and services for marketing to its customer base.  In addition to new insurance-related products, which have been introduced in selected states over the last several years, the Company sells and finances electronic items and appliances to its existing customer base in many states where it operates.  This program is called the “World Class Buying Club.”  Total loan volume under this program was $13.5 million during fiscal 2010, compared to $13.0 million in fiscal 2009.  World Class Buying Club represents less than 1% of the Company’s total loan volume.

The Company's ParaData Financial Systems subsidiary provides data processing systems to 107 separate finance companies, including the Company, and currently supports approximately 1,530 individual branch offices in 44 states and Mexico.  ParaData’s revenue is highly dependent upon its ability to attract new customers, which often requires substantial lead time, and as a result its revenue may fluctuate from year to year.  Its net revenues from system sales and support amounted to $1.8 million, $2.0 million and $2.2 million in fiscal 2010, 2009 and 2008, respectively.  ParaData’s net revenue to the Company will continue to fluctuate on a year to year basis.  ParaData continues to provide state-of-the-art data processing support for the Company’s in-house integrated computer system at a substantially reduced cost to the Company.

The Company offers an income tax return preparation and electronic filing program together with access to refund anticipation loans through an unaffiliated bank in all but a few of its offices.  The Company prepared approximately 62,000, 61,000 and 65,000 returns in each of the fiscal years 2010, 2009 and 2008, respectively.  Net revenue generated by the Company from this program during fiscal 2010, 2009 and 2008 amounted to approximately $10.9 million, $9.9 million and $9.7 million, respectively.  The Company believes that this profitable business provides a beneficial service to its existing customer base and plans to continue to promote and expand the program in the future.

 
21

 

The following table sets forth certain information derived from the Company's consolidated statements of operations and balance sheets, as well as operating data and ratios, for the periods indicated:

   
Years Ended March 31,
 
   
2010
   
2009
   
2008
 
 
 
(Dollars in thousands)
 
                   
Average gross loans receivable (1)
  $ 750,504       658,587       576,050  
Average net loans receivable (2)
    553,650       486,776       426,524  
                         
Expenses as a percentage of total revenues:
                       
Provision for loan losses
    20.5 %     21.8 %     19.5 %
General and administrative
    49.2 %     51.1 %     51.8 %
Total interest expense
    3.2 %     3.8 %     4.6 %
                         
Operating margin (3)
    30.3 %     27.1 %     28.7 %
Return on average assets
    12.7 %     10.9 %     11.0 %
                         
Offices opened and acquired, net
    46       106       106  
Total offices (at period end)
    990       944       838  
 

(1)
Average gross loans receivable have been determined by averaging month-end gross loans receivable over the indicated period.
(2)
Average net loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period.
(3)
Operating margin is computed as total revenues less provision for loan losses and general and administrative expenses as a percentage of total revenues.

As described in Note 2 to the Consolidated Financial Statements included in Item 8 below in the first quarter of fiscal 2010, we adopted 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)”), and applied it retrospectively to all periods presented with a cumulative effect adjustment being made as of the earliest period presented.  Adoption of FASB ASC 470-20 affected our fiscal 2010, fiscal 2009 and fiscal 2008 consolidated statements of operations and balance sheets as reported to the extent described in Note 2, Summary of Significant Accounting Policies in Part II, Item 8 of this report.

Comparison of Fiscal 2010 Versus Fiscal 2009

Net income was $73.7 million during fiscal 2010, a 30.4% increase over the $56.5 million earned during fiscal 2009.  This increase resulted primarily from an increase in operating income (revenues less provision for loan losses and general and administrative expenses) of $26.9 million, or 25.2%, and a $1.0 million decrease in interest expense, offset by an increase in income tax expense.

Total revenues increased to $440.6 million in fiscal 2010, a $48.5 million, or 12.4%, increase over the $392.2 million in fiscal 2009.   Revenues from the 834 offices open throughout both fiscal years increased by 8.1%.  At March 31, 2010, the Company had 990 offices in operation, an increase of 46 offices from March 31, 2009.

