Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________________
Form
10-K
_________________
(Mark
One)
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For the
fiscal year ended March 31, 2009
OR
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
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|
THE
SECURITIES EXCHANGE ACT OF 1934
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|
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
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|
570425114
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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108
Frederick Street
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Greenville, South Carolina
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29607
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(Address
of principal executive offices)
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(Zip
Code)
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(Registrant's
telephone number, including area code)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
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|
Name of Each Exchange on Which
Registered
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Common
Stock, no par value
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The
NASDAQ Stock Market LLC
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(NASDAQ
Global Select Market)
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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 o 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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No
o
Indicate
by check mark 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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o Accelerated
filer x
Non-accelerated filer o Smaller reporting company o
(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 o No
x
The
aggregate market value of voting stock held by non-affiliates of the registrant
as of September 30, 2008, computed by reference to the closing sale price on
such date, was $583,053,948. (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 May 29, 2009,
16,230,259 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 2009 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.
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Page
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PART
I
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1.
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Business
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1
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1A.
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Risk
Factors
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10
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1B.
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Unresolved
Staff Comments
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17
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2.
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Properties
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17
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3.
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Legal
Proceedings
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17
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4.
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Submission
of Matters to a Vote of Security Holders
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17
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PART
II
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5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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17
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6.
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Selected
Financial Data
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19
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7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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30
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8.
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Financial
Statements and Supplementary Data
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31
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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60
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9A.
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Controls
and Procedures
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60
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9B.
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Other
Information
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60
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PART
III
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10.
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Directors,
Executive Officers and Corporate Governance
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61
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11.
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Executive
Compensation
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61
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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61
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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61
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14.
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Principal
Accountant Fees and Services
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62
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PART
IV
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15.
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Exhibits
and Financial Statement Schedules
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63
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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 2009" are to
the Company's fiscal year ended March 31, 2009.
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 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 $130 and $3,000 through 944
offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee,
Illinois, Missouri, New Mexico, Kentucky, Alabama and Mexico as of March 31,
2009. 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 $1,000 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 2009, the Company opened 98 new offices. Eleven other offices
were purchased and 3 offices were closed or merged into other existing offices
due to their inability to grow to profitable levels. In fiscal 2010,
the Company plans to open or acquire at least 30 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 2010. 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.
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:
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At
March 31,
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State
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2000
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2001
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2002
|
|
|
2003
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|
2004
|
|
|
2005
|
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|
2006
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|
2007
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|
|
2008
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|
2009
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
South
Carolina
|
|
|
63 |
|
|
|
62 |
|
|
|
62 |
|
|
|
65 |
|
|
|
65 |
|
|
|
65 |
|
|
|
68 |
|
|
|
89 |
|
|
|
92 |
|
|
|
93 |
|
Georgia
|
|
|
48 |
|
|
|
48 |
|
|
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52 |
|
|
|
52 |
|
|
|
74 |
|
|
|
76 |
|
|
|
74 |
|
|
|
96 |
|
|
|
97 |
|
|
|
100 |
|
Texas
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|
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135 |
|
|
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135 |
|
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|
136 |
|
|
|
142 |
|
|
|
150 |
|
|
|
164 |
|
|
|
168 |
|
|
|
183 |
|
|
|
204 |
|
|
|
223 |
|
Oklahoma
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|
|
43 |
|
|
|
43 |
|
|
|
46 |
|
|
|
45 |
|
|
|
47 |
|
|
|
51 |
|
|
|
58 |
|
|
|
62 |
|
|
|
70 |
|
|
|
80 |
|
Louisiana
|
|
|
21 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
24 |
|
|
|
28 |
|
|
|
34 |
|
|
|
38 |
|
Tennessee
|
|
|
35 |
|
|
|
38 |
|
|
|
40 |
|
|
|
45 |
|
|
|
51 |
|
|
|
55 |
|
|
|
61 |
|
|
|
72 |
|
|
|
80 |
|
|
|
92 |
|
Illinois
|
|
|
30 |
|
|
|
30 |
|
|
|
29 |
|
|
|
28 |
|
|
|
30 |
|
|
|
33 |
|
|
|
37 |
|
|
|
40 |
|
|
|
58 |
|
|
|
61 |
|
Missouri
|
|
|
18 |
|
|
|
22 |
|
|
|
22 |
|
|
|
22 |
|
|
|
26 |
|
|
|
36 |
|
|
|
38 |
|
|
|
44 |
|
|
|
49 |
|
|
|
57 |
|
New
Mexico
|
|
|
13 |
|
|
|
12 |
|
|
|
12 |
|
|
|
16 |
|
|
|
19 |
|
|
|
20 |
|
|
|
22 |
|
|
|
27 |
|
|
|
32 |
|
|
|
37 |
|
Kentucky
|
|
|
4 |
|
|
|
10 |
|
|
|
22 |
|
|
|
30 |
|
|
|
30 |
|
|
|
36 |
|
|
|
41 |
|
|
|
45 |
|
|
|
52 |
|
|
|
58 |
|
Alabama
(1)
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|
|
- |
|
|
|
- |
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|
|
- |
|
|
|
5 |
|
|
|
14 |
|
|
|
21 |
|
|
|
26 |
|
|
|
31 |
|
|
|
35 |
|
|
|
42 |
|
Colorado
(2)
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|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Mexico
(3)
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|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
15 |
|
|
|
35 |
|
|
|
63 |
|
Total
|
|
|
410 |
|
|
|
420 |
|
|
|
441 |
|
|
|
470 |
|
|
|
526 |
|
|
|
579 |
|
|
|
620 |
|
|
|
732 |
|
|
|
838 |
|
|
|
944 |
|
(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 loans that are standardized by amount and maturity in an
effort to reduce documentation and related processing costs. All of
the Company's loans are payable in fully amortizing monthly installments with
terms of 4 to 36 months, and all loans are prepayable at any time without
penalty. In fiscal 2009, the Company's average originated loan size
and term were approximately $1,011 and eleven months,
respectively. 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, 2009, the annual percentage rates on loans offered by the Company,
which include interest, fees and other charges as calculated for the purposes of
federal consumer loan disclosure requirements, ranged from 25% to 215% 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 the
maximum rates allowable under applicable state law. Statutes in Texas
and Oklahoma allow for indexing the maximum loan amounts to the Consumer Price
Index. Fees charged by the Company include origination and account maintenance fees and
monthly handling charges.
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. 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 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. 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. In fiscal
2004, on a limited basis, the Company began to maintain a few inventory items in
each of its branch offices participating in the program. The Company
believes that having certain items on hand has enhanced sales and plans to
continue this practice on a limited basis in the future.
The Company also includes in its
product line larger balance, lower risk, and lower yielding individual consumer
loans. These loans typically average $1,000 to $3,000, with terms of
generally 18 to 24 months, compared to $300 to $1,000, with terms generally of 8
to 12 month terms for the smaller loans. The Company offers these
larger loans in all states except Texas, where they are not profitable under the
Company’s lending criteria and strategy. Additionally, the Company
has purchased numerous larger loan offices and has made several bulk purchases
of larger loans receivable. As of March 31, 2009, the larger class of
loans accounted for approximately $191.4 million of gross loans receivable, a
22.7% increase over the balance outstanding at March 31, 2008. This
portfolio now represents 28.5% of the total loan balances as of the end of the
fiscal year. Management believes that these loans provide lower
expense and loss ratios, thus providing positive contributions.
