Unassociated Document

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

Form 10-Q

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

For the quarterly period ended June 30, 2009

or

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

For the transition period from                                 to                                

Commission File Number:  0-19599

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

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

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

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

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

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

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

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

The number of outstanding shares of the issuer’s no par value common stock as of August 3, 2009 was 16,231,962.

 
 

 

WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES

TABLE OF CONTENTS

   
Page
     
PART I - FINANCIAL INFORMATION
     
Item 1.
Consolidated Financial Statements (unaudited):
 
     
 
Consolidated Balance Sheets as of June 30,
 
 
2009, March 31, 2009 and June 30, 2008
     
 
Consolidated Statements of Operations for the
 
 
three months ended June 30, 2009 and June 30, 2008
     
 
Consolidated Statements of Shareholders' Equity and
 
 
Comprehensive Income for the year ended March 31, 2009
 
 
and the three months ended June 30, 2009
     
 
Consolidated Statements of Cash Flows for the
 
 
three months ended June 30, 2009 and June 30, 2008
     
 
Notes to Consolidated Financial Statements
     
Item 2.
Management's Discussion and Analysis of Financial
21
 
Condition and Results of Operations
 
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
25
     
Item 4.
Controls and Procedures
26
     
PART II - OTHER INFORMATION
     
Item 1.
Legal Proceedings
27
     
Item 1A.
Risk Factors
27
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
     
Item 5.
Other Information
27
     
Item 6.
Exhibits
28
     
Signatures
30

 
2

 

WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
June 30,
   
March 31,
   
June 30,
 
   
2009
   
2009
   
2008
 
         
As Adjusted (Note 2)
 
 ASSETS
                 
                   
Cash and cash equivalents
  $ 7,139,948       6,260,410       8,098,525  
Gross loans receivable
    726,057,092       671,175,985       632,715,266  
Less:
                       
Unearned interest and fees
    (191,761,203 )     (172,743,440 )     (165,208,801 )
Allowance for loan losses
    (40,786,537 )     (38,020,770 )     (35,288,061 )
Loans receivable, net
    493,509,352       460,411,775       432,218,404  
Property and equipment, net
    23,318,963       23,060,360       20,100,045  
Deferred income taxes
    12,700,000       12,250,834       11,848,452  
Other assets, net
    9,560,074       9,541,757       9,986,376  
Goodwill
    5,580,946       5,580,946       5,379,008  
Intangible assets, net
    8,513,911       8,987,551       10,275,201  
Total assets
  $ 560,323,194       526,093,633       497,906,011  
                         
LIABILITIES & SHAREHOLDERS' EQUITY
                       
                         
Liabilities:
                       
Senior notes payable
    137,660,000       113,310,000       116,900,000  
Convertible senior subordinated notes payable
    85,000,000       95,000,000       110,000,000  
Debt discount
    (9,097,354 )     (11,268,462 )     (16,650,645 )
Other notes payable
    -       -       200,000  
Income taxes payable
    12,591,774       11,412,722       11,774,236  
Accounts payable and accrued expenses
    20,464,462       21,304,466       15,960,797  
Total liabilities
    246,618,882       229,758,726       238,184,388  
                         
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 16,231,962, 16,211,659, and 16,360,543 shares at  June 30, 2009, March 31, 2009, and June 30, 2008, respectively
    -       -       -  
Additional paid-in capital
    18,167,930       17,046,310       19,400,738  
Retained earnings
    298,153,332       283,518,260       239,689,954  
Accumulated other comprehensive (loss) income
    (2,616,950 )     (4,229,663 )     630,931  
Total shareholders' equity
    313,704,312       296,334,907       259,721,623  
Commitments and contingencies
                       
    $ 560,323,194       526,093,633       497,906,011  

See accompanying notes to consolidated financial statements.

 
3

 

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

   
Three months ended
 
   
June 30,
 
   
2009
   
2008
 
         
As Adjusted
 
         
(Note 2)
 
Revenues:
           
Interest and fee income
  $ 85,067,798       76,349,486  
Insurance and other income
    15,162,567       12,071,545  
Total revenues
    100,230,365       88,421,031  
                 
Expenses:
               
Provision for loan losses
    20,428,263       17,856,913  
General and administrative expenses:
               
Personnel
    36,291,309       33,315,775  
Occupancy and equipment
    6,703,673       6,053,650  
Data processing
    533,596       589,447  
Advertising
    2,372,500       2,709,965  
Amortization of intangible assets
    564,770       600,347  
Other
    6,866,897       5,520,671  
      53,332,745       48,789,855  
                 
Interest expense
    3,110,147       3,608,563  
Total expenses
    76,871,155       70,255,331  
                 
Income before income taxes
    23,359,210       18,165,700  
                 
Income taxes
    8,724,138       6,822,500  
                 
Net income
  $ 14,635,072       11,343,200  
                 
Net income per common share:
               
Basic
  $ 0.90       0.70  
Diluted
  $ 0.90       0.68  
                 
Weighted average common equivalent shares outstanding:
               
Basic
    16,225,294       16,270,939  
Diluted
    16,351,157       16,573,100  

See accompanying notes to consolidated financial statements.

