Greenville, South Carolina 29606
PO Box 6429
(864) 298-9800
Annual Report
COMPANY PROFILE
WORLD ACCEPTANCE CORPORATION, founded in 1962, is one of the largest small-loan consumer finance
companies in the United States and Mexico. It offers short-term small loans, medium-term larger loans, related credit
insurance products, ancillary products and services to individuals who have limited access to other sources of consumer
credit. It also offers income tax return preparation services and access to refund anticipation loans (through a third party
bank) to its customer base and to others.
World emphasizes quality customer service and the building of strong personal relationships with its customers. As a
result, a substantial portion of the Company's business is repeat business from the renewal of loans to existing customers
and the origination of new loans to former customers. During fiscal 2010, the Company loaned $2.3 billion in the
aggregate in 2.1 million transactions. At March 31, 2010, World had approximately 792,757 customers. The Company's
loans generally are under $4,000 and have maturities of less than 36 months. World’s average gross loan made in fiscal
2010 was $1,067, and the average contractual maturity was approximately eleven months.
The Company also markets computer software and related services to financial services companies through its ParaData
Financial Systems subsidiary. The ParaData system is currently used in approximately 1,530 consumer loan offices,
including the Company's branch offices, and ParaData services over 107 customers.
As of June 18, 2010, World operated 1,005 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee,
Missouri, Illinois, New Mexico, Kentucky, Alabama and Mexico.
CONTENTS
1
Financial Highlights ............................................................................................................................................
2
Message to Shareholders .....................................................................................................................................
5
Selected Consolidated Financial and Other Data ................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations .............................
6
Consolidated Balance Sheets .............................................................................................................................. 16
Consolidated Statements of Operations .............................................................................................................. 17
Consolidated Statements of Shareholders’ Equity and Comprehensive Income ................................................ 18
Consolidated Statements of Cash Flows ............................................................................................................. 19
Notes to Consolidated Financial Statements ....................................................................................................... 20
Management’s Report on Internal Control over Financial Reporting ................................................................. 44
Reports of Independent Registered Public Accounting Firm .............................................................................. 45
Board of Directors ............................................................................................................................................... 47
Company Officers ............................................................................................................................................... 48
Corporate Information ......................................................................................................................................... 49
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Selected Statement of Operations Data:
2010
2009*
Change
Years Ended March 31,
Total revenues ................................................................. $ 440,636
Net income ......................................................................
73,661
Diluted earnings per share ...........................................
4.45
Selected Balance Sheet Data:
Gross loans receivable .................................................... $ 770,265
Total assets ......................................................................
593,052
Total debt ........................................................................
170,642
Total shareholders' equity ...............................................
382,948
Selected Ratios:
Return on average assets .................................................
12.7%
Return on average shareholders' equity ...........................
22.1%
Shareholders' equity to assets ..........................................
64.6%
Statistical Data:
392,152
56,493
3.43
671,176
526,094
197,041
296,335
10.9%
21.2%
56.3%
12.4%
30.4%
29.7%
14.8%
12.7%
(13.4%)
29.2%
16.5%
4.2%
14.7%
Number of customers at period end ................................
792,757
732,109
8.3%
Number of loans made .................................................... 2,119,725
1,914,269
10.7%
Number of offices ...........................................................
990
944
4.9%
*Fiscal year 2009 has been adjusted to reflect the adoption of ASC 470-20. See Note 2 to the Consolidated Financial Statements.
Comparison of Cumulative Total Return Between World
Acceptance Corporation, NASDAQ Composite Index and
NASDAQ Financial Index
World Acceptance Corporation
NASDAQ Composite Index
NASDAQ Financial Index
S
R
A
L
L
O
D
300
200
100
0
2005
2006
2007
2008
2009
2010
World Acceptance Corporation
NASDAQ Composite Index
NASDAQ Financial Index
3/31/05
100.00
100.00
100.00
3/31/06
107.37
117.94
117.48
3/31/07
156.54
122.29
122.97
3/31/08
124.80
114.07
103.81
3/31/09
67.01
61.83
65.72
3/31/10
141.38
96.99
89.74
World Acceptance Corporation
1
To Our Shareholders
Although the Country continued to face a very difficult economic environment in fiscal 2010, including
sustained levels of high unemployment, your Company made remarkable improvements in almost all areas of
operations and achieved a strong financial performance throughout the year. As the chart below indicates, most
key statistics continued to show strong positive trends over the trailing ten and five year periods, as well as
excellent growth rates during the most recent fiscal year:
Key Indicators
Value at
Fiscal Year End
or For Fiscal 2010
(dollars in thousands,
except per share data)
Total Revenues
Net Earnings
Earnings Per
Share (diluted)
Gross Loans
Number of Offices
Stock price per share
$440,636
$73,661
$4.45
$770,265
990
$36.08
Ten Year
Five Year
Annual Compounded Annual Compounded
Growth Rate
Growth Rate
Fiscal 2010
Growth Rate
15.4%
17.9%
19.7%
16.1%
9.2%
21.7%
15.9%
16.7%
20.7%
17.0%
11.3%
7.2%
12.4%
30.4%
29.7%
14.8%
4.9%
111.0%
While the stock price per share ended the year with substantial gains from the prior year’s end, it is down by
17.3% from the high of $43.65 that it hit on March 12, 2010, due, I believe, to legislation pending in Congress.
Financial services reform bills have passed both the House and Senate and they are going through the
reconciliation process at the current time. Both versions of this Bill, in addition to numerous other provisions,
provide for the creation of a Consumer Financial Protection Agency or Bureau with broad powers to write rules
regarding nearly all aspects of consumer financial transactions. While both versions specifically prohibit this new
agency from imposing national interest rate caps, the rule writing authority granted by this legislation could result
in significant restrictions or limitations that could potentially affect the profitability of our Company going
forward. I believe your Company and other companies in this industry provide a vital service to a large portion of
the population that does not have access to greatly needed credit through banking or credit card channels and that
this new agency will recognize both this need and the inability of other institutions to provide small dollar credit
in an efficient manner. Therefore, I am optimistic that this Company and this industry have an excellent future
with growing demand for our products and services.