Interest and fee income during fiscal 2010 increased by $43.6 million, or 13.1%, over fiscal 2009.  This increase resulted from an increase of $66.9 million, or 13.7%, in average net loans receivable between the two fiscal years.  The increase in average loans receivable was attributable to the Company’s internal growth.  During fiscal 2010, internal growth increased because the Company opened 48 new offices and the average loan balance increased from $917 to $971.

Insurance commissions and other income increased by $4.9 million, or 8.1%, over the two fiscal years.  Insurance commissions increased by $4.8 million, or 14.7%, as a result of the increase in loan volume in states where credit insurance is sold. Other income increased slightly, but there were various changes within other income when comparing the two years, including:

 
22

 

 
·
Revenue from tax preparation increased approximately $1.0 million, or 10%.
 
·
In fiscal 2010, a $1.1 million gain on the interest rate swaps was recorded compared to an approximate $800,000 loss is fiscal 2009.
 
·
In fiscal 2010, the Company extinguished $18.0 million par value of its convertible notes at a $2.2 million gain, compared to fiscal 2009, during which $15.0 million par value of the convertible notes were extinguished at a $4.0 million gain.
 
·
In fiscal 2009, a $1.5 million gain was recognized on the sale of a foreign currency option.  There was no such gain recorded during fiscal 2010.

See Note 9 to the Consolidated Financial Statements for further discussion regarding this extinguishment of debt.

The provision for loan losses during fiscal 2010 increased by $4.8 million, or 5.6%, from the previous year.  This increase resulted from a combination of increases in both the allowance for loan losses and the amount of loans charged off.  Net charge-offs for fiscal 2010 amounted to $85.6 million, a 5.6% increase over the $81.1 million charged off during fiscal 2009. Accounts that were 61 days or more past due decreased from 2.7% to 2.4% on a recency basis and from 4.2% to 3.8% on a contractual basis when comparing March 31, 2010 to March 31, 2009. During the current fiscal year, we have also had a reduction in our year-over-year loan losses. Annualized net charge-offs as a percentage of average net loans decreased from 16.7% during fiscal 2009 to 15.5% during fiscal 2010.  Although this represents a 120 basis point decrease, the current year ratio is slightly higher than historical charge-off ratios.  Historically from fiscal 2002 to fiscal 2006 the charge-offs as a percent of average loans ranged from 14.6% to 14.8%. In fiscal 2007 the Company experienced a temporary decline to 13.3%, which was attributed to a change in the bankruptcy law.  However, in fiscal 2008 the ratio returned 14.5%, which was more in line with historical rates. 

Because the ratio in fiscal 2010 is slightly higher than historical levels and we did see improvements during fiscal 2010 compared to fiscal 2009, we believe that we will continue to see slight improvement in our loss ratios in the near future, however, there is no assurance they will return to historical levels anytime soon.  During fiscal year 2010 our charge-offs as a percent of average net loans decreased to 15.5% from 16.7% in fiscal 2009.  We believe our customer base is highly impacted by the cost of basic commodities such as food and energy and unemployment.  The cost of basic commodities rose steeply during the first several months of our fiscal 2009 which had a negative impact on our customer’s ability to repay outstanding loans.  This, in turn, drove our charge-off ratio up significantly over our historical experience.  After moderating in the second half of fiscal 2009, the costs of basic commodities have risen more gradually during fiscal 2010 allowing our customers to adapt to such costs increases and better manage their ability to repay outstanding loans.  The rate of unemployment has also stabilized.  We believe these are major factors in the reduction of our charge-off ratio during fiscal 2010.