 
4

 
 
WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Unaudited)
               
Accumulated
             
               
Other
             
   
Additional
         
Comprehensive
   
Total
   
Total
 
   
Paid-in
   
Retained
   
Income
   
Shareholders’
   
Comprehensive
 
   
Capital
   
Earnings
   
(Loss)
   
Equity
   
Income
 
Balances at March 31, 2008
  $ 1,323,001       232,812,768       169,503       234,305,272        
Cumulative effect of change in accounting principle (Note 2)
    14,961,722       (4,466,014 )     -       10,495,708        
Proceeds from exercise of stock options (142,683 shares), including tax benefits of $1,320,974
    2,975,335       -       -        2,975,335          
Common stock repurchases (288,700 shares)
    (6,527,680 )     (1,321,084 )     -       (7,848,764 )        
Issuance of restricted common stock under stock option plan (78,592 shares)
    1,418,031       -       -       1,418,031          
Stock option expense
    3,232,229       -       -       3,232,229          
Repurchase and cancellation of convertible notes
    (336,328 )     -       -       (336,328 )        
Other comprehensive loss
    -       -       (4,399,166 )     (4,399,166 )     (4,399,166 )
Net income
    -       56,492,590       -       56,492,590       56,492,590  
Total comprehensive income
    -       -       -       -       52,093,424  
Balances at March 31, 2009 (As Adjusted – Note 2)
    17,046,310       283,518,260       (4,229,663 )     296,334,907          
                                         
Proceeds from exercise of stock options (3,600 shares), including tax benefits of $19,459
    70,053       -       -       70,053          
Issuance of restricted common stock under stock option plan (16,703 shares)
    734,875       -       -       734,875          
Stock option expense
    742,341       -       -       742,341          
Repurchase and cancellation of convertible notes
    (425,649 )     -       -       (425,649 )        
Other comprehensive income
    -       -       1,612,713       1,612,713       1,612,713  
Net income
    -       14,635,072       -       14,635,072       14,635,072  
Total comprehensive income
    -       -       -       -       16,247,785  
Balances at June 30, 2009
  $ 18,167,930       298,153,332       (2,616,950 )     313,704,312          

See accompanying notes to consolidated financial statements.
 
5

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

   
Three months ended
 
   
June 30,
 
   
2009
   
2008
 
         
As Adjusted
 
         
(Note 2)
 
Cash flows from operating activities:
           
             
Net income
  $ 14,635,072       11,343,200  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
                 
Amortization of intangible assets
    564,770       600,347  
Amortization of loan costs and discounts
    113,889       190,816  
Provision for loan losses
    20,428,263       17,856,913  
Amortization of convertible note discount
    1,022,119       1,170,980  
Depreciation
    1,343,831       1,053,303  
Deferred tax expense (benefit)
    (449,166 )     3,650,623  
Compensation related to stock option and restricted stock plans
    1,477,216       1,447,320  
Unrealized gains on interest rate swap
    (474,963 )     (830,884 )
Gain on extinguishment of debt
    (2,361,181 )     -  
                 
Change in accounts:
               
Other assets, net
    (213,213 )     508,238  
Income taxes payable
    1,218,478       (6,361,427 )
Accounts payable and accrued expenses
    (320,117 )     (2,074,232 )
                 
Net cash provided by operating activities
    36,984,998       28,555,197  
                 
Cash flows from investing activities:
               
                 
Increase in loans receivable, net
    (51,991,756 )     (32,158,828 )
Assets acquired from office acquisitions, primarily loans
    (420,547 )     (6,380,722 )
Increase in intangible assets from acquisitions
    (91,130 )     (904,554 )
Purchases of property and equipment, net
    (1,366,054 )     (2,470,838 )
                 
Net cash used in investing activities
    (53,869,487 )     (41,914,942 )
                 
Cash flows from financing activities:
               
                 
Proceeds of senior revolving notes payable, net
    24,350,000       12,400,000  
Repayment of subordinated convertible notes
    (6,750,000 )     -  
Repayment of other notes payable
    -       (200,000 )
Proceeds from exercise of stock options
    50,594       1,147,932  
Excess tax benefit from exercise of stock options
    19,459       520,763  
                 
Net cash provided by financing activities
    17,670,053       13,868,695  
                 
Increase in cash and cash equivalents
    785,564       508,950  
                 
Effect of foreign currency fluctuations on cash
    93,974       -  
                 
Cash and cash equivalents at beginning of period
    6,260,410       7,589,575  
                 
Cash and cash equivalents at end of period
  $ 7,139,948       8,098,525  
 
See accompanying notes to consolidated financial statements.
 