After opening 324 offices over the previous three
fiscal years, the Company’s management made a
conscious decision to reduce our office expansion to
only 46 stores in Fiscal 2010. This decision was made
because of the great deal of uncertainty in the economy
as we approached the beginning of the fiscal year as
well as the need to add strength to our middle
management that had been stressed by the accelerated
office expansion during
three years.
the prior
Additionally,
this year’s more modest expansion
allowed the Company to greatly reduce the number of
unprofitable offices (primarily due to size and number
of accounts) without adding significantly
this
category. While this decision may have had a small
impact on our year over year growth in loan balances
and has reduced the base of new offices for growth in fiscal 2011, the benefits gained at the supervisory level and
the resulting improvement in our overall expense ratios will prove to be beneficial in the long term. The
Company’s plans for Fiscal 2011 are to open 70 new offices plus evaluate any acquisitions that may become
available.
to
2
World Acceptance Corporation
To Our Shareholders
Gross loans receivable, the Company’s primary
earning asset, increased to $770.3 million at March 31,
2010, up 14.8% over the $671.2 million outstanding at
the end of fiscal 2009.This year over year growth in
loans represents a substantial increase from the 12.0%
growth rate achieved in fiscal 2009. The Company
continues to demonstrate its ability to prosper in even
the worst economic environment, primarily due to the
relationship and close personal contact it maintains with
its customers. At the end of the fiscal year, the Company
had open loan relationships with approximately 793,000
customers. This is compared to 732,000 customers at
March 31, 2009. We are also pleased that the majority of our loan growth continues to be generated through the
opening of new accounts, as opposed to an increase in our average balance per account. During fiscal 2010, the
14.8% growth in gross loans consisted of an 8.6% increase in accounts and a 6.2% increase in average balances.
We believe that our expanding customer base provides an excellent opportunity for additional growth in the
coming year. We also believe that because our loan portfolio is our primary earning asset, loan growth is a good
indicator of future trends in revenue and earnings for World Acceptance.
Acquisitions will remain a very important part of our overall growth strategy; however, growth through
acquisitions is inherently less predictable due to the timing of the availability of attractive purchase opportunities.
We are very pleased that we achieved reasonable loan growth even with relatively fewer acquisitions. During the
most recent fiscal year, we completed the purchase of 12 offices in 9 separate transactions. Of these, 11 offices
were merged into existing Company offices and one became a new office location. These acquisitions
contributed approximately 6,300 accounts and $3.9 million in gross loan balances. Over the previous eight years,
we acquired an average of $16.8 million in gross loans and an average of 20,300 accounts per year. We will
continue to review potential acquisition candidates in existing and contiguous markets for future growth
opportunities.
Net earnings for the year rose to $73.7 million, or
$4.45 per diluted share, compared with $56.5 million, or
$3.43 per diluted share, during fiscal 2009. Earnings
grew 30.4% and earnings per share rose 29.7%
compared with the prior year. Both net earnings and
earnings per share benefited from gains recognized on
the early retirement of a portion of our convertible notes
at a substantial discount as well as other nonrecurring
gains. These net gains amounted to approximately $3.3
million in fiscal 2010 and approximately $4.7 million in
fiscal 2009.
Historically, the Company’s growth in earnings per share has exceeded its net earnings growth due to its
ongoing stock repurchase program. While very few shares were repurchased in fiscal 2010, primarily due to the
decision to retire convertible notes at substantial discounts combined with the uncertainty in the economy, the
Company believes that share repurchase is an important part of its long term strategy in building shareholder
value. In the last 15 years, the Company has repurchased 8.5 million shares at an aggregate price of $167.1
million. The intent is to apply this strategy aggressively in the future as well.
The area of greatest improvement during fiscal 2010 was our credit quality and loan losses. This will always
be one of the most critical components of our business and is continuously monitored by all levels of
management. While delinquencies remain relatively flat due to our consistent and aggressive charge-off policies,
our charge-off ratio is the key indicator of credit quality. The increase in our net charge-offs as a percentage of
average net loans to 16.7% in fiscal 2009, the highest level in the Company’s history, had a direct negative
World Acceptance Corporation
3
To Our Shareholders
impact on both loan growth and net earnings. We were very pleased to see this ratio decline to 15.5% in fiscal
2010. While still not at historical average levels of 14.5% over the seven years ending in fiscal 2008, we are
seeing continuing movement in that direction. Although there can be no assurance that we will ever return to
these historical levels, we will remain extremely focused on this area.
Control over our operating expenses has
continued to contribute to our earnings growth and is
closely monitored by all levels of management. We
have reduced general and administrative expenses as a
percentage of total revenue in each of the past ten years
and were again successful in achieving this goal in
fiscal 2010. This ratio declined from 51.1% in fiscal
2009 to 49.6% in the most recent fiscal year. While the
Company’s expense ratios benefited from the reduction
in new office openings during the year, the ongoing
monitoring of our general and administrative expenses
will always remain a high priority.
Our expansion into Mexico is another area where we made a lot of progress during fiscal 2010. We opened
an additional 15 offices, which gave us a total of 80 open offices at the end of the fiscal year. At that time we
had over 77,000 accounts and approximately $33.1 million in gross loans outstanding. Although we continued
to operate at a small after tax loss during the year, we are confident that this subsidiary will become profitable in
fiscal 2011.
We are very pleased with the progress that the Company made in fiscal 2010. The improvements that were
made in so many areas of operations were especially satisfying given the ongoing difficult economic
environment. I believe that we are well positioned to continue this improvement and I am very optimistic about
our prospects in fiscal 2011. On behalf of the directors, management and all of our more than 3,300 dedicated
and loyal employees, many of whom are shareholders, we thank you for your support and continued interest in
World Acceptance Corporation.