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 number of returns completed has grown from
16,000 in fiscal 2000 to approximately 63,000 in fiscal 2009, and the net
revenues to the Company from this service grew from approximately $800,000 to
$9.9 million over this same period. 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 and
Seasonality. The following table sets forth the composition of
the Company's gross loans receivable by state at March 31 of each year from 2000
through 2009:
|
|
At March 31,
|
|
State
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Carolina
|
|
|
21 |
% |
|
|
21 |
% |
|
|
19 |
% |
|
|
15 |
% |
|
|
14 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
13 |
% |
|
|
12 |
% |
|
|
11 |
% |
Georgia
|
|
|
15 |
|
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
|
|
14 |
|
|
|
15 |
|
|
|
14 |
|
Texas
|
|
|
28 |
|
|
|
25 |
|
|
|
24 |
|
|
|
23 |
|
|
|
21 |
|
|
|
20 |
|
|
|
24 |
|
|
|
23 |
|
|
|
22 |
|
|
|
21 |
|
Oklahoma
|
|
|
6 |
|
|
|
6 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
Louisiana
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Tennessee
|
|
|
13 |
|
|
|
11 |
|
|
|
12 |
|
|
|
14 |
|
|
|
15 |
|
|
|
18 |
|
|
|
15 |
|
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
Illinois
|
|
|
4 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Missouri
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
New
Mexico
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Kentucky
|
|
|
4 |
|
|
|
10 |
|
|
|
12 |
|
|
|
13 |
|
|
|
12 |
|
|
|
12 |
|
|
|
11 |
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
Alabama
(1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
Mexico
(2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and the average loan
balance by state at March 31, 2009:
|
|
Total
Number
|
|
|
Average
Gross Loan
|
|
|
|
of Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
South
Carolina
|
|
|
78,872 |
|
|
$ |
977 |
|
Georgia
|
|
|
79,541 |
|
|
|
1,212 |
|
Texas
|
|
|
191,509 |
|
|
|
732 |
|
Oklahoma
|
|
|
48,379 |
|
|
|
826 |
|
Louisiana
|
|
|
22,061 |
|
|
|
758 |
|
Tennessee
|
|
|
87,058 |
|
|
|
1,107 |
|
Illinois
|
|
|
39,339 |
|
|
|
1,058 |
|
Missouri
|
|
|
34,899 |
|
|
|
1,091 |
|
New
Mexico
|
|
|
23,395 |
|
|
|
783 |
|
Kentucky
|
|
|
43,308 |
|
|
|
1,355 |
|
Alabama
|
|
|
28,717 |
|
|
|
968 |
|
Mexico
|
|
|
55,031 |
|
|
|
367 |
|
Total
|
|
|
732,109 |
|
|
$ |
917 |
|
For fiscal 2009, 2008 and 2007,
96.9%, 98.2% and 99.2%, respectively, of the Company’s revenues were
attributable to U.S. customers and 3.1%, 1.8% and 0.8%, 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.”
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 2009, approximately 84.0%
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 2009, 2008 and 2007, the percentages of the
Company's loan originations that were refinancings of existing loans were 75.0%,
73.3% and 74.3%, 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 approximately 2% of the Company’s loan volume in
fiscal 2009.
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.
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 2009, the captive insurance subsidiary reinsured
approximately 2.6% of the credit insurance sold by the Company and contributed
approximately $1.2 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.
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 and must approve all credit
applications. 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 office in their states 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.
The Company converted all of its loan
offices to a new computer system following its acquisition of Paradata Financial
Systems, a small software company located near St. Louis,
Missouri. This system uses a proprietary data processing software
package developed by Paradata, and has enabled the Company to fully automate all
loan account processing and collection reporting. The system provides
thorough management information and control capabilities. The Company
also markets the system to other finance companies, but experiences significant
fluctuations from year to year in the amount of revenues generated from sales of
the system to third parties and does not expect such revenues to be
material.
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.
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 training sessions outside the
office. The Company has also implemented an enhanced training tool as
World University which provides more effective online training to all
locations. This allows for more training available to all
employees.
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 3.3% of total
revenues in fiscal 2009, 3.7% in fiscal 2008 and 3.5% in 2007.
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
$1,000.
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. 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.
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
Commission, 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.
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.
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.
The Company is subject to extensive
federal regulation as well, including 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.
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. As
discussed further in Part I, Item 1A, “Risk Factors,” 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 – 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,” “– 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” and “– 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.”
Employees. As of
March 31, 2009, the Company had 2,969 U.S. employees, none of whom were
represented by labor unions and 480 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 (57)
|
|
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 (38)
|
|
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.
|
|
|
|
|
|
Mark
C. Roland (52)
|
|
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 (46)
|
|
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.
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D.
Clinton Dyer (36)
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Senior
Vice President, Central Division
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Senior
Vice President, Central Division since June 2005; Vice President,
Operations – Tennessee and Missouri 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.
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James
D. Walters (41)
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Senior
Vice President, Southern Division
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Senior
Vice President, Southern Division since April 2005; Vice President,
Operations – South Carolina and Alabama from August 1998 to March
2005.
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Francisco Javier Sauza Del Pozo (54)
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Senior
Vice President, Mexico
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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.
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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: changes in interest rates; risks
inherent in making loans, including repayment risks and value of collateral;
recently enacted, proposed or future legislation; 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
under “Risk Factors” and in the Company’s other filings made from time to time
with the Securities and Exchange Commission (“SEC”). The Company does
not undertake any obligation to update any forward-looking statements it may
make.
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.
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 remains under consideration by the Illinois
legislature. At this point in time it is impossible to predict what
the ultimate legislative result, if any, of this initiative will
be. See “—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”
below.
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.
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. See “—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 have been
introduced in the U.S. Congress within the past calendar year. One such
bill, affecting certain aspects of the credit card industry (H.R. 627), recently
passed both houses of Congress and was signed into law on May 22,
2009.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. For
instance, on February 26, 2009, U.S. Senator Richard Durbin introduced a bill (S. 500) in
Congress to establish a federally defined, all inclusive rate cap of 36% per
year for all consumer credit transactions. Similar
bills (including, but not limited to, H. R. 1608 and H. R. 1640) have also been
introduced in the House of Representatives. Other recently proposed
federal legislation would create a new federal agency to oversee consumer credit
and regulate the types of consumer financial products on the market. The
proposed legislation would empower the new federal agency to effectively ban any
consumer credit products that it determined to involve “inappropriate consumer
credit practices.” In addition to these bills, the Obama
Administration agenda states that U.S. President Barack Obama and Vice President
Joseph Biden seek to extend a 36% APR limit to all consumer credit
transactions. 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 that proposed in the Durbin bill in its current form or in
similar congressional bills would, if enacted, almost certainly eliminate
our ability to continue our current operations.
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 and 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. Negative perception of our products and services could also
result in increased scrutiny from regulators and potential litigants, encourage
restrictive local zoning rules and make it more difficult to obtain government
approvals necessary to open or acquire new offices. Such trends could
materially adversely affect our business, prospects, results of operations and
financial condition. See also, “—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,” and “—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.”
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 3.1% of our revenues and 3.0% of our
gross loans receivable for the year ended March 31, 2009, 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. Among
the additional risks potentially affecting our Mexican operations are changes in
local economic conditions, disruption from political unrest and difficulty in
enforcing agreements due to differences in the Mexican legal and regulatory
regimes compared to those of the U.S. Our success in conducting
foreign operations will depend, in large part, on our ability to succeed in
differing economic, social and political conditions. Among other
things, we face potential difficulties in staffing and managing local
operations, and we have to design local solutions to manage credit risks posed
by local customers. We may not continue to succeed in developing and
implementing policies and strategies that are effective in each location where
we do business.
We have
devoted significant management time and financial resources to expanding our
operations into Mexico. Our international operations have increased
the complexity of our organization and the administrative, operating and legal
cost of operating our business. Penetrating new markets will likely
require additional marketing expenses and incremental start-up
costs. We may, although we have no such current plans, decide to
reduce fees, or even temporarily operate loan offices at a loss, in order to
build brand recognition and establish a foothold in these new
markets. Additionally, as a foreign business we are subject to local
regulations, tariffs and labor controls to which other domestic businesses may
not be subject. Our financial results also may be negatively affected
by tax rates in Mexico or as a result of withholding requirements and tax
treaties with those countries. Moreover, if political, regulatory or
economic conditions deteriorate or social unrest or the level of criminal
activity continues to increase in Mexico, our
ability to expand and maintain our international operations could be impaired or
the costs of doing so could increase, either of which could further erode our
business, prospects, results of operations and financial condition.