6

 
WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009 and 2008
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The consolidated financial statements of the Company at June 30, 2009, and for the three months then ended were prepared in accordance with the instructions for Form 10-Q and are unaudited; however, in the opinion of management, all adjustments (consisting only of items of a normal recurring nature) necessary for a fair presentation of the financial position at June 30, 2009, and the results of operations and cash flows for the periods ended June 30, 2009 and 2008, have been included.  The results for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

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

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

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

NOTE 2 – SUMMARY OF SIGNIFICANT POLICIES

Change in Accounting Principle

In May 2008, the 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.  The Company adopted FSP APB 14-1 effective April 1, 2009.  The impact on our Consolidated Financial Statements is as follows:
 
7

 
   
Year Ended March 31,
 
   
2009
   
2008
 
   
As
         
Upon
   
As
         
Upon
 
   
Previously
   
Impact of
   
Adoption
   
Previously
   
Impact of
   
Adoption
 
   
Reported
   
FSP 14-1
   
of FSP 14-1
   
Reported
   
FSP 14-1
   
of FSP 14-1
 
   
(in thousands, except per share data)
 
Consolidated Statements of Operations
                                   
Insurance commissions and other income
  $ 62,251       (1,553 )     60,698       53,590       -       53,590  
Interest expense
    10,389       4,497       14,886       11,569       4,368       15,937  
Income before income taxes
    97,624       (6,050 )     91,574       87,717       (4,368 )     83,349  
Income taxes
    36,920       (1,839 )     35,081       34,721       (1,625 )     33,096  
Net income
    60,703       (4,210 )     56,493       52,996       (2,743 )     50,253  
                                                 
Earnings per common share
                                               
Basic
  $ 3.74       (0.26 )     3.48       3.11       (0.16 )     2.95  
Diluted
    3.69       (0.26 )     3.43       3.05       (0.16 )     2.89  

   
Year Ended March 31,
 
   
2009
   
2008
 
   
As
         
Upon
   
As
         
Upon
 
   
Previously
   
Impact of
   
Adoption
   
Previously
   
Impact of
   
Adoption
 
   
Reported
   
FSP 14-1
   
of FSP 14-1
   
Reported
   
FSP 14-1
   
of FSP 14-1
 
 
 
(in thousands)
 
Consolidated Balance Sheets
                                   
Deferred income taxes
  $ 16,983       (4,732 )     12,251       22,134       (6,635 )     15,499  
Other assets, net
    9,970       (428 )     9,542       10,818       (594 )     10,224  
Total assets
    531,254       (5,160 )     526,094       486,110       (7,229 )     478,881  
                                                 
Convertible senior subordinated
                                               
notes payable
    95,000       (11,268 )     83,732       110,000       (17,822 )     92,178  
Income taxes payable
    11,253       160       11,413       18,039       97       18,136  
Total liabilities
    240,868       (11,109 )     229,759       251,805       (17,725 )     234,080  
                                                 
Additional paid-in capital
    2,421       14,625       17,046       1,323       14,962       16,285  
Retained earnings
    292,195       (8,677 )     283,518       232,813       (4,466 )     228,347  
Total shareholders’ equity
    290,386       5,949       296,335       234,305       10,496       244,801  
                                                 
Total liabilities and shareholders’ equity
    531,254       (5,160 )     526,094       486,110       (7,229 )     478,881  

   
Three Months Ended June 30,
 
   
2008
   
2007
 
   
As
         
Upon
   
As
         
Upon
 
   
Previously
   
Impact of
   
Adoption
   
Previously
   
Impact of
   
Adoption
 
   
Reported
   
FSP 14-1
   
of FSP 14-1
   
Reported
   
FSP 14-1
   
of FSP 14-1
 
 
 
(in thousands, except per share data)
 
Consolidated Statements of Operations
                                   
Interest expense
  $ 2,480       1,129       3,609       2,336       1,071       3,407  
Income before income taxes
    19,294       (1,129 )     18,165       17,645       (1,071 )     16,574  
Income taxes
    7,242       (420 )     6,822       6,795       (399 )     6,396  
Net income
    12,052       (709 )     11,343       10,850       (672 )     10,178  
                                                 
Earnings per common share
                                               
Basic
  $ 0.74       (0.04 )     0.70       0.62       (0.04 )     0.58  
Diluted
    0.73       (0.05 )     0.68       0.61       (0.04 )     0.57  
 
8

 
   
Three Months Ended June 30,
 
   
2008
   
2007
 
   
As
         
Upon
   
As
         
Upon
 
   
Previously
   
Impact of
   
Adoption
   
Previously
   
Impact of
   
Adoption
 
   
Reported
   
FSP 14-1
   
of FSP 14-1
   
Reported
   
FSP 14-1
   
of FSP 14-1
 
   
(in thousands)
 
Consolidated Balance Sheets
                                   
Deferred income taxes
  $ 18,047       (6,199 )     11,848       19,311       (7,911 )     11,400  
Other assets,  net
    10,538       (552 )     9,986       10,679       (723 )     9,956  
Total assets
    504,657       (6,751 )     497,906       443,346       (8,632 )     434,714  
                                                 