Sincerely,
A. A. McLean III
Chairmen and
Chief Executive Officer
4
World Acceptance Corporation
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in thousands, except per share amounts)
Years Ended March 31,
2010
2009*
2008*
2007*
2006
Statement of Operations Data:
Interest and fee income
$ 375,031
$ 331,454
$ 292,457
$ 247,007
$ 204,450
Insurance commissions and other income
65,605
60,698
53,590
45,311
38,822
Total revenues
Provision for loan losses
440,636
392,152
346,047
292,318
243,272
90,299
85,476
67,542
51,925
46,026
General and administrative expenses
217,012
200,216
179,218
153,627
128,514
Interest expense
Total expenses
13,881
14,886
15,938
11,696
7,137
321,192
300,578
262,698
217,248
181,677
Income before income taxes
119,444
91,574
83,349
75,070
61,595
Income taxes
Net income
45,783
35,081
33,096
28,897
23,080
$ 73,661
$ 56,493
$ 50,253
$ 46,173
$ 38,515
Net income per common share (diluted)
$
4.45
$
3.43
$
2.89
$
2.51
$
2.02
Diluted weighted average shares
16,546
16,464
17,375
18,394
19,098
Balance Sheet Data (end of period):
Loans receivable, net of unearned and deferred fees
$ 571,086
$ 498,433
$445,091
$378,038
$ 312,746
Allowance for loan losses
Loans receivable, net
Total assets
Total debt
Shareholders' equity
Other Operating Data:
(42,897)
(38,021)
(33,526)
(27,840)
(22,717)
528,189
460,412
411,565
350,198
290,029
593,052
526,094
478,881
402,026
332,784
170,642
197,042
197,078
148,840
100,600
382,948
296,335
244,801
228,731
210,430
As a percentage of average loans receivable:
Provision for loan losses
Net charge-offs
16.3%
17.6%
15.8%
14.5%
15.4%
15.5%
16.7%
14.5%
13.3%
14.8%
Number of offices open at year-end
990
944
838
732
620
* Fiscal year 2007 through 2009 have been adjusted to reflect the adoption of ASC 470-20. See Note 2 to the Consolidated Financial
Statements.
World Acceptance Corporation
5
Management’s Discussion And Analysis
General
The Company's financial performance continues to be dependent in large part upon the growth in its outstanding loans
receivable, the ongoing introduction of new products and services for marketing to its customer base, the maintenance of
loan quality and acceptable levels of operating expenses. Since March 31, 2005, gross loans receivable have increased at a
16.9% annual compounded rate from $352.0 million to $770.3 million at March 31, 2010. The increase reflects both the
higher volume of loans generated through the Company's existing offices and the contribution of loans generated from new
offices opened or acquired over the period. During this same five-year period, the Company has grown from 579 offices to
990 offices as of March 31, 2010. During fiscal 2011, the Company plans to open approximately 55 new offices in the
United States, 15 new offices in Mexico and evaluate acquisition opportunities.
The Company attempts to identify new products and services for marketing to its customer base. In addition to new
insurance-related products, which have been introduced in selected states over the last several years, the Company sells and
finances electronic items and appliances to its existing customer base in many states where it operates. This program is
called the “World Class Buying Club.” Total loan volume under this program was $13.5 million during fiscal 2010,
compared to $13.0 million in fiscal 2009. World Class Buying Club represents less than 1% of the Company’s total loan
volume.
The Company's ParaData Financial Systems subsidiary provides data processing systems to 107 separate finance companies,
including the Company, and currently supports approximately 1,530 individual branch offices in 44 states and Mexico.
ParaData’s revenue is highly dependent upon its ability to attract new customers, which often requires substantial lead time,
and as a result its revenue may fluctuate from year to year. Its net revenues from system sales and support amounted to $1.8
million, $2.0 million and $2.2 million in fiscal 2010, 2009 and 2008, respectively. ParaData’s net revenue to the Company
will continue to fluctuate on a year to year basis. ParaData continues to provide state-of-the-art data processing support for
the Company’s in-house integrated computer system at a substantially reduced cost to the Company.
The Company offers an income tax return preparation and electronic filing program together with access to refund
anticipation loans through an unaffiliated bank in all but a few of its offices. The Company prepared approximately 62,000,
61,000 and 65,000 returns in each of the fiscal years 2010, 2009 and 2008, respectively. Net revenue generated by the
Company from this program during fiscal 2010, 2009 and 2008 amounted to approximately $10.9 million, $9.9 million and
$9.7 million, respectively. The Company believes that this profitable business provides a beneficial service to its existing
customer base and plans to continue to promote and expand the program in the future.
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:
Average gross loans receivable (1)
Average net loans receivable (2)
Expenses as a percentage of total revenues:
Provision for loan losses
General and administrative
Total interest expense
Operating margin (3)
Return on average assets
Offices opened and acquired, net
Total offices (at period end)
2010
Years Ended March 31,
2009
(Dollars in thousands)
2008
$ 750,504
553,650
658,587
486,776
576,050
426,524
20.5%
49.2%
3.2%
30.3%
12.7%
46
990
21.8%
51.1%
3.8%
27.1%
10.9%
106
944
19.5%
51.8%
4.6%
28.7%
11.0%
106
838
(1) Average gross loans receivable have been determined by averaging month-end gross loans receivable over the indicated
period.
(2) Average net loans receivable have been determined by averaging month-end gross loans receivable less unearned interest
and deferred fees over the indicated period.
(3) Operating margin is computed as total revenues less provision for loan losses and general and administrative expenses as a
percentage of total revenues.
6
World Acceptance Corporation
Management’s Discussion And Analysis
As described in Note 2 to the Consolidated Financial Statements included in Item 8 below in the first quarter of fiscal 2010,
we adopted FASB ASC 470-20 (Prior authoritative literature: FASB Staff Position No. APB 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”), and
applied it retrospectively to all periods presented with a cumulative effect adjustment being made as of the earliest period
presented. Adoption of FASB ASC 470-20 affected our fiscal 2010, fiscal 2009 and fiscal 2008 consolidated statements of
operations and balance sheets as reported to the extent described in Note 2, Summary of Significant Accounting Policies in
Part II, Item 8 of this report.
Comparison of Fiscal 2010 Versus Fiscal 2009
Net income was $73.7 million during fiscal 2010, a 30.4% increase over the $56.5 million earned during fiscal 2009. This
increase resulted primarily from an increase in operating income (revenues less provision for loan losses and general and
administrative expenses) of $26.9 million, or 25.2%, and a $1.0 million decrease in interest expense, offset by an increase in
income tax expense.