General and administrative expenses during fiscal 2010 increased by $16.8 million, or 8.4%, over the previous fiscal year.  This increase was due primarily to costs associated with the new offices opened or acquired during the fiscal year.  General and administrative expenses, when divided by average open offices, increased slightly when comparing the two fiscal years and, overall, general and administrative expenses as a percent of total revenues decreased from 51.1% in fiscal 2009 to 49.2% during fiscal 2010.  This decrease resulted from the reduction of branch openings during fiscal 2010 and management’s ongoing monitoring and control of expenses.  Management plans to increase the number of branch openings in fiscal 2011 compared to fiscal 2010; therefore, the Company may not experience similar reductions in general and administrative expenses as a percent of total revenues in fiscal 2011.

Interest expense decreased by $1.0 million, or 6.7%, during fiscal 2010, as compared to the previous fiscal year as a result of a decrease in average debt outstanding of 4.5% and a slight decrease in average interest rates.  Average interest rates decreased from 6.7% in fiscal 2009 to 6.5% in fiscal 2010.

Income tax expense increased $10.7 million, or 30.5%, primarily from an increase in pre-tax income.  The effective rate remained consistent at 38.33% in fiscal 2010 compared to 38.31% in fiscal 2009.

 
23

 

Comparison of Fiscal 2009 Versus Fiscal 2008

Net income was $56.5 million during fiscal 2009, a 12.4% increase over the $50.3 million earned during fiscal 2008.  This increase resulted primarily from an increase in operating income (revenues less provision for loan losses and general and administrative expenses) of $7.2 million, or 7.2%, a reduction in the income tax effective rate and a reduction in interest expense.

Total revenues increased to $392.2 million in fiscal 2009, a $46.1 million, or 13.3%, increase over the $346.0 million in fiscal 2008.   Revenues from the 727 offices open throughout both fiscal years increased by 7.7%.  At March 31, 2009, the Company had 944 offices in operation, an increase of 106 offices from March 31, 2008.

Interest and fee income during fiscal 2009 increased by $39.0 million, or 13.3%, over fiscal 2008.  This increase resulted from an increase of $60.3 million, or 14.1%, in average net loans receivable between the two fiscal years.  The increase in average loans receivable was attributable to the Company acquiring approximately $9.1 million in net loans and internal growth.  During fiscal 2009, internal growth increased because the Company opened 98 new offices and the average loan balance increased from $877 to $917.

Insurance commissions and other income increased by $7.1 million, or 13.3%, over the two fiscal years.  Insurance commissions increased by $2.0 million, or 6.7%, as a result of the increase in loan volume in states where credit insurance is sold.  Other income increased by $5.1 million, or 21.9%, over the two years, primarily due to a $1.5 million gain on the sale of a foreign currency option and a $4.0 million gain on the extinguishment of $15 million par value of the Convertible Notes.  See Note 9 to the Consolidated Financial Statements for further discussion regarding this extinguishment of debt.  This increase was partially offset by approximately a $0.8 million loss related to our interest rate swap.

The provision for loan losses during fiscal 2009 increased by $17.9 million, or 26.6%, from the previous year.  This increase resulted from a combination of increases in both the allowance for loan losses and the amount of loans charged off.  Net charge-offs for fiscal 2009 amounted to $81.1 million, a 30.9% increase over the $62.0 million charged off during fiscal 2008. Net charge-offs as a percentage of average loans increased from 14.5% to 16.7% when comparing the two annual periods.  We believe the 2.2 percentage point increase resulted from the difficult economic environment and higher energy cost that our customers faced.  Accounts that were 61 days or more past due on a recency basis increased from 2.6% to 2.7% and on a contractual basis increased from 4.0% to 4.2% at March 31, 2008 and March 31, 2009, respectively.

General and administrative expenses during fiscal 2009 increased by $21.0 million, or 11.7%, over the previous fiscal year.  This increase was due primarily to costs associated with the new offices opened or acquired during the fiscal year.  General and administrative expenses, when divided by average open offices, remained flat when comparing the two fiscal years and, overall, general and administrative expenses as a percent of total revenues decreased from 51.8% in fiscal 2008 to 51.1% during fiscal 2009.  This decrease resulted from management’s ongoing monitoring and control of expenses.