Convertible senior subordinated notes payable
    110,000       (16,650 )     93,350       110,000       (21,247 )     88,753  
Income taxes payable
    11,662       112       11,774       9,083       48       9,131  
Total liabilities
    254,723       (16,539 )     238,184       215,633       (21,199 )     194,434  
Additional paid-in capital
    4,439       14,962       19,401       7,635       14,962       22,597  
Retained earnings
    244,865       (5,175 )     239,690       220,071       (2,395 )     217,676  
Total shareholders’ equity
    249,934       9,788       259,722       227,713       12,567       240,280  
                                                 
Total liabilities and shareholders’ equity
    504,657       (6,751 )     497,906       443,346       (8,632 )     434,714  
 
New Accounting Pronouncements Adopted

Business Combinations

In December 2007, the Financial Accounting Standards Board issued SFAS No. 141 (revised 2007), Business Combinations, which replaces SFAS No. 141, Business Combinations. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. SFAS 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 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.  The Company adopted SFAS 141R effective April 1, 2009 with no significant impact to the Consolidated Financial Statements.  However, SFAS 141R could have a significant effect on future acquisitions, if any.

Subsequent Events

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”).  SFAS 165 requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date.  For public entities, this is the date the financial statements are issued.  SFAS 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and will not result in significant changes in the subsequent events reported by the Company.  SFAS 165 is effective for interim or annual periods ending after June 15, 2009.  The Company implemented SFAS 165 during the quarter ended June 30, 2009.  The Company evaluated for subsequent events through August 3, 2009, the issuance date of the Company’s financial statements, see Note 13 – Subsequent Event.

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.  The Company adopted FSP FAS 142-3 effective April 1, 2009 with no significant impact to the Consolidated Financial Statements.

 
9

 
 
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly
 
FASB Staff Position No. FAS 157-4 (“FSP FAS 157-4”), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also provides guidance for determining when a transaction is an orderly one.  The Company adopted during the quarter ended June 30, 2009 FSP FAS 157-4 and the adoption did not have a significant impact on the Company’s Consolidated Financial Statements.
 
Interim Disclosures about Fair Value of Financial Instruments
 
FASB Staff Position No. FAS 107-1 and APB 28-1 (“FSP FAS 107-1”), “Interim Disclosures about Fair Value of Financial Instruments,” amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” and APB Opinion No. 28 to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The Company adopted FSP FAS 107-1 during the quarter ended June 30, 2009. See Note 3.
 
Recognition and Presentation of Other-Than-Temporary Impairments
 
FASB Staff Position FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”), “Recognition and Presentation of Other-Than-Temporary Impairments,” amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 is effective for interim reporting periods ending after June 15, 2009, and did not have a significant impact on the Company’s 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 adds clarity 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”. The company adopted during the quarter ended June 30, 2009 EITF 07-5. The adoption of EITF 07-5 did not have a material impact on the Company’s Consolidated Financial Statements.

NOTE 3 – FAIR VALUE

Effective April 1, 2008, the first day of fiscal 2009, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157 ("SFAS 157"), “Fair Value Measurements” for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  SFAS 157 applies under other accounting pronouncements in which the Financial Accounting Standards Board ("FASB") has previously concluded that fair value is the relevant measurement attribute.    Accordingly, SFAS 157 does not require any new fair value measurements.  Effective April 1, 2009, the Company adopted the provisions of SFAS 157 for nonfinancial assets and liabilities which were previously deferred under the provisions of FSP FAS 157-2.
 
Financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities.  These levels are:
 
10


 
o
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 
o
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in market that are less active.

 
o
Level 3 – Unobservable inputs for assets or liabilities reflecting the reporting entity’s own assumptions.

The following financial liabilities were measured at fair value on a recurring basis at June 30, 2009:
 
   
Fair Value Measurements Using
 
   
June 30,
   
Quoted
Prices in
Active
Markets for
Identical
Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
 
   
2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Interest rate swaps
  $ 1,968,702     $ -     $ 1,968,702     $ -  

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

Fair Value of Long-Term Debt

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

   
June 30,
   
March 31,
 
   
2009
   
2009
 
             
Book value:
           
Senior Note Payable
  $ 137,660       113,310  
Convertible Notes
    85,000       95,000  
    $ 222,660       208,310  
                 
Estimate fair value:
               
Senior Note Payable
  $ 137,660       113,310  
Convertible Notes
    58,182       61,702  
    $ 195,842       175,012  

The difference between the estimated fair value of long-term debt compared with its historical cost reported in our Condensed Consolidated Balance Sheets at June 30, 2009 and March 31, 2009 relates primarily to market quotations for the Company’s 3% Convertible Senior Subordinated  Notes due in 2011.