Total revenues increased to $440.6 million in fiscal 2010, a $48.5 million, or 12.4%, increase over the $392.2 million in
fiscal 2009. Revenues from the 834 offices open throughout both fiscal years increased by 8.1%. At March 31, 2010, the
Company had 990 offices in operation, an increase of 46 offices from March 31, 2009.
Interest and fee income during fiscal 2010 increased by $43.6 million, or 13.1%, over fiscal 2009. This increase resulted
from an increase of $66.9 million, or 13.7%, in average net loans receivable between the two fiscal years. The increase in
average loans receivable was attributable to the Company’s internal growth. During fiscal 2010, internal growth increased
because the Company opened 48 new offices and the average loan balance increased from $917 to $971.
Insurance commissions and other income increased by $4.9 million, or 8.1%, over the two fiscal years. Insurance
commissions increased by $4.8 million, or 14.7%, as a result of the increase in loan volume in states where credit insurance
is sold. Other income increased slightly, but there were various changes within other income when comparing the two years,
including:
•
•
•
•
Revenue from tax preparation increased approximately $1.0 million, or 10%.
In fiscal 2010, a $1.1 million gain on the interest rate swaps was recorded compared to an approximate
$800,000 loss is fiscal 2009.
In fiscal 2010, the Company extinguished $18.0 million par value of its convertible notes at a $2.2 million
gain, compared to fiscal 2009, during which $15.0 million par value of the convertible notes were
extinguished at a $4.0 million gain.
In fiscal 2009, a $1.5 million gain was recognized on the sale of a foreign currency option. There was no
such gain recorded during fiscal 2010.
See Note 9 to the Consolidated Financial Statements for further discussion regarding this extinguishment of debt.
The provision for loan losses during fiscal 2010 increased by $4.8 million, or 5.6%, from the previous year. This increase
resulted from a combination of increases in both the allowance for loan losses and the amount of loans charged off. Net
charge-offs for fiscal 2010 amounted to $85.6 million, a 5.6% increase over the $81.1 million charged off during fiscal 2009.
Accounts that were 61 days or more past due decreased from 2.7% to 2.4% on a recency basis and from 4.2% to 3.8% on a
contractual basis when comparing March 31, 2010 to March 31, 2009. During the current fiscal year, we have also had a
reduction in our year-over-year loan losses. Annualized net charge-offs as a percentage of average net loans decreased from
16.7% during fiscal 2009 to 15.5% during fiscal 2010. Although this represents a 120 basis point decrease, the current year
ratio is slightly higher than historical charge-off ratios. Historically from fiscal 2002 to fiscal 2006 the charge-offs as a
percent of average loans ranged from 14.6% to 14.8%. In fiscal 2007 the Company experienced a temporary decline to
13.3%, which was attributed to a change in the bankruptcy law. However, in fiscal 2008 the ratio returned 14.5%, which
was more in line with historical rates.
Because the ratio in fiscal 2010 is slightly higher than historical levels and we did see improvements during fiscal 2010
compared to fiscal 2009, we believe that we will continue to see slight improvement in our loss ratios in the near future,
however, there is no assurance they will return to historical levels anytime soon. During fiscal year 2010 our charge-offs as
a percent of average net loans decreased to 15.5% from 16.7% in fiscal 2009. We believe our customer base is highly
impacted by the cost of basic commodities such as food and energy and unemployment. The cost of basic commodities rose
steeply during the first several months of our fiscal 2009 which had a negative impact on our customer’s ability to repay
outstanding loans. This, in turn, drove our charge-off ratio up significantly over our historical experience. After moderating
World Acceptance Corporation
7
Management’s Discussion And Analysis
in the second half of fiscal 2009, the costs of basic commodities have risen more gradually during fiscal 2010 allowing our
customers to adapt to such costs increases and better manage their ability to repay outstanding loans. The rate of
unemployment has also stabilized. We believe these are major factors in the reduction of our charge-off ratio during fiscal
2010.
General and administrative expenses during fiscal 2010 increased by $16.8 million, or 8.4%, over the previous fiscal year.
This increase was due primarily to costs associated with the new offices opened or acquired during the fiscal year. General
and administrative expenses, when divided by average open offices, increased slightly when comparing the two fiscal years
and, overall, general and administrative expenses as a percent of total revenues decreased from 51.1% in fiscal 2009 to
49.2% during fiscal 2010. This decrease resulted from the reduction of branch openings during fiscal 2010 and
management’s ongoing monitoring and control of expenses. Management plans to increase the number of branch openings
in fiscal 2011 compared to fiscal 2010; therefore, the Company may not experience similar reductions in general and
administrative expenses as a percent of total revenues in fiscal 2011.
Interest expense decreased by $1.0 million, or 6.7%, during fiscal 2010, as compared to the previous fiscal year as a result of
a decrease in average debt outstanding of 4.5% and a slight decrease in average interest rates. Average interest rates
decreased from 6.7% in fiscal 2009 to 6.5% in fiscal 2010.
Income tax expense increased $10.7 million, or 30.5%, primarily from an increase in pre-tax income. The effective rate
remained consistent at 38.33% in fiscal 2010 compared to 38.31% in fiscal 2009.
Comparison of Fiscal 2009 Versus Fiscal 2008
Net income was $56.5 million during fiscal 2009, a 12.4% increase over the $50.3 million earned during fiscal 2008. This
increase resulted primarily from an increase in operating income (revenues less provision for loan losses and general and
administrative expenses) of $7.2 million, or 7.2%, a reduction in the income tax effective rate and a reduction in interest
expense.
Total revenues increased to $392.2 million in fiscal 2009, a $46.1 million, or 13.3%, increase over the $346.0 million in
fiscal 2008. Revenues from the 727 offices open throughout both fiscal years increased by 7.7%. At March 31, 2009, the
Company had 944 offices in operation, an increase of 106 offices from March 31, 2008.
Interest and fee income during fiscal 2009 increased by $39.0 million, or 13.3%, over fiscal 2008. This increase resulted
from an increase of $60.3 million, or 14.1%, in average net loans receivable between the two fiscal years. The increase in
average loans receivable was attributable to the Company acquiring approximately $9.1 million in net loans and internal
growth. During fiscal 2009, internal growth increased because the Company opened 98 new offices and the average loan
balance increased from $877 to $917.