Interest expense decreased by $1.1 million, or 6.6%, during fiscal 2009, as compared to the previous fiscal year as a result of a decrease in interest rates, partially offset by an increase in average debt outstanding of 12.1%.  Average interest rates decreased from 8.3% in fiscal 2008 to 6.7% in fiscal 2009.

Income tax expense increased $2.0 million, or 6.0%, primarily from an increase in pre-tax income.  The decrease in the effective rate from 39.7% to 38.3% was a result of the prior year tax examination discussed in Note 14 to our Consolidated Financial Statements.

Critical Accounting Policies

The Company’s accounting and reporting policies are in accordance with U.S. generally accepted accounting principles and conform to general practices within the finance company industry.  The significant accounting policies used in the preparation of the consolidated financial statements are discussed in Note 1 to the consolidated financial statements.  Certain critical accounting policies involve significant judgment by the Company’s management, including the use of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues, and expenses.  As a result, changes in these estimates and assumptions could significantly affect the Company’s financial position and results of operations.  The Company considers its policies regarding the allowance for loan losses and share-based compensation to be its most critical accounting policies due to the significant degree of management judgment involved.

 
24

 

Allowance for Loan Losses

The Company has developed policies and procedures for assessing the adequacy of the allowance for loan losses that take into consideration various assumptions and estimates with respect to the loan portfolio.   The Company’s assumptions and estimates may be affected in the future by changes in economic conditions, among other factors.  For additional discussion concerning the allowance for loan losses, see “Credit Quality” below.

Share-Based Compensation

The Company measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest. The fair value of restricted stock is based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions, including expected volatility, risk-free interest rate and expected life, changes to which can materially affect the fair value estimate. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

Income Taxes
          
Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors change.

No assurance can be given that either the tax returns submitted by management or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the U.S. Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service (“IRS”) or state taxing authorities. The Company is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.
          
The Company adopted FASB ASC 740 (Prior authoritative literature: FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”) on April 1, 2007. Under FASB ASC 740, the Company includes the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While the Company supports its tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis that considers all relevant facts, circumstances and regulations, management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position.

Credit Quality

The Company’s delinquency and net charge-off ratios reflect, among other factors, changes in the mix of loans in the portfolio, the quality of receivables, the success of collection efforts, bankruptcy trends and general economic conditions.

Delinquency is computed on the basis of the date of the last full contractual payment on a loan (known as the recency method) and on the basis of the amount past due in accordance with original payment terms of a loan (known as the contractual method).  Management closely monitors portfolio delinquency using both methods to measure the quality of the Company's loan portfolio and the probability of credit losses.

 
25

 

The following table classifies the gross loans receivable of the Company that were delinquent on a recency and contractual basis for at least 61 days at March 31, 2010, 2009, and 2008:

   
At March 31,
 
                   
   
2010
   
2009
   
2008
 
   
(Dollars in thousands)
 
Recency basis:
                 
61-90 days past due
  $ 11,094       11,304       10,414  
91 days or more past due
    7,337       6,661       5,003  
                         
Total
  $ 18,431       17,965       15,417  
                         
Percentage of period-end gross loans receivable
    2.4 %     2.7 %     2.6 %
                         
Contractual basis:
                       
61-90 days past due
  $ 14,548       14,223       12,838  
91 days or more past due
    14,985       13,673       11,123  
                         
Total
  $ 29,533       27,896       23,961  
                         
Percentage of period-end gross loans receivable
    3.8 %     4.2 %     4.0 %

Loans are charged off at the earlier of when such loans are deemed to be uncollectible or when six months have elapsed since the date of the last full contractual payment.  The Company’s charge-off policy has been consistently applied and no significant changes have been made to the policy during the periods reported. Management considers the charge-off policy when evaluating the appropriateness of the allowance for loan losses.  Charge-offs as a percent of average net loans decreased from 16.7% in fiscal 2009 to 15.5% in fiscal 2010.