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

NOTE 4 – COMPREHENSIVE INCOME

The Company applies the provisions of FASB Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income.”  The following summarizes accumulated other comprehensive income (loss) as of June 30:

   
2009
   
2008
 
Balance at beginning of year
  $ (4,229,663 )     169,503  
Unrealized gain from foreign exchange
               
translation adjustment
    1,612,713       461,428  
Total accumulated other comprehensive income (loss)
  $ (2,616,950 )     630,931  
 
11

 
NOTE 5 ALLOWANCE FOR LOAN LOSSES

The following is a summary of the changes in the allowance for loan losses for the periods indicated (unaudited):
 
   
Three months ended June 30,
 
   
2009
   
2008
 
Balance at beginning of period
  $ 38,020,770       33,526,147  
                 
Provision for loan losses
    20,428,263       17,856,913  
Loan losses
    (19,715,351 )     (18,173,143 )
Recoveries
    1,949,138       1,748,113  
Translation adjustments
    103,717       28,884  
Allowance on acquired loans
    -       301,147  
Balance at end of period
  $ 40,786,537       35,288,061  
 
The Company adopted Statement of Position No. 03-3 ("SOP 03-3"), "Accounting for Certain Loans or Debt Securities Acquired in a Transfer," which prohibits carry over or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP.  The Company believes that a loan has shown deterioration if it is over 60 days delinquent.  The Company believes that loans acquired since the adoption of 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 the Company did not pay consideration for, or record, acquired loans over 60 days delinquent.  Loans acquired that are more than 60 days past due are included in the scope of SOP 03-3 and therefore, subsequent refinances or restructures of these loans would not be accounted for as a new loan.

For the quarter ended June 30, 2008, the Company recorded an adjustment of approximately $301,000 to the allowance for loan losses in connection with acquisitions in accordance with generally accepted accounting principles. This adjustment represents the allowance for loan losses on acquired loans which do not meet the scope of SOP 03-3.  No adjustment was recorded for the quarter ended June 30, 2009.

NOTE 6 – AVERAGE SHARE INFORMATION

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

   
Three months ended June 30,
 
   
2009
   
2008
 
Basic:
           
Average common shares outstanding (denominator)
    16,225,294       16,270,939  
                 
Diluted:
               
Average common shares outstanding
    16,225,294       16,270,939  
Dilutive potential common shares
    125,863       302,161  
Average diluted shares outstanding (denominator)
    16,351,157       16,573,100  

Options to purchase 317,909 and 38,639 shares of common stock at various prices were outstanding during the three months ended June 30, 2009 and 2008, respectively, but were not included in the computation of diluted EPS because the options are anti-dilutive.  The shares related to the convertible senior notes payable (1,762,519) and related warrants were also not included in the computation of diluted EPS because the effect of such instruments was anti-dilutive.

NOTE 7 – STOCK-BASED COMPENSATION

Stock Option Plans

The Company has a 1992 Stock Option Plan, a 1994 Stock Option Plan, a 2002 Stock Option Plan, a 2005 Stock Option Plan and a 2008 Stock Option Plan for the benefit of certain directors, officers, and key employees.  Under these plans, 6,010,000 shares of authorized common stock have been reserved for issuance pursuant to grants approved by the Compensation and Stock Option Committee of the Board of Directors.  Stock options granted under these plans have a maximum duration of 10 years, may be subject to certain vesting requirements, which are generally one year for directors and between two and five years for officers and key employees, and are priced at the market value of the Company's common stock on the date of grant of the option.  At June 30, 2009, there were 823,023 shares available for grant under the plans.
 
12


Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123-R”), using the modified prospective transition method, and did not retroactively adjust results from prior periods.  Under this transition method, stock option compensation is recognized as an expense over the remaining unvested portion of all stock option awards granted prior to April 1, 2006, based on the fair values estimated at grant date in accordance with the original provisions of SFAS 123.  The Company has applied the Black-Scholes valuation model in determining the fair value of the stock option awards.  Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on historical experience and future expectations.

There were no option grants during the quarters ended June 30, 2009 or June 30, 2008.

Option activity for the three months ended June 30, 2009 was as follows:
 
   
Weighted
   
Weighted
       
   
Average
   
Average
       
   
Exercise
   
Remaining
   
Aggregated
 
   
Shares
   
Price
   
Contractual Term
   
Intrinsic Value
 
                                 
Options outstanding, beginning of year
    1,390,900     $ 25.00                  
Granted
    -       -                  
Exercised
    (3,600 )     14.05                  
Forfeited
    (1,150 )     46.29                  
Options outstanding, end of period
    1,386,150     $ 25.01       6.94     $ 3,200,723  
Options exercisable, end of period
    603,350     $ 22.88       5.25     $ 2,278,898  
 
The aggregate intrinsic value reflected in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on June 30, 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by option holders had all option holders exercised their options  as of  June 30, 2009.  This amount will change as the stock’s market price changes.  The total intrinsic value of options exercised during the period ended June 30, 2009 and 2008 was as follows:
 
   
2009
   
2008
 
Three months ended
  $ 53,766       1,705,060  

As of June 30, 2009 total unrecognized stock-based compensation expense related to non-vested stock options amounted to approximately $5.6 million, which is expected to be recognized over a weighted-average period of approximately 3.26 years.
 
Restricted Stock

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

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

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

On May 19, 2008 the Company granted 12,000 shares of restricted stock (which are equity classified) with a grant date fair value of $43.67 per share to its independent directors and a certain officer.  One-half of the restricted stock vested immediately and the other half vested on the first anniversary of the grant.
 