Insurance commissions and other income increased by $7.1 million, or 13.3%, over the two fiscal years. Insurance
commissions increased by $2.0 million, or 6.7%, as a result of the increase in loan volume in states where credit insurance is
sold. Other income increased by $5.1 million, or 21.9%, over the two years, primarily due to a $1.5 million gain on the sale
of a foreign currency option and a $4.0 million gain on the extinguishment of $15 million par value of the Convertible Notes.
See Note 9 to the Consolidated Financial Statements for further discussion regarding this extinguishment of debt. This
increase was partially offset by approximately a $0.8 million loss related to our interest rate swap.
The provision for loan losses during fiscal 2009 increased by $17.9 million, or 26.6%, from the previous year. This increase
resulted from a combination of increases in both the allowance for loan losses and the amount of loans charged off. Net
charge-offs for fiscal 2009 amounted to $81.1 million, a 30.9% increase over the $62.0 million charged off during fiscal
2008. Net charge-offs as a percentage of average loans increased from 14.5% to 16.7% when comparing the two annual
periods. We believe the 2.2 percentage point increase resulted from the difficult economic environment and higher energy
cost that our customers faced. Accounts that were 61 days or more past due on a recency basis increased from 2.6% to 2.7%
and on a contractual basis increased from 4.0% to 4.2% at March 31, 2008 and March 31, 2009, respectively.
General and administrative expenses during fiscal 2009 increased by $21.0 million, or 11.7%, over the previous fiscal year.
This increase was due primarily to costs associated with the new offices opened or acquired during the fiscal year. General
and administrative expenses, when divided by average open offices, remained flat when comparing the two fiscal years and,
overall, general and administrative expenses as a percent of total revenues decreased from 51.8% in fiscal 2008 to 51.1%
during fiscal 2009. This decrease resulted from management’s ongoing monitoring and control of expenses.
Interest expense decreased by $1.1 million, or 6.6%, during fiscal 2009, as compared to the previous fiscal year as a result of
a decrease in interest rates, partially offset by an increase in average debt outstanding of 12.1%. Average interest rates
decreased from 8.3% in fiscal 2008 to 6.7% in fiscal 2009.
8
World Acceptance Corporation
Management’s Discussion And Analysis
Income tax expense increased $2.0 million, or 6.0%, primarily from an increase in pre-tax income. The decrease in the
effective rate from 39.7% to 38.3% was a result of the prior year tax examination discussed in Note 14 to our Consolidated
Financial Statements.
Critical Accounting Policies
The Company’s accounting and reporting policies are in accordance with U.S. generally accepted accounting principles and
conform to general practices within the finance company industry. The significant accounting policies used in the
preparation of the consolidated financial statements are discussed in Note 1 to the consolidated financial statements. Certain
critical accounting policies involve significant judgment by the Company’s management, including the use of estimates and
assumptions which affect the reported amounts of assets, liabilities, revenues, and expenses. As a result, changes in these
estimates and assumptions could significantly affect the Company’s financial position and results of operations. The
Company considers its policies regarding the allowance for loan losses and share-based compensation to be its most critical
accounting policies due to the significant degree of management judgment involved.
Allowance for Loan Losses
The Company has developed policies and procedures for assessing the adequacy of the allowance for loan losses that take
into consideration various assumptions and estimates with respect to the loan portfolio. The Company’s assumptions and
estimates may be affected in the future by changes in economic conditions, among other factors. For additional discussion
concerning the allowance for loan losses, see “Credit Quality” below.
Share-Based Compensation
The Company measures compensation cost for share-based awards at fair value and recognizes compensation over the
service period for awards expected to vest. The fair value of restricted stock is based on the number of shares granted and the
quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation
model. The Black-Scholes model requires the input of highly subjective assumptions, including expected volatility, risk-free
interest rate and expected life, changes to which can materially affect the fair value estimate. In addition, the estimation of
share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from our current estimates, such amounts will be recorded as a cumulative adjustment in the period that the estimates are
revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee
class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current
estimates.
Income Taxes
Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax
liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax
expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations.
Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax
liabilities and assets. These judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors
change.
No assurance can be given that either the tax returns submitted by management or the income tax reported on the
Consolidated Financial Statements will not be adjusted by either adverse rulings by the U.S. Tax Court, changes in the tax
code, or assessments made by the Internal Revenue Service (“IRS”) or state taxing authorities. The Company is subject to
potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the
permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency
on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.
The Company adopted FASB ASC 740 (Prior authoritative literature: FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”) on April 1, 2007. Under FASB ASC 740, the Company includes the current and deferred tax
impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that
such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical
merits of the tax position. While the Company supports its tax positions by unambiguous tax law, prior experience with the
taxing authority, and analysis that considers all relevant facts, circumstances and regulations, management must still rely on
assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position.
Credit Quality
The Company’s delinquency and net charge-off ratios reflect, among other factors, changes in the mix of loans in the
portfolio, the quality of receivables, the success of collection efforts, bankruptcy trends and general economic conditions.
World Acceptance Corporation
9
Management’s Discussion And Analysis
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, 2010, 2009, and 2008:
At March 31,
2010
2009
(Dollars in thousands)
2008
Recency basis:
61-90 days past due
91 days or more past due
Total
Percentage of period-end gross loans receivable
Contractual basis:
61-90 days past due
91 days or more past due
Total
Percentage of period-end gross loans receivable
$ 11,094
7,337
11,304
6,661
$
18,431
2.4%
17,965
2.7%
$
14,548
14,985
14,223
13,673
$
29,533
3.8%
27,896
4.2%
10,414
5,003
15,417
2.6%
12,838
11,123
23,961
4.0%
Loans are charged off at the earlier of when such loans are deemed to be uncollectible or when six months have elapsed since
the date of the last full contractual payment. The Company’s charge-off policy has been consistently applied and no
significant changes have been made to the policy during the periods reported. Management considers the charge-off policy
when evaluating the appropriateness of the allowance for loan losses. Charge-offs as a percent of average net loans
decreased from 16.7% in fiscal 2009 to 15.5% in fiscal 2010.