In fiscal 2010, approximately 84.7% of the Company’s loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers.  A refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer.  For fiscal 2010, 2009, and 2008, the percentages of the Company’s loan originations that were refinancings of existing loans were 76.4%, 75.0% and 73.3%, respectively.  The Company’s refinancing policies, while limited by state regulations, in all cases consider the customer’s payment history and require that the customer has made at least two payments on the loan being considered for refinancing.  A refinancing is considered a current refinancing if the customer is no more than 45 days delinquent on a contractual basis.  Delinquent refinancings may be extended to customers that are more than 45 days past due on a contractual basis if the customer completes a new application and the manager believes that the customer’s ability and intent to repay has improved.  It is the Company’s policy to not refinance delinquent loans in amounts greater than the original amounts financed.  In all cases, a customer must complete a new application every two years.  During fiscal 2010, delinquent refinancings represented less than 2% of the Company’s total loan volume compared to 2.1% in fiscal 2009.

Charge-offs, as a percentage of loans made by category, are greatest on loans made to new borrowers and less on loans made to former borrowers and refinancings.  This is as expected due to the payment history experience available on repeat borrowers.  However, as a percentage of total loans charged off, refinancings represent the greatest percentage due to the volume of loans made in this category.  The following table depicts the charge-offs as a percent of loans made by category and as a percent of total charge-offs during fiscal 2010:

   
Loan Volume
   
Percent of
   
Charge-off as a Percent of Total
 
   
by Category
   
Total Charge-offs
   
Loans Made by Category
 
                   
Refinancing
    76.4 %     76.1 %     5.0 %
Former borrowers
    8.3 %     5.2 %     3.7 %
New borrowers
    15.3 %     18.7 %     9.9 %
      100.0 %     100.0 %        
 
 
26

 

The Company maintains an allowance for loan losses in an amount that, in management’s opinion, is adequate to cover losses inherent in the existing loan portfolio.  The Company charges against current earnings, as a provision for loan losses, amounts added to the allowance to maintain it at levels expected to cover probable losses of principal.  When establishing the allowance for loan losses, the Company takes into consideration the growth of the loan portfolio, the mix of the loan portfolio, current levels of charge-offs, current levels of delinquencies, and current economic factors.  In accordance with FASB ASC Topic 450 (Prior authoritative literature: Statement of Accounting Standards No. 5 “Accounting for Contingencies”), the Company accrues an estimated loss if it is probable and can be reasonably estimated.  It is probable that there are losses in the existing portfolio.  To estimate the losses, the Company uses historical information for net charge-offs and average loan life.  This method is based on the fact that many customers refinance their loans prior to the contractual maturity.  Average contractual loan terms are approximately nine months and the average loan life is approximately four months.  Based on this method, the Company had an allowance for loan losses that approximated six months of average net charge-offs at March 31, 2010, 2009, and 2008. Therefore, at each year end the Company had an allowance for loan losses that covered estimated losses for its existing loans based on historical charge-offs and average lives.  In addition, the entire loan portfolio turns over approximately three times during a typical twelve-month period.  Therefore, a large percentage of loans that are charged off during any fiscal year are not on the Company’s books at the beginning of the fiscal year.  The Company believes that it is not appropriate to provide for losses on loans that have not been originated, that twelve months of net charge-offs are not needed in the allowance, and that the method employed is in accordance with generally accepted accounting principles.

The Company records acquired loans at fair value based on current interest rates, less an allowance for uncollectibility and collection costs.