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, but such
changes could also affect our ability to originate loans. If the
interest we pay on our revolving credit facility or any other debt increases,
our earnings would be adversely affected because the Company is generally
charging the maximum fees allowed by the respective state’s regulatory
agency. Additional information regarding interest rate risk is
included in the section captioned “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Quantitative and Qualitative
Disclosures about Market Risk and Inflation.”
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. We use interest rate swaps for interest rate risk
management and options to hedge foreign currency fluctuation risk. 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 the section captioned “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 September 2010 that
allows us to borrow up to $187.0 million, assuming we are in compliance with a
number of covenants and conditions. Because we typically use
substantially all of our available cash generated from our operations to repay
borrowings on our revolving credit agreement on a current basis, we have limited
cash balances and we expect that a significant portion of our liquidity needs
will be funded primarily from borrowings under our revolving credit
agreement. As of March 31, 2009, we had approximately $73.7
million available for future borrowings under this agreement, excluding the
seasonal line which expires each March 31. Due to the
seasonal nature of our business, our borrowings are historically the highest
during the third quarter and the lowest during the fourth
quarter. 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. See “—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,” “—Our revolving
credit agreement contains restrictions and limitations that could significantly
affect our ability to operate our business” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources” for further discussion of our liquidity
risks.
Our
revolving credit agreement contains restrictions and limitations that could
significantly affect our ability to operate our business.
Our
revolving credit agreement contains a number of significant covenants that could
adversely affect our business. These covenants impose limitations on
the Company with respect to:
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Declaring
or paying dividends or making distributions on or acquiring common or
preferred stock or warrants or
options;
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· Redeeming
or purchasing or prepaying principal or interest on subordinated
debt;
· Incurring
additional indebtedness; and
· Entering
into a merger, consolidation or sale of substantial assets or
subsidiaries.
The
breach of any covenants or obligation in our revolving credit agreement will
result in a default. If there were an event of default under our
revolving credit agreement, the lenders under the revolving credit agreement
could cause all amounts outstanding thereunder to become due and payable,
subject to applicable grace periods. This could trigger
cross-defaults under our other existing or future debt
instruments. As a result, our ability to respond to changing business
and economic conditions and to secure additional financing, if needed, may be
significantly restricted, and we may be prevented from engaging in transactions
that might further our growth strategy. If we were unable to repay,
refinance or restructure our indebtedness under our revolving credit agreement,
the lenders under that agreement could proceed against the collateral securing
that indebtedness. Our obligations under the revolving credit
agreement are guaranteed by each of our existing and future subsidiaries. The
borrowings under the revolving credit agreement and the subsidiary guarantees
are secured by substantially all of our assets and the assets of the subsidiary
guarantors. In addition, borrowings under the revolving credit
agreement are secured by a pledge of substantially all of the capital stock, or
similar equity interests, of the subsidiary guarantors. In the event
of our insolvency, liquidation, dissolution or reorganization, the lenders under
our revolving credit agreement and any other existing or future debt of ours
would be entitled to payment in full from our assets before distributions, if
any, were made to our shareholders.
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 last year has negatively affected corporate
liquidity, equity values, credit agency ratings and confidence in financial
institutions.
In
addition to cash generated from operations, the Company depends on borrowings
from institutional lenders to finance its operations, acquisitions and office
expansion plans. Therefore, notwithstanding the Company’s belief that
its current liquidity position is adequate, the Company is not insulated from
the pressures and potentially negative consequences of the current financial
crisis.
The
Company has a $187.0 million base revolving credit facility with a syndicate of
banks. The syndicate’s current commitment under this facility extends
through the end of September, 2010. As a result of the recent
turmoil, there have been reports that some banks and other providers of credit
have been unable or unwilling to meet their existing commitments or undertake
new commitments to provide funds to commercial borrowers, which has forced some
of these borrowers to either curtail certain operations or to seek operating
capital from other, and likely more expensive, sources. Should a
similar situation occur with one or more of the members of the syndicate of
banks under the Company’s revolving credit facility, the Company would be faced
with one or more undesirable alternatives, including the limitation or
curtailment of its lending operations, limitation or curtailment of its growth
and expansion plans, or an attempt to seek other, and likely more expensive,
sources of operating capital in either the corporate credit markets or the
equity markets, both of which are currently under significant
strain.
More
generally, our ability to meet our liquidity needs is subject to numerous risks
beyond our control. These risks include, but are not limited to,
downturns, uncertainties or turmoil in the corporate credit and capital markets,
the broader economy, the financial services industry or our business operations,
as well as political or social unrest, acts of war or terrorism, natural
disasters or other such disruptive events. The occurrence or
continuation of one or more of these events could negatively affect the
availability, amount or cost of our liquidity, which would adversely affect our
ongoing ability to service or refinance debt, meet contractual obligations, and
fund asset growth and new business transactions at a reasonable cost, in a
timely manner and without adverse consequences. Any substantial,
unexpected and/or prolonged change in the availability, amount or cost of
liquidity could have a material adverse effect on our financial condition and
results of operations. Additional information regarding our liquidity
risk is included under “—We depend to a substantial extent on borrowings under
our revolving credit agreement to fund our liquidity needs,” “—Our revolving
credit agreement contains restrictions and limitations that could significantly
affect our ability to operate our business” and in “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.
There are
inherent risks associated with 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.
In
particular, during times such as the challenging economic environment we are
currently experiencing, we expect that the continuation or worsening of
conditions that drive consumer confidence, spending and disposable income (such
as unemployment levels, energy costs and wage rates) will adversely affect the
levels of delinquencies and charge-offs we experience in our loan portfolio, our
provision for loan losses and, accordingly, our profitability.
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. During the fiscal year ended March 31, 2009, our four largest
states (measured by total revenues) accounted for approximately 59.0% of our
total revenues. While we believe we have a diverse geographic
presence, for the near term we expect that significant revenues will continue to
be generated by certain states, largely due to the currently prevailing
economic, demographic, regulatory, competitive and other conditions in those
states. Nonetheless, changes to prevailing economic, demographic,
regulatory or any other conditions in the markets in which we operate could lead
to a reduction in our ability to profitably offer our products and services, a
decline in our revenues or an increase in our provision for doubtful accounts
that could result in a deterioration of our financial condition. 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, 2009 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 which, although not
affecting cash flow, could have a material adverse impact on our operating
results and financial position.
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, which also could have a material
adverse effect on our stock price.
We
maintain an allowance for loan losses for loans we make directly to
consumers. To estimate the appropriate allowance for loan losses, we
consider the amount of outstanding loan balances owed to us, historical
delinquency and charge-off trends, and other factors discussed in our
consolidated financial statements.
As of
March 31, 2009, our allowance for loan losses was $38.0
million. These amounts, however, are estimates. If our
actual loan losses are greater than our allowance for loan losses, our provision
for loan losses would increase. This would result in a decline in our
future revenues and earnings, which also could have a material adverse effect on
our stock price.
Controls
and procedures may fail or be circumvented.
Controls
and procedures are particularly important for small-loan consumer finance
companies. Management regularly reviews and updates our internal
controls, disclosure controls and procedures, and corporate governance policies
and procedures. 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.
The
locations where we have offices may cease to be attractive as demographic or
economic patterns change.
The
success of our offices is significantly influenced by
location. Current locations may not continue to be attractive as
demographic patterns change. It is possible that the neighborhood or
economic conditions where our offices are located could change in the future,
potentially resulting in reduced revenues in those locations.
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. Our future performance will depend
on our ability to motivate and retain these and other key officers and key team
members, particularly divisional senior vice-presidents and regional
vice-presidents of operations. 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 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, 2009 among our office employees was
approximately 41.1%. 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. We cannot assure you that we will be
able to expand our market presence in our current markets or successfully enter
new markets through the opening of new offices or
acquisitions. Moreover, the start-up costs and the losses from
initial operations attributable to each newly opened office place demands upon
our liquidity and cash flow, and we cannot assure you that we will be able to
satisfy these demands.