In fiscal 2010, approximately 84.7% of the Company’s loans were generated through refinancings of outstanding loans and
the origination of new loans to previous customers. A refinancing represents a new loan transaction with a present customer
in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is
advanced to the customer. For fiscal 2010, 2009, and 2008, the percentages of the Company’s loan originations that were
refinancings of existing loans were 76.4%, 75.0% and 73.3%, respectively. The Company’s refinancing policies, while
limited by state regulations, in all cases consider the customer’s payment history and require that the customer has made at
least two payments on the loan being considered for refinancing. A refinancing is considered a current refinancing if the
customer is no more than 45 days delinquent on a contractual basis. Delinquent refinancings may be extended to customers
that are more than 45 days past due on a contractual basis if the customer completes a new application and the manager
believes that the customer’s ability and intent to repay has improved. It is the Company’s policy to not refinance delinquent
loans in amounts greater than the original amounts financed. In all cases, a customer must complete a new application every
two years. During fiscal 2010, delinquent refinancings represented less than 2% of the Company’s total loan volume
compared to 2.1% in fiscal 2009.
Charge-offs, as a percentage of loans made by category, are greatest on loans made to new borrowers and less on loans made
to former borrowers and refinancings. This is as expected due to the payment history experience available on repeat
borrowers. However, as a percentage of total loans charged off, refinancings represent the greatest percentage due to the
volume of loans made in this category. The following table depicts the charge-offs as a percent of loans made by category
and as a percent of total charge-offs during fiscal 2010:
Loan Volume
by Category
Percent of
Total Charge-offs
Charge-off as a Percent of Total
Loans Made by Category
Refinancing
Former borrowers
New borrowers
76.4%
8.3%
15.3%
100.0%
76.1%
5.2%
18.7%
100.0%
5.0%
3.7%
9.9%
10
World Acceptance Corporation
Management’s Discussion And Analysis
The Company maintains an allowance for loan losses in an amount that, in management’s opinion, is adequate to cover
losses inherent in the existing loan portfolio. The Company charges against current earnings, as a provision for loan losses,
amounts added to the allowance to maintain it at levels expected to cover probable losses of principal. When establishing
the allowance for loan losses, the Company takes into consideration the growth of the loan portfolio, the mix of the loan
portfolio, current levels of charge-offs, current levels of delinquencies, and current economic factors. In accordance with
FASB ASC Topic 450 (Prior authoritative literature: Statement of Accounting Standards No. 5 “Accounting for
Contingencies”), the Company accrues an estimated loss if it is probable and can be reasonably estimated. It is probable
that there are losses in the existing portfolio. To estimate the losses, the Company uses historical information for net
charge-offs and average loan life. This method is based on the fact that many customers refinance their loans prior to the
contractual maturity. Average contractual loan terms are approximately nine months and the average loan life is
approximately four months. Based on this method, the Company had an allowance for loan losses that approximated six
months of average net charge-offs at March 31, 2010, 2009, and 2008. Therefore, at each year end the Company had an
allowance for loan losses that covered estimated losses for its existing loans based on historical charge-offs and average
lives. In addition, the entire loan portfolio turns over approximately three times during a typical twelve-month period.
Therefore, a large percentage of loans that are charged off during any fiscal year are not on the Company’s books at the
beginning of the fiscal year. The Company believes that it is not appropriate to provide for losses on loans that have not
been originated, that twelve months of net charge-offs are not needed in the allowance, and that the method employed is in
accordance with generally accepted accounting principles.
The Company records acquired loans at fair value based on current interest rates, less an allowance for uncollectibility and
collection costs.
FASB ASC Topic 310 (Prior authoritative literature: Statement of Position No. 03-3, “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer,”) was adopted by the Company on April 1, 2005. FASB ASC Topic 310 prohibits
carryover or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the
scope of the accounting literature. Management believes that a loan has shown deterioration if it is over 60 days delinquent.
The Company believes that loans acquired since the adoption of FASB ASC Topic 310 have not shown evidence of
deterioration of credit quality since origination, and therefore, are not within the scope of FASB ASC Topic 310 because
there is no consideration paid for acquired loans over 60 days delinquent. For the years ended March 31, 2009 and 2008, the
Company recorded adjustments of approximately $0.5 million and $0.1 million, respectively, to the allowance for loan losses
in connection with acquisitions in accordance generally accepted accounting principles. No adjustment was recorded for the
year ended March 31, 2010. These adjustments represent the allowance for loan losses on acquired loans which are not
within the scope of FASB ASC Topic 310. The Company believes that its allowance for loan losses is adequate to cover
losses in the existing portfolio at March 31, 2010.
The following is a summary of the changes in the allowance for loan losses for the years ended March 31, 2010, 2009, and
2008:
Balance at the beginning of the year
Provision for loan losses
Loan losses
Recoveries
Translation adjustment
Allowance on acquired loans
Balance at the end of the year
Allowance as a percentage of loans receivable, net
of unearned and deferred fees
Net charge-offs as a percentage of average loans receivable
2010
$ 38,020,770
90,298,934
(94,782,185)
9,139,923
219,377
-
$ 42,896,819
March 31,
2009
33,526,147
85,476,092
(88,728,498)
7,590,928
(306,340)
462,441
38,020,770
2008
27,840,239
67,541,805
(68,985,269)
6,989,297
18,135
121,940
33,526,147
(1)
7.5%
15.5%
7.6%
16.7%
7.5%
14.5%
(1) Average loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred
fees over the indicated period.
World Acceptance Corporation
11
Management’s Discussion And Analysis
Quarterly Information and Seasonality
The Company's loan volume and corresponding loans receivable follow seasonal trends. The Company's highest loan
demand typically occurs from October through December, its third fiscal quarter. Loan demand has generally been the
lowest and loan repayment highest from January to March, its fourth fiscal quarter. Loan volume and average balances
typically remain relatively level during the remainder of the year. This seasonal trend affects quarterly operating
performance through corresponding fluctuations in interest and fee income and insurance commissions earned and the
provision for loan losses recorded, as well as fluctuations in the Company's cash needs. Consequently, operating results for
the Company's third fiscal quarter generally are significantly lower than in other quarters and operating results for its fourth
fiscal quarter are significantly higher than in other quarters.
The following table sets forth, on a quarterly basis, certain items included in the Company's unaudited consolidated financial
statements and shows the number of offices open during fiscal years 2010 and 2009.