13


On November 28, 2007, the Company granted 20,800 shares of restricted stock (which are equity classified), with a grant date fair value of $30.94 per share, to certain executive officers.  One-third of the restricted stock vested immediately and one-third will vest on the first and second anniversary of grant.  On that same date, the Company granted an additional 15,150 shares of restricted stock (which are equity classified), with a grant date fair value of $30.94 per share, to the same executive officers.  The 15,150 shares will vest in three years based on the Company’s compounded annual EPS growth according to the following schedule:
 
   
Compounded
Vesting
 
Annual
Percentage
 
EPS Growth
100%
 
15% or higher
67%
 
12% - 14.99%
33%
 
10% - 11.99%
0%
 
Below 10%

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

Compensation expense related to restricted stock is based on the number of shares expected to vest and the fair market value of the common stock on the grant date.  The Company recognized $760,495 and $511,324, respectively, of compensation expense for the quarters ended June 30, 2009 and 2008 related to restricted stock, which is included as a component of general and administrative expenses in the Company’s Consolidated Statements of Operations.  All shares are expected to vest.

As of June 30, 2009, there was approximately $1.0 million of unrecognized compensation cost related to unvested restricted stock awards granted, which is expected to be recognized over the next two years.

A summary of the status of the Company’s restricted stock as of June 30, 2009, and changes during the quarter ended June 30, 2009, is presented below:

   
Number of
Shares
   
Weighted Average Fair Value
at Grant Date
 
Outstanding at March 31, 2009
    80,246     $ 22.94  
Granted during the period
    18,000       28.14  
Vested during the period
    (24,000 )     32.02  
Cancelled during the period
    (1,297 )     19.75  
Outstanding at June 30, 2009
    72,949     $ 21.29  

Total share-based compensation included as a component of net income during the quarters ended June 30, 2009 and 2008 was as follows:
 
   
Three months ended
 
   
June 30,
 
   
2009
   
2008
 
Share-based compensation related to equity classified units:
           
Share-based compensation related to stock options
  $ 742,341     $ 950,145  
Share-based compensation related to restricted stock units
    760,495       511,324  
                 
Total share-based compensation related to equity classified awards
  $ 1,502,836     $ 1,461,469  
 
NOTE 8 – ACQUISITIONS

The following table sets forth the acquisition activity of the Company for the quarters ended June 30, 2009 and 2008:
 
14


   
2009
   
2008
 
             
Number of offices purchased
    1       11  
Merged into existing offices
    1       4  
                 
Purchase Price
  $ 511,677     $ 7,285,276  
Tangible assets:
               
Net loans
    420,547       6,351,772  
Furniture, fixtures & equipment
    -       28,500  
Other
    -       450  
                 
Excess of purchase prices over carrying value of net tangible assets
  $ 91,130     $ 904,554  
                 
Customer lists
    89,130       837,221  
Non-compete agreements
    2,000       41,000  
Goodwill
    -       26,333  
                 
Total intangible assets
  $ 91,130     $ 904,554  
 
The Company evaluates each acquisition to determine if the acquired enterprise meets the definition of a business.  Those acquired enterprises that meet the definition of a business are accounted for as a business combination under SFAS 141(R) and all other acquisitions are accounted for as asset purchases.  All acquisitions have been from independent third parties.

When the acquisition results in a new office, the Company records the transaction as a business combination, since the office acquired will continue to generate loans. The Company typically retains the existing employees and the office location.  The purchase price is allocated to the estimated fair value of the tangible assets acquired and to the estimated fair value of the identified intangible assets acquired (generally non-compete agreements and customer lists).  The remainder is allocated to goodwill.  During the quarter ended June 30, 2009, no acquisitions were recorded as business combinations.

When the acquisition is of a portfolio of loans only, the Company records the transaction as an asset purchase. In an asset purchase, no goodwill is recorded.  The purchase price is allocated to the estimated fair value of the tangible and intangible assets acquired.  During the quarter ended June 30, 2009, one acquisition was recorded as asset acquisition.

The Company’s acquisitions include tangible assets (generally loans and furniture and equipment) and intangible assets (generally non-compete agreements, customer lists, and goodwill), both of which are recorded at their fair values, which are estimated pursuant to the processes described below.

Acquired loans are valued at the net loan balance.  Given the short-term nature of these loans, generally four months, and that these loans are subject to continual re-pricing at current rates, management believes the net loan balances approximate their fair value.

Furniture and equipment are valued at the specific purchase price as agreed to by both parties at the time of acquisition, which management believes approximates their fair values.

Non-compete agreements are valued at the stated amount paid to the other party for these agreements, which the Company believes approximates the fair value. The fair value of the customer lists is based on a valuation model that utilizes the Company’s historical data to estimate the value of any acquired customer lists.  In a business combination the remaining excess of the purchase price over the fair value of the tangible assets, customer list, and non-compete agreements is allocated to goodwill.  The offices the Company acquires are small privately owned offices, which do not have sufficient historical data to determine attrition.  The Company believes that the customers acquired have the same characteristics and perform similarly to its customers.  Therefore, the company utilized the attrition patterns of its customers when developing the method.  This method is re-evaluated periodically.