In
addition, our ability to execute our growth strategy will depend on a number of
other factors, some of which are beyond our control, including:
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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;
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· 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 compete for expansion opportunities in suitable
locations;
· our
ability to recruit, train and retain qualified personnel;
· our
ability to adapt our infrastructure and systems to accommodate our growth;
and
· our
ability to obtain adequate financing for our expansion plans.
We cannot
assure you that our systems, procedures, controls and existing space will be
adequate to support expansion of our operations. Our growth has
placed significant demands on all aspects of our business, including our
administrative, technical and financial personnel and
systems. Additional expansion may further strain our management,
financial and other resources. Our future results of operations will
substantially depend on the ability of our officers and key employees to manage
changing business conditions and to implement and improve our technical,
administrative, financial control and reporting systems. In addition,
we cannot assure you that we will be able to implement our business strategy
profitably in geographic areas we do not currently serve.
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. If we are unable to continue our small consumer installment
loan business and/or diversify our operations, our revenues and earnings could
decline. Our current lack of product and business diversification
could inhibit our opportunities for growth, reduce our revenues and profits and
make us more susceptible to earnings fluctuations than many other financial
institutions who are more diversified and provide other services such as
mortgage lending, credit cards, auto financing or other similar
services. External factors, such as changes in laws and regulations,
new entrants and enhanced competition, could also make it more difficult for us
to operate as profitably as a more diversified company could
operate. Any internal or external change in our industry could result
in a decline in our revenues and earnings, which could have a material adverse
effect on our business, prospects, results of operations and financial
condition.
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. The occurrence of any failures, interruptions
or security breaches of our information systems could damage our reputation,
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.
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.
Our
business is seasonal in nature, which causes our revenues, collection rates and
earnings to fluctuate. These fluctuations could have a material
adverse effect on our results of operations and stock price.
Our
business is seasonal because demand for small consumer loans is highest in the
third quarter of each year, corresponding to the holiday seasons, and lowest in
the fourth quarter of each year, corresponding to our customers’ receipt of
income tax refunds. Our provision for loan losses is historically
lowest as a percentage of revenues in the fourth quarter of each year,
corresponding to our customers’ receipt of income tax refunds, and increases as
a percentage of revenues for the remainder of each year. This
seasonality requires us to manage our cash flows over the course of the
year. If our revenues or collections were to fall substantially below
what we would normally expect during certain periods, our ability to service our
debt and meet our other liquidity requirements may be adversely affected, which
could have a material adverse effect on our results of operations and stock
price.
In
addition, our quarterly results have fluctuated in the past and are likely to
continue to fluctuate in the future because of the seasonal nature of our
business. Therefore, our quarterly revenues and results of operations
are difficult to forecast, which, in turn could cause our future quarterly
results to not meet the expectations of securities analysts or
investors. Our failure to meet such expectations could cause a
material drop in the market price of our common stock.
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 and 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.
Overall
stock market volatility may materially and adversely affect the market price of
our common stock.
World’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 World’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; 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. Of late the stock
market in general, and the market for shares of equity securities of many
financial service companies in particular, have experienced extreme price
fluctuations that have at times been unrelated to the operating performance of
those companies. Such fluctuations and market volatility based on
these or other factors may materially and adversely affect the market price of
our common stock.
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, 2009, the Company had 944 branch offices,
most of which are leased pursuant to short-term operating
leases. During the fiscal year ended March 31, 2009, total lease
expense was approximately $14.3 million, or an average of approximately $15,900
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.
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. However, the Company believes that it is not presently a
party to any pending legal proceedings that would have a material adverse effect
on its financial condition or results of operations.
Item
4. Submission of Matters to a Vote of Security
Holders
There were no matters submitted to
the Company's security holders during the fourth fiscal quarter ended March 31,
2009.
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 May 29,
2009, there were 81 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.
Since April 1989, the Company has not
declared or paid any cash dividends on its common stock. Its policy
has been to retain earnings for use in its business and on occasion, repurchase
its common stock on the open market. In the future, the Company's
Board of Directors will determine whether to pay cash dividends based on
conditions then existing, including the Company's earnings, financial condition,
capital requirements and other relevant factors. In addition, the
Company's credit agreements contain certain restrictions on the payment of cash
dividends on its capital stock. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources.”
The company did not repurchase any of
its common stock during the quarter ended March 31, 2009.
The table below reflects the stock
prices published by NASDAQ by quarter for the last two fiscal
years. The last reported sale price on May 26, 2009 was
$18.69.
Market Price of Common
Stock
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 |
|
Fiscal 2008
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
First
|
|
$ |
45.74 |
|
|
$ |
39.27 |
|
Second
|
|
|
43.16 |
|
|
|
27.76 |
|
Third
|
|
|
35.59 |
|
|
|
26.40 |
|
Fourth
|
|
|
35.50 |
|
|
|
19.89 |
|
Item
6. Selected Financial Data
Selected
Consolidated Financial and Other Data
(Dollars
in thousands, except per share amounts)
|
|
Years Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fee income
|
|
$ |
331,454 |
|
|
$ |
292,457 |
|
|
$ |
247,007 |
|
|
$ |
204,450 |
|
|
$ |
177,582 |
|
Insurance
commissions and other income
|
|
|
62,251 |
|
|
|
53,590 |
|
|
|
45,311 |
|
|
|
38,822 |
|
|
|
33,176 |
|
Total
revenues
|
|
|
393,705 |
|
|
|
346,047 |
|
|
|
292,318 |
|
|
|
243,272 |
|
|
|
210,758 |
|
Provision
for loan losses
|
|
|
85,476 |
|
|
|
67,542 |
|
|
|
51,925 |
|
|
|
46,026 |
|
|
|
40,037 |
|
General
and administrative expenses
|
|
|
200,216 |
|
|
|
179,219 |
|
|
|
153,627 |
|
|
|
128,514 |
|
|
|
112,223 |
|
Interest
expense
|
|
|
10,389 |
|
|
|
11,569 |
|
|
|
9,596 |
|
|
|
7,137 |
|
|
|
4,640 |
|
Total
expenses
|
|
|
296,081 |
|
|
|
258,330 |
|
|
|
215,148 |
|
|
|
181,677 |
|
|
|
156,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
97,624 |
|
|
|
87,717 |
|
|
|
77,170 |
|
|
|
61,595 |
|
|
|
53,858 |
|
Income
taxes
|
|
|
36,921 |
|
|
|
34,721 |
|
|
|
29,274 |
|
|
|
23,080 |
|
|
|
19,868 |
|
Net
income
|
|
|
60,703 |
|
|
$ |
52,996 |
|
|
$ |
47,896 |
|
|
$ |
38,515 |
|
|
$ |
33,990 |
|
Net
income per common share (diluted)
|
|
$ |
3.69 |
|
|
$ |
3.05 |
|
|
$ |
2.60 |
|
|
$ |
2.02 |
|
|
$ |
1.74 |
|
Diluted
weighted average shares
|
|
|
16,464 |
|
|
|
17,375 |
|
|
|
18,394 |
|
|
|
19,098 |
|
|
|
19,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net of unearned and deferred fees
|
|
$ |
498,433 |
|
|
$ |
445,091 |
|
|
$ |
378,038 |
|
|
$ |
312,746 |
|
|
$ |
267,024 |
|
Allowance
for loan losses
|
|
|
(38,021 |
) |
|
|
(33,526 |
) |
|
|
(27,840 |
) |
|
|
(22,717 |
) |
|
|
(20,673 |
) |
Loans
receivable, net
|
|
|
460,412 |
|
|
|
411,565 |
|
|
|
350,198 |
|
|
|
290,029 |
|
|
|
246,351 |
|
Total
assets
|
|
|
531,254 |
|
|
|
486,110 |
|
|
|
411,116 |
|
|
|
332,784 |
|
|
|
293,507 |
|
Total
debt
|
|
|
208,310 |
|
|
|
214,900 |
|
|
|
171,200 |
|
|
|
100,600 |
|
|
|
83,900 |
|
Shareholders'
equity
|
|
|
290,386 |
|
|
|
234,305 |
|
|
|
215,493 |
|
|
|
210,430 |
|
|
|
189,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of average loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
17.6 |
% |
|
|
15.8 |
% |
|
|
14.5 |
% |
|
|
15.4 |
% |
|
|
15.3 |
% |
Net
charge-offs
|
|
|
16.7 |
% |
|
|
14.5 |
% |
|
|
13.3 |
% |
|
|
14.8 |
% |
|
|
14.6 |
% |
Number
of offices open at year-end
|
|
|
944 |
|
|
|
838 |
|
|
|
732 |
|
|
|
620 |
|
|
|
579 |
|
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, 2004, gross loans receivable have
increased at a 16.7% annual compounded rate from $310.1 million to $671.2
million at March 31, 2009. 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
470 offices to 944 offices as of March 31, 2009. During fiscal 2010,
the Company plans to open or acquire approximately 30 new offices in the United
States and 15 new offices in Mexico.