FASB ASC Topic 310 (Prior authoritative literature: Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,”) was adopted by the Company on April 1, 2005.  FASB ASC Topic 310 prohibits carryover or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of the accounting literature.  Management 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 Topic 310 have not shown evidence of deterioration of credit quality since origination, and therefore, are not within the scope of FASB ASC Topic 310 because there is no consideration paid for acquired loans over 60 days delinquent.  For the years ended March 31, 2009 and 2008, the Company recorded adjustments of approximately $0.5 million and $0.1 million, respectively, to the allowance for loan losses in connection with acquisitions in accordance generally accepted accounting principles.  No adjustment was recorded for the year ended March 31, 2010.  These adjustments represent the allowance for loan losses on acquired loans which are not within the scope of FASB ASC Topic 310.  The Company believes that its allowance for loan losses is adequate to cover losses in the existing portfolio at March 31, 2010.

The following is a summary of the changes in the allowance for loan losses for the years ended March 31, 2010, 2009, and 2008:

   
March 31,
 
   
2010
   
2009
   
2008
 
                   
Balance at the beginning of the year
  $ 38,020,770       33,526,147       27,840,239  
Provision for loan losses
    90,298,934       85,476,092       67,541,805  
Loan losses
    (94,782,185 )     (88,728,498 )     (68,985,269 )
Recoveries
    9,139,923       7,590,928       6,989,297  
Translation adjustment
    219,377       (306,340 )     18,135  
Allowance on acquired loans
    -       462,441       121,940  
Balance at the end of the year––
  $ 42,896,819       38,020,770       33,526,147  
Allowance as a percentage of loans receivable, net of unearned and deferred fees
    7.5 %     7.6 %     7.5 %
Net charge-offs as a percentage of average loans receivable (1)
    15.5 %     16.7 %     14.5 %
 

(1)
Average loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period.

 
27

 

Quarterly Information and Seasonality

The Company's loan volume and corresponding loans receivable follow seasonal trends.  The Company's highest loan demand typically occurs from October through December, its third fiscal quarter.  Loan demand has generally been the lowest and loan repayment highest from January to March, its fourth fiscal quarter.  Loan volume and average balances typically remain relatively level during the remainder of the year.  This seasonal trend affects quarterly operating performance through corresponding fluctuations in interest and fee income and insurance commissions earned and the provision for loan losses recorded, as well as fluctuations in the Company's cash needs.  Consequently, operating results for the Company's third fiscal quarter generally are significantly lower than in other quarters and operating results for its fourth fiscal quarter are significantly higher than in other quarters.

The following table sets forth, on a quarterly basis, certain items included in the Company's unaudited consolidated financial statements and shows the number of offices open during fiscal years 2010 and 2009.

   
At or for the Three Months Ended
 
   
2010
   
2009
 
   
June
   
September
   
December
   
March
   
June
   
September
   
December
   
March
 
   
30,
   
30,
   
31,
   
31,
   
30,
   
30,
   
31,
   
31,
 
 
 
(Dollars in thousands)
 
                                                 
Total revenues
  $ 100,230       104,206       112,310       123,890       88,421       91,721       99,161       112,849  
Provision for loan losses
    20,428       25,156       29,633       15,082       17,857       23,307       29,490       14,822  
General and administrative expenses
    53,333       51,755       55,537       56,387       48,790       48,379       51,716       51,331  
Net income
    14,635       14,612       14,751       29,663       11,343       9,946       8,863       26,341  
                                                                 
Gross loans receivable
  $ 726,057       754,854       838,864       770,265       632,715       667,179       736,234       671,176  
Number of offices open
    949       966       975       990       872       907       923       944  

Recently Issued Accounting Pronouncements


Liquidity and Capital Resources

The Company has financed and continues to finance its operations, acquisitions and office expansion through a combination of cash flows from operations and borrowings from its institutional lenders.  The Company has generally applied its cash flows from operations to fund its increasing loan volume, fund acquisitions, repay long-term indebtedness, and repurchase its common stock.  As the Company's gross loans receivable increased from $310.1 million at March 31, 2004 to $770.3 million at March 31, 2010, net cash provided by operating activities for fiscal years 2010, 2009 and 2008 was $183.6 million, $153.9 million and $136.0 million, respectively.