Customer lists are allocated at an office level and are evaluated for impairment at an office level when a triggering event occurs, in accordance with SFAS 144.  If a triggering event occurs, the impairment loss to the customer list is generally the remaining unamortized customer list balance.  In most acquisitions, the original fair value of the customer list allocated to an office is less than $100,000 and management believes that in the event a triggering event were to occur, the impairment loss to an unamortized customer list would be immaterial.

 
15

 


The results of all acquisitions have been included in the Company’s consolidated financial statements since the respective acquisition dates.  The pro forma impact of these purchases as though they had been acquired at the beginning of the periods presented would not have a material effect on the results of operations as reported.

NOTE 9 – CONVERTIBLE SENIOR NOTES

On October 10, 2006, the Company issued $110 million aggregate principal amount of its 3.0% 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 payable semi-annually in arrears on April 1 and October 1 of each year, commencing April 1, 2007. The Convertible Notes are the Company’s direct, senior subordinated, unsecured obligations and rank equally in right of payment with all existing and future unsecured senior subordinated debt of the Company, senior in right of payment to all of the Company’s existing and future subordinated debt and junior to all of the Company’s existing and future senior debt.  The Convertible Notes are structurally junior to the liabilities of the Company’s subsidiaries.  The Convertible Notes are convertible prior to maturity, subject to certain conditions described below, at an initial conversion rate of 16.0229 shares per $1,000 principal amount of notes, which represents an initial conversion price of approximately $62.41 per share, subject to adjustment.  Upon conversion, the Company will pay cash up to the principal amount of notes converted and deliver shares of its common stock to the extent the daily conversion value exceeds the proportionate principal amount based on a 30 trading-day observation period.

Holders may convert the Convertible Notes prior to July 1, 2011 only if one or more of the following conditions are satisfied:

·
During any fiscal quarter commencing after December 31, 2006, if the last reported sale price of the common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 120% of the applicable conversion price on such last trading day;
·
During the five business day period after any ten consecutive trading day period in which the trading price per note for each day of such ten consecutive trading day period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such day; or
 
·
The occurrence of specified corporate transactions.

If the Convertible Notes are converted in connection with certain fundamental changes that occur prior to October 1, 2011, the Company may be obligated to pay an additional make-whole premium with respect to the Convertible Notes converted.  If the Company undergoes certain fundamental changes, holders of Convertible Notes may require the Company to purchase the Convertible Notes at a price equal to 100% of the principal amount of the Convertible Notes purchased plus accrued interest to, but excluding, the purchase date.

Holders may also surrender their Convertible Notes for conversion anytime on or after July 1, 2011 until the close of business on the third business day immediately preceding the maturity date, regardless of whether any of the foregoing conditions have been satisfied. 

The aggregate underwriting commissions and other debt issuance costs incurred with respect to the issuance of the Convertible Notes were approximately $3.6 million and are being amortized over the period the convertible senior notes are outstanding.

Convertible Notes Hedge Strategy

Concurrent and in connection with the sale of the Convertible Notes, the Company purchased call options to purchase shares of the Company’s common stock equal to the conversion rate as of the date the options are exercised for the Convertible Notes, at a price of $62.41 per share.  The cost of the call options totaled $24.6 million.  The Company also sold warrants to the same counterparties to purchase from the Company an aggregate of 1,762,519 shares of the Company’s common stock at a price of $73.97 per share and received net proceeds from the sale of these warrants of $16.2 million.  Taken together, the call option and warrant agreements increased the effective conversion price of the Convertible Notes to $73.97 per share.  The call options and warrants must be settled in net shares.  On the date of settlement, if the market price per share of the Company’s common stock is above $73.97 per share, the Company will be required to deliver shares of its common stock  representing the value of the call options and warrants in excess of $73.97 per share.

 
16

 

The warrants have a strike price of $73.97 and are generally exercisable at anytime.  The Company issued and sold the warrants in a transaction exempt from the registration requirements of the Securities Act of 1993, as amended, by virtue of section 4(2) thereof.  There were no underwriting commissions or discounts in connection with the sale of the warrants.

In accordance with EITF. No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, the Company’s Own Stock.” The Company accounted for the call options and warrants as a net reduction in additional paid in capital, and is not required to recognize subsequent changes in fair value of the call options and warrants in its consolidated financial statements.

On April 1, 2009, we adopted FSP 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 requires the convertible debt to be separated between its liability and equity components, in a manner that reflects our non-convertible debt borrowing rate, determined to be 8.7% at the time of the issuance of the convertible notes, and must be applied retroactively to all periods presented.  See Note 2 for disclosure about the financial statement impact of our adoption of FSP APB 14-1.