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 $13.0 million during
fiscal 2009, compared to $16.2 million in fiscal 2008. World Class
Buying Club represents less than 2% 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
1,465 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 greatly from year to year. Its net
revenues from system sales and support amounted to $2.0 million, $2.2 million
and $2.5 million in fiscal 2009, 2008 and 2007,
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 also includes in its
product line larger balance, lower risk, and lower yielding individual consumer
loans. These loans typically average $1,000 to $3,000, with terms of
generally 18 to 24 months, compared to smaller loans, which average $300 to
$1,000, with terms of generally 8 to 12 months. The Company offers
the larger loans in all states except Texas, where they are not profitable under
our lending criteria and strategy. Additionally, the Company has
purchased over the years numerous larger loan offices and has made several bulk
purchases of larger loans receivable. As of March 31, 2009, the
larger loan category accounted for approximately $191.4 million of gross loans
receivable, a 22.7% increase over the balance outstanding at March 31,
2008. At the end of the current fiscal year, this portfolio was 28.5%
of the total loan balances, a slight increase from the previous year mix of
26.0%. Management believes that these loans provide lower expense and
loss ratios, and thus provide positive contributions.
The Company offers an income tax
return preparation and access to refund anticipation loan program in all but a
few of its offices. Based on the results of this test, the Company
expanded this program in fiscal 2000 into substantially all of its
offices. The Company prepared approximately 63,000, 65,000 and 60,000
returns in each of the fiscal years 2009, 2008 and 2007,
respectively. Net revenue generated by the Company from this program
during fiscal 2009 amounted to approximately $9.9 million. 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.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Average
gross loans receivable (1)
|
|
$ |
658,587 |
|
|
|
576,050 |
|
|
|
480,120 |
|
Average
net loans receivable (2)
|
|
|
486,776 |
|
|
|
426,524 |
|
|
|
358,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
as a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
21.7 |
% |
|
|
19.5 |
% |
|
|
17.8 |
% |
General
and administrative
|
|
|
50.9 |
% |
|
|
51.8 |
% |
|
|
52.6 |
% |
Total
interest expense
|
|
|
2.6 |
% |
|
|
3.3 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin (3)
|
|
|
27.4 |
% |
|
|
28.7 |
% |
|
|
29.7 |
% |
Return
on average assets
|
|
|
11.6 |
% |
|
|
11.3 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Offices
opened and acquired, net
|
|
|
106 |
|
|
|
106 |
|
|
|
112 |
|
Total
offices (at period end)
|
|
|
944 |
|
|
|
838 |
|
|
|
732 |
|
(1)
|
Average
gross loans receivable have been determined by averaging month-end gross
loans receivable over the indicated
period.
|
(2)
|
Average
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 below under “– Recently Issued Accounting Pronouncements – Convertible
Debt Instruments,” in the first quarter of fiscal 2010, we will be required to
adopt FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”), and apply it retrospectively to all periods
presented with a cumulative effect adjustment being made as of the earliest
period presented. Adoption of FSP APB 14-1 will affect our fiscal
2009 and fiscal 2008 consolidated statements of operations and balance sheets as
reported in future periods to the extent described in Note 1, Summary of
Significant Accounting Policies in Part II, Item 8 of this report.
Comparison
of Fiscal 2009 Versus Fiscal 2008
Net income was $60.7 million during
fiscal 2009, a 14.5% increase over the $53.0 million earned during fiscal
2008. This increase resulted from an increase in operating income
(revenues less provision for loan losses and general and administrative
expenses) of $8.7 million, or 8.8%, a reduction in the income tax effective rate
and a reduction in interest expense.
Total revenues increased to $393.7
million in fiscal 2009, a $47.7 million, or 13.8%, 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 $8.7 million, or 16.2%, 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 $6.6 million, or 28.6%, over the two
years, primarily due to a $1.5 million gain on the sale of the foreign currency
option and a $5.5 million gain on the extinguishment of $15 million par value of
the Convertible Notes. See Note 8 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. Delinquencies 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
50.9% during fiscal 2009. This decrease resulted from management’s
ongoing monitoring and control of expenses.
Interest expense decreased by $1.2
million, or 10.2%, 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 5.4% in fiscal 2008 to 4.4% in fiscal 2009.
Income tax expense increased $2.2
million, or 6.3%, primarily from an increase in pre-tax income. The
decrease in the effective rate from 39.6% to 37.8% was a result of the prior
year tax examination discussed in Note 13 to our Consolidated Financial
Statements. At this time, it is too early to predict the outcome on
this tax issue and any future recoverability of this
charge. Until the tax issue is resolved, the Company expects to
accrue approximately $40,000 per quarter for interest and
penalties.
Comparison
of Fiscal 2008 Versus Fiscal 2007
Net income was $53.0 million during
fiscal 2008, a 10.6% increase over the $47.9 million earned during fiscal
2007. This increase resulted from an increase in operating income of
$12.5 million, or 14.4%, partially offset by an increase in interest expense and
income taxes.
Total revenues increased to $346.0
million in fiscal 2008, a $53.7 million, or 18.4%, increase over the $292.3
million in fiscal 2007. Revenues from the 645 offices open
throughout both fiscal years increased by 8.9%. At March 31, 2008,
the Company had 838 offices in operation, an increase of 106 offices from March
31, 2007.
Interest and fee income during fiscal
2008 increased by $45.5 million, or 18.4%, over fiscal 2007. This
increase resulted from an increase of $68.5 million, or 19.1%, in average net
loans receivable between the two fiscal years. The increase in
average loans receivable was attributable to the Company acquiring approximately
$3.1 million in net loans and internal growth. During fiscal 2008,
internal growth increased because the Company opened 95 new offices and the
average loan balance increased from $837 to $877.
Insurance commissions and other income
increased by $8.3 million, or 18.3%, over the two fiscal
years. Insurance commissions increased by $6.0 million, or 24.5%, as
a result of the increase in loan volume in states where credit insurance is
sold. Other income increased by $2.3 million, or 11.0%, over the two
years, primarily due to an increase in fees received from income tax return
preparation of $1.5 million, an increase in motor club product sales of $1.1
million and an $0.8 million increase in World Class Buying Club
sales. This increase was partially offset by a $1.8 million loss
related to our interest rate swap.
The provision for loan losses during
fiscal 2008 increased by $15.6 million, or 30.1%, 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 2008 amounted to $62.0 million, a
29.8% increase over the $47.7 million charged off during fiscal 2007. Net
charge-offs as a percentage of average loans increased from 13.3% to 14.5% when
comparing the two annual periods. This increase was mainly attributed
to a change in the bankruptcy laws which decreased the number of bankruptcy
filings in fiscal 2007. However, in fiscal 2008 the bankruptcy
charge-offs returned to more historical levels. This resulted in the
fiscal 2008 net charge-offs being more in line with historical losses
of 14.8% in 2006, 14.6% in 2005, 14.7% in 2004 and 14.6% in
2003. Delinquencies on a recency basis increased from 2.2% to 2.6%
and on a contractual basis increased from 3.6% to 4.0% at March 31, 2007 and
March 31, 2008, respectively.