At or for the Three Months Ended
2010
2009
June September December March
31,
30,
31,
30,
June
30,
(Dollars in thousands)
30,
September December March
31,
31,
Total revenues
$ 100,230
104,206
112,310
123,890
88,421
91,721
99,161
112,849
Provision for
loan losses
General and
administrative
expenses
20,428
25,156
29,633
15,082
17,857
23,307
29,490
14,822
53,333
51,755
55,537
56,387
48,790
48,379
51,716
51,331
Net income
14,635
14,612
14,751
29,663
11,343
9,946
8,863
26,341
Gross loans
receivable
Number of
offices open
$ 726,057
754,854
838,864
770,265
632,715
667,179
736,234
671,176
949
966
975
990
872
907
923
944
Recently Issued Accounting Pronouncements
See “Item 8. Financial Statements and Supplementary Data. Note 1. Summary of Significant Accounting Policies,” of the
Consolidated Financial Statements for the impact of new accounting pronouncements.
Liquidity and Capital Resources
The Company has financed and continues to finance its operations, acquisitions and office expansion through a combination
of cash flows from operations and borrowings from its institutional lenders. The Company has generally applied its cash
flows from operations to fund its increasing loan volume, fund acquisitions, repay long-term indebtedness, and repurchase its
common stock. As the Company's gross loans receivable increased from $310.1 million at March 31, 2004 to $770.3 million
at March 31, 2010, net cash provided by operating activities for fiscal years 2010, 2009 and 2008 was $183.6 million, $153.9
million and $136.0 million, respectively.
The Company's primary ongoing cash requirements relate to the funding of new offices and acquisitions, the overall growth
of loans outstanding, the repayment or repurchase of long-term indebtedness and the repurchase of its common stock. As of
March 31, 2010, approximately 6.5 million shares have been repurchased since 2000 for an aggregate purchase price of
approximately $151.1 million. During fiscal 2010 the Company repurchased 38,500 shares for $1.4 million. In May 2009,
the Board of Directors authorized the Company to repurchase $15 million of the Company’s stock. Subsequent to the end of
fiscal 2010, on May 11, 2010, the Board of Directors authorized an additional increase of $20 million in the Company’s
share repurchase program. Through June 8, 2010, the Company repurchased shares of its common stock for approximately
$27.4 million. See Note 1 – Subsequent Events to the Consolidated Financial Statements. During fiscal 2010 and 2009, the
Company repurchased $18.0 million and $15.0 million par value of its Convertible Senior Subordinated notes payable,
12
World Acceptance Corporation
Management’s Discussion And Analysis
respectively. The Company believes stock repurchases and debt repurchases to be a viable component of the Company’s
long-term financial strategy and an excellent use of excess cash when the opportunity arises. In addition, the Company plans
to open approximately 55 branches in the United States, 15 branches in Mexico, and evaluate acquisition opportunities in
fiscal 2011. Expenditures by the Company to open and furnish new offices generally averaged approximately $25,000 per
office during fiscal 2010. New offices have also required from $100,000 to $400,000 to fund outstanding loans receivable
originated during their first 12 months of operation.
The Company acquired a net of one office and a number of loan portfolios from competitors in six states in nine separate
transactions during fiscal 2010. Gross loans receivable purchased in these transactions were approximately $3.9 million in
the aggregate at the dates of purchase. The Company believes that attractive opportunities to acquire new offices or
receivables from its competitors or to acquire offices in communities not currently served by the Company will continue to
become available as conditions in local economies and the financial circumstances of owners change.
The Company has a $238.3 million base credit facility with a syndicate of banks. The credit facility will expire on July 31,
2011. Funds borrowed under the revolving credit facility bear interest, at the Company's option, at either the agent bank's
prime rate per annum or the LIBOR rate plus 3.0% per annum with a minimum 4.0% interest rate. At March 31, 2010, the
interest rate on borrowings under the revolving credit facility was 4.25%. The Company pays a commitment fee equal to
0.375% per annum of the daily unused portion of the revolving credit facility. Amounts outstanding under the revolving
credit facility may not exceed specified percentages of eligible loans receivable. On March 31, 2010, $99.2 million was
outstanding under this facility, and there was $139.1 million of unused borrowing availability under the borrowing base
limitations.
The Company's credit agreements contain a number of financial covenants including minimum net worth and fixed charge
coverage requirements. The credit agreements also contain certain other covenants, including covenants that impose
limitations on the Company with respect to (i) declaring or paying dividends or making distributions on or acquiring
common or preferred stock or warrants or options; (ii) redeeming or purchasing or prepaying principal or interest on
subordinated debt; (iii) incurring additional indebtedness; and (iv) entering into a merger, consolidation or sale of substantial
assets or subsidiaries. The Company was in compliance with these agreements at March 31, 2010 and does not believe that
these agreements will materially limit its business and expansion strategy.
On October 2, 2006, the Company amended its senior credit facility in connection with the issuance of $110 million in
aggregate principal amount of its 3% convertible senior subordinated notes due October 1, 2011. See Note 8 to the
Consolidated Financial Statements included in this report for more information regarding this transaction.
The following table summarizes the Company’s contractual cash obligations by period (in thousands):
Fiscal Year Ended March 31,
2011
2012
2013
2014
2015
Thereafter
Total
Convertible Senior
Subordinated Notes
Payable
$
Maturities of
Notes Payable
Interest Payments on
Convertible Senior
Subordinated Notes
Payable
Interest Payments on
Notes Payable
Minimum Lease
Payments
-
-
$ 77,000
$
99,150
2,310
2,310
4,214
1,405
-
-
-
-
$
-
-
-
-
$
-
$
-
-
-
Total
$ 21,406
$ 189,731
$ 4,670
$
657
$ 139
$
14,882
9,866
4,670
657
139
-
-
-
-
-
-
$ 77,000
99,150
4,620
5,619
30,214
$216,603
World Acceptance Corporation
13
Management’s Discussion And Analysis
As of March 31, 2010, the Company’s contractual obligations relating to FASB ASC 740 included unrecognized tax benefits
of $2.6 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
recurring 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, 2010, the Company’s financial instruments consist of the following: cash and cash equivalents, loans
receivable, senior notes payable, convertible senior subordinated notes payable, and interest rate swaps. Fair value
approximates carrying value for all of these instruments, except the convertible senior subordinated notes payable, for which
the fair value of $73.4 million 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 $99.2 million at
March 31, 2010. Interest on borrowings under this facility is based, at the Company’s option, on the prime rate or LIBOR
plus 3.0%, with a minimum rate of 4.0%.