The carrying amounts of the debt and equity components are as follows (in thousands):

   
June 30,
   
March 31,
   
June 30,
 
   
2009
   
2009
   
2008
 
                   
Face value of convertible debt
  $ 85,000       95,000       110,000  
Unamortized discount
    (9,097 )     (11,268 )     (16,651 )
Net carrying amount of debt component
  $ 75,903       83,732       93,349  
                         
Carrying amount of equity component
  $ 22,933       23,359       23,696  

For the three months ended June 30, 2009 and 2008, the effective interest rate on the liability component was 8.7% and interest expense relating to both the contractual interest coupon and amortization of the discount on the liability component was $1.7 million and $2.0 million, respectively.  Due to the combination of put, call and conversion options that are part of the terms of the convertible note agreement, the remaining discount on the liability component will be amortized over 16 months.

NOTE 10 – EXTINGUISHMENT OF DEBT


In May 2009, the Company repurchased, in a privately negotiated transaction, $10 million of its Convertible Notes at an average discount to face value of approximately 32.5%.  The Company paid approximately $6.8 million and recorded a gain of approximately $2.4 million, which was partially offset by the write-off of $165,000 of deferred financing costs pre-tax associated with the repurchase and cancellation of the Convertible Notes.  As of June 30, 2009, $85.0 million principal amount of the Convertible Notes was outstanding.

NOTE 11 – DERIVATIVE FINANCIAL INSTRUMENTS

On December 8, 2008, the Company entered into an interest rate swap with a notional amount of $20 million to economically hedge a portion of the cash flows from its floating rate revolving credit facility.  Under the terms of the interest rate swap, the Company pays a fixed rate of 2.4% on the $20 million notional amount and receives payments from a counterparty based on the 1 month LIBOR rate for a term ending December 8, 2011.  Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense.

On October 5, 2005, the Company entered into an interest rate swap with a notional amount of $30 million to economically hedge a portion of the cash flows from its floating rate revolving credit facility.  Under the terms of the interest rate swap, the Company will pay a fixed rate of 4.755% on the $30 million notional amount and receive payments from a counterparty based on the 1 month LIBOR rate for a term ending October 5, 2010.  Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense.

On May 15, 2008, the Company entered into a $10 million foreign currency exchange option to economically hedge its foreign exchange risk relative to the Mexican peso.  Under the terms of the option contract, the Company could exchange $10 million U.S. dollars at a rate of 11.0 Mexican pesos per dollar.  The option was sold in October 2008 and the Company recorded a $1.5 million net gain.

 
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The fair value of the Company’s interest rate derivative instruments is included in the Consolidated Balance Sheets as follows:

   
Interest
   
Foreign Currency
 
   
Rate Swaps
   
Exchange Option
 
June 30, 2009:
           
Accounts payable and accrued expenses
  $ 1,968,702       -  
Fair value of derivative instrument
  $ 1,968,702       -  
                 
June 30, 2008:
               
Accounts payable and accrued expenses
  $ 839,734       -  
Other assets
  $ -       229,000  
Fair value of derivative instrument
  $ 839,734       229,000  

Both of the interest rate swaps are currently in liability positions, therefore there is no significant risk of loss related to counterparty credit risk.

The gains (losses) recognized in the Company’s Consolidated Statements of Operations as a result of the interest rate swaps and foreign currency exchange option are as follows:

   
Quarter Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
 
Realized gains (losses):
           
Interest rate swaps – included as a component of interest expense
  $ ( 429,312 )     (155,785 )
Foreign currency exchange option – included as a component of other income
  $ -       -  
                 
Unrealized gains (losses) included as a component of other income
               
Interest rate swaps
  $ 474,963       830,884  
                 
Foreign currency exchange option
  $ -       (52,700 )

The Company does not enter into derivative financial instruments for trading or speculative purposes.  The purpose of these instruments is to reduce the exposure to variability in future cash flows attributable to a portion of its LIBOR-based borrowings and to reduce variability in foreign cash flows.  The Company is currently not accounting for these derivative instruments using the cash flow hedge accounting provisions of SFAS 133; therefore, the changes in fair value of the swap and option are included in earnings as other income or expenses.

By using derivative instruments, the Company is exposed to credit and market risk.  Credit risk, which is the risk that a counterparty to a derivative instrument will fail to perform, exists to the extent of the fair value gain in a derivative.  Market risk is the adverse effect on the financial instruments from a change in interest rates or implied volatility of exchange rates.  The Company manages the market risk associated with interest rate contracts and currency options by establishing and monitoring limits as to the types and degree of risk that may be undertaken.  The market risk associated with derivatives used for interest rate and foreign currency risk management activities is fully incorporated in the Company’s market risk sensitivity analysis.

NOTE 12 – INCOME TAXES

We are required to assess whether the earnings of our two Mexican foreign subsidiaries, SWAC and WAC de Mexico, will be permanently reinvested in the respective foreign jurisdiction or if previously untaxed foreign earnings of the Company will no longer be permanently reinvested and thus become taxable in the United States.  As of June 30, 2009, the Company has determined that $220,609 of cumulative undistributed net earnings of Servicios World Acceptance Corporation de México, S. de R.L. de C.V. and $215,129 of cumulative undistributed net losses of World Acceptance Corporation de México, S. de R.L. de C.V., as well as the future net earnings and losses of both foreign subsidiaries will be permanently reinvested.

 
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The Company adopted the provision of Financial Accounting S