General and administrative expenses
during fiscal 2008 increased by $25.6 million, or 16.7%, 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, decreased by
0.6% when comparing the two fiscal years and, overall, general and
administrative expenses as a percent of total revenues decreased from 52.6% in
fiscal 2007 to 51.8% during fiscal 2008.
Interest expense increased by $2.0
million, or 20.6%, during fiscal 2008, as compared to the previous fiscal year
as a result of an increase in average debt outstanding of 40.2%. This
was offset by a decrease in average interest rates from 6.3% in fiscal 2007 to
5.4% in fiscal 2008.
Income tax expense increased $5.4
million, or 18.6%, primarily from an increase in pre-tax income and a charge of
$1.5 million related to a tax examination. A state jurisdiction has
completed its examinations and issued a proposed assessment for tax years 2001
through 2006. In consideration of the proposed assessment, net income for fiscal
2008 was reduced by a charge of $1.5 million and the total gross unrecognized
tax benefits was increased by $2.3 million in fiscal 2008 as a result of this
examination. As a result, the Company’s effective income tax rate
increased to 39.6% for the year ended March 31, 2008 from 37.9% for the year
ended March 31, 2007.
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.
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 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.
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.
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,
2009, 2008, and 2007:
|
|
At March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
Recency
basis:
|
|
|
|
|
|
|
|
|
|
61-90
days past due
|
|
$ |
11,304 |
|
|
|
10,414 |
|
|
|
7,732 |
|
91
days or more past due
|
|
|
6,661 |
|
|
|
5,003 |
|
|
|
3,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,965 |
|
|
|
15,417 |
|
|
|
11,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of period-end gross loans receivable
|
|
|
2.7 |
% |
|
|
2.6 |
% |
|
|
2.2 |
% |
Contractual
basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
61-90
days past due
|
|
$ |
14,223 |
|
|
|
12,838 |
|
|
|
9,684 |
|
91
days or more past due
|
|
|
13,673 |
|
|
|
11,123 |
|
|
|
8,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
27,896 |
|
|
|
23,961 |
|
|
|
17,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of period-end gross loans receivable
|
|
|
4.2 |
% |
|
|
4.0 |
% |
|
|
3.5 |
% |
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.
The Company experienced an increase in
contractual delinquency from 4.0% at March 31, 2008 to 4.2% at March 31,
2009. The delinquency rate on a recency basis also increased from
2.6% at the end of fiscal 2008 to 2.7% at the end of the current fiscal
year. Charge-offs as a percent of average loans increased from 14.5%
in fiscal 2008 to 16.7% in fiscal 2009.
In fiscal 2009, approximately 84.0% 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 2009, 2008,
and 2007, the percentages of the Company’s loan originations that were
refinancings of existing loans were 75.0%, 73.3% and 74.3%,
respectively. The Company’s refinancing policies, while limited by
state regulations, in all cases consider our customer’s payment history and
require that our customer have 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 2009, delinquent refinancings
represented 2.1% of the Company’s total loan volume compared to 1.9% in fiscal
2008.
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 2009:
|
|
Loan
Volume
|
|
|
Percent
of
|
|
|
Percent
of Total
|
|
|
|
by Category
|
|
|
Total Charge-offs
|
|
|
Loans Made by Category
|
|
|
|
|
|
|
|
|
|
|
|
Refinancing
|
|
|
75.0 |
% |
|
|
73.0 |
% |
|
|
5.4 |
% |
Former
borrowers
|
|
|
9.0 |
% |
|
|
5.9 |
% |
|
|
4.0 |
% |
New
borrowers
|
|
|
16.0 |
% |
|
|
21.1 |
% |
|
|
11.7 |
% |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
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
Statement of Accounting Standards No. 5 “Accounting for Contingencies” (SFAS No.
5), 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, 2009, 2008, and 2007. 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 3 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.
Statement of Position No. 03-3 (SOP
03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,”
was adopted by the Company on April 1, 2005. SOP 03-3 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
SOP. 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 SOP 03-3 have not shown evidence of deterioration of
credit quality since origination, and therefore, are not within the scope of SOP
03-3 because there is no consideration paid for acquired loans over 60 days
delinquent. For the years ended March 31, 2009, 2008 and 2007, the
Company recorded adjustments of approximately $0.5 million, $0.1 million and
$0.9 million, respectively, to the allowance for loan losses in connection with
acquisitions in accordance generally accepted accounting
principles. These adjustments represent the allowance for loan losses
on acquired loans which are not within the scope of SOP 03-3.
The Company believes that its
allowance for loan losses is adequate to cover losses in the existing portfolio
at March 31, 2009.
The following is a summary of the
changes in the allowance for loan losses for the years ended March 31, 2009,
2008, and 2007:
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the year
|
|
$ |
33,526,147 |
|
|
|
27,840,239 |
|
|
|
22,717,192 |
|
Provision
for loan losses
|
|
|
85,476,092 |
|
|
|
67,541,805 |
|
|
|
51,925,080 |
|
Loan
losses
|
|
|
(88,728,498 |
) |
|
|
(68,985,269 |
) |
|
|
(53,979,375 |
) |
Recoveries
|
|
|
7,590,928 |
|
|
|
6,989,297 |
|
|
|
6,230,010 |
|
Translation
adjustment
|
|
|
(306,340 |
) |
|
|
18,135 |
|
|
|
(956 |
) |
Allowance
on acquired loans
|
|
|
462,441 |
|
|
|
121,940 |
|
|
|
948,288 |
|
Balance
at the end of the year
|
|
$ |
38,020,770 |
|
|
|
33,526,147 |
|
|
|
27,840,239 |
|
Allowance
as a percentage of loans receivable, net of unearned and deferred
fees
|
|
|
7.6 |
% |
|
|
7.5 |
% |
|
|
7.4 |
% |
Net
charge-offs as a percentage of average loans receivable (1)
|
|
|
16.7 |
% |
|
|
14.5 |
% |
|
|
13.3 |
% |
(1)
|
Average
loans receivable have been determined by averaging month-end gross loans
receivable less unearned interest and deferred fees over the indicated
period.
|
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
2009 and 2008.
|
|
At
or for the Three Months Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
|
First,
|
|
|
Second,
|
|
|
Third,
|
|
|
Fourth,
|
|
|
First,
|
|
|
Second,
|
|
|
Third,
|
|
|
Fourth,
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
88,421 |
|
|
|
91,721 |
|
|
|
99,656 |
|
|
|
113,907 |
|
|
|
76,389 |
|
|
|
80,198 |
|
|
|
88,043 |
|
|
|
101,417 |
|
Provision
for loan losses
|
|
|
17,857 |
|
|
|
23,307 |
|
|
|
29,490 |
|
|
|
14,822 |
|
|
|
14,217 |
|
|
|
18,416 |
|
|
|
23,224 |
|
|
|
11,685 |
|
General
and administrative expenses
|
|
|
48,790 |
|
|
|
48,379 |
|
|
|
51,716 |
|
|
|
51,331 |
|
|
|
42,191 |
|
|
|
41,930 |
|
|
|
47,470 |
|
|
|
47,628 |
|
Net
income
|
|
|
12,052 |
|
|
|
10,664 |
|
|
|
10,004 |
|
|
|
27,983 |
|
|
|
10,850 |
|
|
|
10,466 |
|
|
|
7,288 |
|
|
|
24,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loans receivable
|
|
$ |
632,715 |
|
|
|
667,179 |
|
|
|
736,234 |
|
|
|
671,176 |
|
|
|
544,964 |
|
|
|
571,319 |
|
|
|
663,217 |
|
|
|
599,509 |
|
Number
of offices open
|
|
|
872 |
|
|
|
907 |
|
|
|
923 |
|
|
|
944 |
|
|
|
782 |
|
|
|
817 |
|
|
|
831 |
|
|
|
838 |
|
Recently
Issued Accounting Pronouncements
Business
Combinations
In
December 2007, the Financial Accounting Standards Board issued
SFAS No. 141 (revised 2007), Business
Combinations, (“SFAS No. 141R”), which replaces
SFAS No. 141, Business Combinations.