The Company's primary ongoing cash requirements relate to the funding of new offices and acquisitions, the overall growth of loans outstanding, the repayment or repurchase of long-term indebtedness and the repurchase of its common stock.  As of March 31, 2010, approximately 6.5 million shares have been repurchased since 2000 for an aggregate purchase price of approximately $151.1 million. During fiscal 2010 the Company repurchased 38,500 shares for $1.4 million.  In May 2009, the Board of Directors authorized the Company to repurchase $15 million of the Company’s stock.  Subsequent to the end of fiscal 2010, on May 11, 2010, the Board of Directors authorized an additional increase of $20 million in the Company’s share repurchase program.  Through June 8, 2010, the Company repurchased shares of its common stock for approximately $27.4 million.  See Note 1 – Subsequent Events to the Consolidated Financial Statements.  During fiscal 2010 and 2009, the Company repurchased $18.0 million and $15.0 million par value of its Convertible Senior Subordinated notes payable, respectively.  The Company believes stock repurchases and debt repurchases to be a viable component of the Company’s long-term financial strategy and an excellent use of excess cash when the opportunity arises.  In addition, the Company plans to open approximately 55 branches in the United States, 15 branches in Mexico, and evaluate acquisition opportunities in fiscal 2011.  Expenditures by the Company to open and furnish new offices generally averaged approximately $25,000 per office during fiscal 2010.  New offices have also required from $100,000 to $400,000 to fund outstanding loans receivable originated during their first 12 months of operation.

 
28

 

The Company acquired a net of one office and a number of loan portfolios from competitors in six states in nine separate transactions during fiscal 2010. Gross loans receivable purchased in these transactions were approximately $3.9 million in the aggregate at the dates of purchase.  The Company believes that attractive opportunities to acquire new offices or receivables from its competitors or to acquire offices in communities not currently served by the Company will continue to become available as conditions in local economies and the financial circumstances of owners change.

The Company has a $238.3 million base credit facility with a syndicate of banks.  The credit facility will expire on July 31, 2011.  Funds borrowed under the revolving credit facility bear interest, at the Company's option, at either the agent bank's prime rate per annum or the LIBOR rate plus 3.0% per annum with a minimum 4.0% interest rate.  At March 31, 2010, the interest rate on borrowings under the revolving credit facility was 4.25%.   The Company pays a commitment fee equal to 0.375% per annum of the daily unused portion of the revolving credit facility.  Amounts outstanding under the revolving credit facility may not exceed specified percentages of eligible loans receivable.  On March 31, 2010, $99.2 million was outstanding under this facility, and there was $139.1 million of unused borrowing availability under the borrowing base limitations.

The Company's credit agreements contain a number of financial covenants including minimum net worth and fixed charge coverage requirements.  The credit agreements also contain certain other covenants, including covenants that impose limitations on the Company with respect to (i) declaring or paying dividends or making distributions on or acquiring common or preferred stock or warrants or options; (ii) redeeming or purchasing or prepaying principal or interest on subordinated debt; (iii) incurring additional indebtedness; and (iv) entering into a merger, consolidation or sale of substantial assets or subsidiaries.  The Company was in compliance with these agreements at March 31, 2010 and does not believe that these agreements will materially limit its business and expansion strategy.

On October 2, 2006, the Company amended its senior credit facility in connection with the issuance of $110 million in aggregate principal amount of its 3% convertible senior subordinated notes due October 1, 2011.  See Note 8 to the Consolidated Financial Statements included in this report for more information regarding this transaction.

The following table summarizes the Company’s contractual cash obligations by period (in thousands):

   
Fiscal Year Ended March 31,
 
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
Convertible Senior Subordinated Notes Payable
  $ -     $ 77,000     $ -     $ -     $ -     $ -     $ 77,000  
                                                         
Maturities of Notes Payable
    -       99,150       -       -       -       -       99,150  
                                                         
Interest Payments on Convertible Senior Subordinated Notes Payable
    2,310       2,310       -       -