SFAS No. 141R requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. SFAS No. 141R also requires acquisition-related costs and
restructuring costs that the acquirer expected, but was not obligated to incur
at the acquisition date, to be recognized separately from the business
combination. In addition, SFAS No. 141R amends SFAS No. 109,
Accounting for Income Taxes,
to require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a business combination
either in income from continuing operations in the period of the combination or
directly in contributed capital. SFAS No. 141R applies prospectively
to business combinations in fiscal years beginning on or after December 15,
2008 and would therefore impact our accounting for future acquisitions beginning
in fiscal 2010.
Disclosures
about Derivative Instruments and Hedging Activities
Statement
161, which amends FASB Statement No. 133, “Accounting for Derivative Instruments
and Hedging Activities,“ requires companies with derivative instruments to
disclose information about how and why a company uses derivative instruments,
how derivative instruments and related hedged items are accounted for under
Statement 133, and how derivative instruments and related hedged items affect a
company's financial position, financial performance, and cash flows. The
required disclosures include the fair value of derivative instruments and their
gains or losses in tabular format, information about credit-risk-related
contingent features in derivative agreements, counterparty credit risk, and the
company's strategies and objectives for using derivative instruments. The
Statement expands the current disclosure framework in Statement 133. Statement
161 is effective prospectively for periods beginning on or after November 15,
2008. See Note 9 to our Consolidated Financial
Statements.
Fair
Value Option for Financial Assets and Financial Liabilities
On
February 15, 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The
Fair Value Option for Financial Assets and Financial Liabilities,” which allows
an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these financial
assets and liabilities would be recognized in earnings when they occur. SFAS 159
further establishes certain additional disclosure requirements. SFAS 159 is
effective for the first fiscal period beginning after November 15,
2007. The adoption of this standard did not have a material impact on
our Consolidated Financial Statements.
Convertible
Debt Instruments
On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1
applies to any convertible debt instrument that at conversion may be settled
wholly or partly with cash, requires cash-settleable convertibles to be
separated into their debt and equity components at issuance and prohibits the
use of the fair-value option for such instruments. FSP APB 14-1 is
effective for the first fiscal period beginning after December 15, 2008 and must
be applied retrospectively to all periods presented with a cumulative effect
adjustment being made as of the earliest period presented. We will be
required to adopt FSP APB 14-1 in the first quarter of fiscal
2010. See Item 8, Financial Statements and Supplementary Data, Note
1: Summary of Significant Accounting Policies for a description of
the impact on our Consolidated Financial Statements.
Instruments
Indexed to an Entity’s Own Stock
In June
2008, the FASB ratified EITF Issue 07-5, “Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5
provides a new two-step model to be applied to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative
in paragraphs 6-9 of Statement No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” (“SFAS 133”) in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. It also
clarifies on the impact of foreign currency denominated strike prices and
market-based employee stock option valuation instruments on the evaluation. EITF
07-5 also applies to any freestanding financial instrument that is potentially
settled in an entity’s own stock, regardless of whether the instrument has all
the characteristics of a derivative in paragraphs 6-9 of SFAS 133, for purposes
of determining whether the instrument is within the scope of EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”. EITF 07-5 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. The
Company is in the process of assessing the effect that the adoption of EITF 07-5
will have on our Consolidated Financial Statements.
Useful
Life of Intangible Assets
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3,”Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3
applies to all recognized intangible assets and its guidance is restricted to
estimating the useful life of recognized intangible assets. FSP FAS
142-3 is effective for the first fiscal period beginning after December 15, 2008
and must be applied prospectively to intangible assets acquired after the
effective date. We will be required to adopt FSP FAS 142-3 to
intangible assets acquired beginning with the first quarter of fiscal
2010.
Liquidity
and Capital Resources
The Company has financed and
continues to finance its operations, acquisitions and office expansion through a
combination of cash flow from operations and borrowings from its institutional
lenders. The Company has generally applied its cash flow 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 $671.2 million at March 31, 2009, net cash provided by operating activities
for fiscal years 2009, 2008 and 2007 was $153.9 million, $136.0 million and
$110.1 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. In November 2007 and February 2008, the Board of Directors
authorized the Company to increase its share repurchase program by an additional
$10 million, respectively. As of March 31, 2009, 6,454,144 shares have been
repurchased since 2000 for respective aggregate purchase price of approximately
$149.7 million. During fiscal 2009 the Company repurchased 288,700 shares for
$7.8 million. During fiscal 2009, the Company repurchased $15.0 million par
value of its Convertible Senior Subordinated notes payable. 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 or acquire approximately 30 branches in the United States and 15 branches
in Mexico in fiscal 2010. Expenditures by the Company to open and
furnish new offices generally averaged approximately $25,000 per office during
fiscal 2009. New offices have also required from $100,000 to $400,000
to fund outstanding loans receivable originated during their first 12 months of
operation.
The Company acquired a net of 11
offices and a number of loan portfolios from competitors in 7 states in 14
separate transactions during fiscal 2009. Gross loans receivable purchased in
these transactions were approximately $10.9 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 $187.0 million base
credit facility with a syndicate of banks. In addition to the base
revolving credit commitment, there is a $30 million seasonal revolving credit
commitment available November 15 of each year through March 31 of the
immediately succeeding year to cover the increase in loan demand during this
period. The credit facility will expire on September 30,
2010. 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 1.80% per annum. At March 31, 2009, the
interest rate on borrowings under the revolving credit facility was
3.25%. 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, 2009, $113.3 million was outstanding under this facility, and there
was $73.7 million of unused borrowing availability under the borrowing base
limitations, excluding the seasonal line which expires each March
31.
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, 2009 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 7 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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
Convertible
Senior Subordinated Notes Payable
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
95,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
95,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
of Notes Payable
|
|
|
- |
|
|
|
113,310 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
113,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Payments on Convertible Senior Subordinated Notes Payable
|
|
|
2,850 |
|
|
|
2,850 |
|
|
|
2,850 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Payments on Notes Payable
|
|
|
3,683 |
|
|
|
1,841 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Lease Payments
|
|
|
12,977 |
|
|
|
8,416 |
|
|
|
3,840 |
|
|
|
843 |
|
|
|
217 |
|
|
|
- |
|
|
|
26,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
19,510 |
|
|
$ |
126,417 |
|
|
$ |
101,690 |
|
|
$ |
843 |
|
|
$ |
217 |
|
|
$ |
- |
|
|
$ |
248,677 |
|
As of March 31, 2009, the Company’s
contractual obligations relating to FIN 48 included unrecognized tax benefits of
$3.9 million which are expected to be settled in greater than one
year. While the settlement of the obligation is expected to be in
excess of one year, the precise timing of the settlement is
indeterminable.
The Company believes that cash flow
from operations and borrowings under its revolving credit facility will be
adequate for the next twelve months, and for the foreseeable future thereafter,
to fund the expected cost of opening or acquiring new offices, including
funding initial operating losses of new offices and funding loans
receivable originated by those offices and the Company's other
offices. Except as otherwise discussed in this report, including in
Part 1, Item 1A, “Risk Factors,” management is not currently aware of any
trends, demands, commitments, events or uncertainties that it believes will or
could result in, or are or could be reasonably likely to result in, the
Company’s liquidity increasing or decreasing in any material
way. From time to time, the Company has needed and obtained, and
expects that it will continue to need on a periodic basis, an increase in the
borrowing limits under its revolving credit facility. The Company has
successfully obtained such increases in the past and anticipates that it will be
able to do so in the future as the need arises; however, there can be no
assurance that this additional funding will be available (or available on
reasonable terms) if and when needed. See Part I, Item 1A, “Risk Factors,” for a
further discussion of risks and contingencies that could affect our business,
financial condition and liquidity.
Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Risk
As of March 31, 2009, the Company’s
financial instruments consist of the following: cash, loans
receivable, senior notes payable, convertible senior subordinated notes payable,
and an interest rate swap. Fair value approximates carrying value for
all of these instruments, except the convertible senior subordinated notes
payable, for which the fair value of $61,701,550 represents the quoted market
price. Loans receivable are originated at prevailing market rates and have an
average life of approximately four months. Given the short-term
nature of these loans, they are continually repriced at current market
rates. The Company’s outstanding debt under its revolving
credit facility was $113.3 million at March 31, 2009. Interest on
borrowings under this facility is based, at the Company’s option, on the prime
rate or LIBOR plus 1.80%.
Based on the outstanding balance at
March 31, 2009, a change of 1% in the LIBOR interest rate would cause a change
in interest expense of approximately $633,000 on an annual
basis.
In October 2005, the Company entered
into an interest rate swap to economically hedge the variable cash flows
associated with $30 million of its LIBOR-based borrowings. This swap
converted the $30 million from a variable rate of one-month LIBOR to a fixed
rate of 4.755% for a period of five years. In December 2008, the
Company entered into a $20 million interest rate swap to convert a variable rate
of one month LIBOR to a fixed rate of 2.4%. In accordance with SFAS
133, the Company records derivatives at fair value, as other assets or
liabilities, on the consolidated balance sheets. Since the Company is
not utilizing hedge accounting under SFAS 133, changes in the fair value of the
derivative instrument are included in other income. As of March 31,
2009 the fair value of the interest rate swap was a liability of $2.4 million
and included in other liabilities. The change in fair value from the
beginning of the year, recorded as an unrealized loss in other income, was
approximately $773,000.
On October 10, 2006, the Company issued
$110 million convertible senior subordinated notes due October 1, 2011 (the
“Convertible Notes”) to qualified institutional brokers in accordance with Rule
144A of the Securities Act of 1933. Interest on the Convertible Notes
is fixed at 3% and is payable semi-annually in arrears on April 1 and October 1
of each year, commencing April 1, 2007. During fiscal 2009, the
company repurchased and cancelled $15.0 million of the convertible senior
subordinated notes. See Note 8 to the Consolidated Financial
Statements included in this report for more information regarding these
repurchases.
Foreign
Currency Exchange Rate Risk
In September 2005 the Company began
opening offices in Mexico, where local businesses utilize the Mexican peso as
their functional currency. The consolidated financial statements of the
Company are denominated in U.S. dollars and are therefore subject to fluctuation
as the U.S. dollar and Mexican peso foreign exchange rate
changes. International revenues were approximately 3.1% of total
revenues for the year ended March 31, 2009 and net loans denominated in Mexican
pesos were approximately $12.0 million (USD) at March 31, 2009.
The Company’s foreign currency exchange
rate exposures may change over time as business practices evolve and could have
a material effect on its financial results. There have been, and there may
continue to be, period-to-period fluctuations in the relative portions of
Mexican revenues.
Because earnings are affected by
fluctuations in the value of the U.S. dollar against foreign currencies, an
analysis was performed assuming a hypothetical 10% increase or decrease in the
value of the U.S. dollar relative to the Mexican peso in which the Company’s
transactions in Mexico are denominated. At March 31, 2009, the
analysis indicated that such market movements would not have had a material
effect on the consolidated financial statements. The actual effects
on the consolidated financial statements in the future may differ materially
from results of the analysis for the year ended March 31, 2009. The
Company will continue to monitor and assess the effect of currency fluctuations
and may institute further hedging alternatives.
Inflation
The Company does not believe that
inflation has a material adverse effect on its financial condition or results of
operations. The primary impact of inflation on the operations of the
Company is reflected in increased operating costs. While increases in
operating costs would adversely affect the Company's operations, the consumer
lending laws of two of the eleven states in which the Company operates allow
indexing of maximum loan amounts to the Consumer Price Index. These
provisions will allow the Company to make larger loans at existing interest
rates in those states, which could partially offset the potential increase in
operating costs due to inflation.
Legal
Matters
As of March 31, 2009, the Company and
certain of its subsidiaries have been named as defendants in various legal
actions arising from their normal business activities in which damages in
various amounts are claimed. Although the amount of any ultimate
liability with respect to such matters cannot be determined, the Company
believes that any such liability will not have a material adverse effect on the
Company’s consolidated financial condition or results of operations taken as a
whole.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
“Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Quantitative and Qualitative
Disclosures about Market Risk” of this report is incorporated by reference in
response to this Item 7A.
Part
II
Item
8. Financial Statements and Supplementary Data
CONSOLIDATED
BALANCE SHEETS
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,260,410 |
|
|
|
7,589,575 |
|
Gross
loans receivable
|
|
|
671,175,985 |
|
|
|
599,508,969 |
|
Less:
|
|
|
|
|
|
|
|
|
Unearned
interest and deferred fees
|
|
|
(172,743,440 |
) |
|
|
(154,418,105 |
) |
Allowance
for loan losses
|
|
|
(38,020,770 |
) |
|
|
(33,526,147 |
) |
Loans
receivable, net
|
|
|
460,411,775 |
|
|
|
411,564,717 |
|
Property
and equipment, net
|
|
|
23,060,360 |
|
|
|
18,654,010 |
|
Deferred
income taxes
|
|
|
16,983,275 |
|
|
|
22,134,066 |
|
Other
assets, net
|
|
|
9,970,016 |
|
|
|
10,818,057 |
|
Goodwill
|
|
|
5,580,946 |
|
|
|
5,352,675 |
|
Intangible
assets, net
|
|
|
8,987,551 |
|
|
|
9,997,327 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
531,254,333 |
|
|
|
486,110,427 |
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Senior
notes payable
|
|
|
113,310,000 |
|
|
|
104,500,000 |
|
Convertible
senior subordinated notes payable
|
|
|
95,000,000 |
|
|
|
110,000,000 |
|
Other
notes payable
|
|
|
- |
|
|
|
400,000 |
|
Income
taxes payable
|
|
|
11,253,460 |
|
|
|
18,039,242 |
|
Accounts
payable and accrued expenses
|
|
|
21,304,466 |
|
|
|
18,865,913 |
|
Total
liabilities
|
|
|
240,867,926 |
|
|
|
251,805,155 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value Authorized 5,000,000 shares, no shares issued or
outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock, no par value Authorized 95,000,000 shares; issued and outstanding
16,211,659 and 16,278,684 shares at March 31, 2009 and 2008,
respectively
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
2,420,916 |
|
|
|
1,323,001 |
|
Retained
earnings
|
|
|
292,195,154 |
|
|
|
232,812,768 |
|
Accumulated
other comprehensive income (loss), net of tax
|
|
|
(4,229,663 |
) |
|
|
169,503 |
|
Total
shareholders' equity
|
|
|
290,386,407 |
|
|
|
234,305,272 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
$ |
531,254,333 |
|
|
|
486,110,427 |
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Interest
and fee income
|
|
$ |
331,453,835 |
|
|
|
292,457,259 |
|
|
|
247,007,668 |
|
Insurance
commissions and other income
|
|
|
62,251,485 |
|
|
|
53,589,595 |
|
|
|
45,310,752 |
|
Total
revenues
|
|
|
393,705,320 |
|
|
|
346,046,854 |
|
|
|
292,318,420 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
85,476,092 |
|
|
|
67,541,805 |
|
|
|
51,925,080 |
|
General
and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
130,674,094 |
|
|
|
119,483,185 |
|
|
|
102,824,945 |
|
Occupancy
and equipment
|
|
|
|