Based on the outstanding balance at March 31, 2010, a change of 1% in the LIBOR interest rate would cause a change in
interest expense of approximately $200,000 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 FASB ASC
Topic 815-10-15 (Prior authoritative literature: 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 FASB ASC Topic
815-10-15, changes in the fair value of the derivative instrument are included in other income. As of March 31, 2010 the fair
value of the interest rate swaps was a liability of $1.3 million and included in other liabilities. The change in fair value from
the beginning of the year, recorded as an unrealized gain in other income, was approximately $1.1 million.
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. The
coupon rate 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 and fiscal 2010, the company repurchased and cancelled $15.0 million
and $18.0 million, respectively, of the convertible senior subordinated notes. See Note 8 to the Consolidated Financial
Statements 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 4.1% of total revenues for the year ended March 31, 2010 and net loans denominated in Mexican pesos
were approximately $21.3 million (USD) at March 31, 2010.
14
World Acceptance Corporation
Management’s Discussion And Analysis
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, 2010, 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,
2010. 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, within reasonably anticipated rates, will have a material adverse effect on its
financial condition. Although inflation would increase the Company’s operating costs in absolute terms, the Company
expects that the same decrease in the value of money would result in an increase in the size of loans demanded by its
customer base. It is reasonable to anticipate that such a change in customer preference would result in an increase in total
loan receivables and an increase in absolute revenues to be generated from that larger amount of loans receivable. That
increase in absolute revenues should offset any increase in operating costs. In addition, because the Company’s loans are
relatively short in both contractual term and average life, it is unlikely that loans made at any given point in time will be
repaid with significantly inflated dollars.
Legal Matters
As of March 31, 2010, 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.
World Acceptance Corporation
15
CONSOLIDATED BALANCE SHEETS
Assets
Cash and cash equivalents
Gross loans receivable
Less:
Unearned interest and deferred fees
Allowance for loan losses
Loans receivable, net
Property and equipment, net
Deferred income taxes
Other assets, net
Goodwill
Intangible assets, net
Liabilities and Shareholders' Equity
Liabilities:
Senior notes payable
Convertible senior subordinated notes payable
March 31,
2010
2009
(As adjusted - Note 2)
$
5,445,168
6,260,410
770,265,207
671,175,985
(199,179,293)
(172,743,440)
(42,896,819)
(38,020,770)
528,189,095
460,411,775
22,985,830
11,642,590
11,559,684
5,616,380
7,613,518
23,060,360
12,250,834
9,541,757
5,580,946
8,987,551
$ 593,052,265
526,093,633
99,150,000
77,000,000
113,310,000
95,000,000
Discount on convertible senior subordinated notes payable
(5,507,959)
(11,268,462)
Income taxes payable
Accounts payable and accrued expenses
Total liabilities
Shareholders' equity:
Preferred stock, no par value
14,043,486
11,412,722
25,418,784
21,304,466
210,104,311
229,758,726
Authorized 5,000,000 shares, no shares issued or outstanding
Common stock, no par value
Authorized 95,000,000 shares; issued and outstanding 16,521,553
and 16,211,659 shares at March 31, 2010 and 2009, respectively
-
-
-
-
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Total shareholders' equity
Commitments and contingencies
27,112,822
17,046,310
357,179,568
283,518,260
(1,344,436)
(4,229,663)
382,947,954
296,334,907
$ 593,052,265
526,093,633
See accompanying notes to consolidated financial statements.
16
World Acceptance Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
2010
2008
2009
(As adjusted - Note 2)
Revenues:
Interest and fee income
$ 375,030,993
331,453,835
292,457,259
Insurance commissions and other income
65,605,147
60,698,020
53,589,596
Total revenues
440,636,140
392,151,855
346,046,855
Expenses:
Provision for loan losses
General and administrative expenses:
Personnel
Occupancy and equipment
Data processing
Advertising
90,298,934
85,476,092
67,541,805
142,482,669
130,674,094
119,483,185
28,468,673
25,577,437
21,554,655
1,925,114
2,307,172
2,112,399
12,842,759
13,067,079
12,647,576
Amortization of intangible assets
2,242,517
2,454,872
2,505,465
Other
Interest expense
Total expenses
Income before income taxes
Income taxes
Net income
Net income per common share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
29,050,275
26,136,095
20,915,465
217,012,007
200,216,749
179,218,745
13,881,224
14,885,634
15,937,660
321,192,165
300,578,475
262,698,210
119,443,975
91,573,380
83,348,645
45,782,667
35,080,790
33,095,596
$ 73,661,308
56,492,590
50,253,049
$
$
4.52
4.45
3.48
3.43
2.95
2.89
16,304,207
16,239,883
17,044,122
16,545,703
16,464,403
17,374,746
See accompanying notes to consolidated financial statements.
World Acceptance Corporation
17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
.
Balances at March 31, 2007
Adjustment for change in accounting
principle – Note 2
Balances at March 31, 2007, as adjusted
Proceeds from exercise of stock
options (116,282 shares), including
tax benefits of $1,110,598
Common stock repurchases
(1,375,100 shares)
Issuance of restricted common stock
under stock option plan (44,981
shares)
Stock option expense
Cumulative effect of FASB ASC 740-10
Other comprehensive income
Net income
Total comprehensive income
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss), Net
Total
Shareholders’
Equity
Total
Comprehensive
Income
$ 5,770,665
209,769,808
(47,826)
215,492,647
14,961,722
20,732,387
(1,722,905)
208,046,903
-
(47,826)
13,238,817
228,731,464
2,724,938
-
(12,458,946)
(29,403,198)
-
-
2,724,938
(41,862,144)
1,348,419
3,937,925
-
-
-
-
-
-
(550,000)
-
50,253,049
-
-
-
-
217,329
-
-
1,348,419
3,937,925
(550,000)
217,329
50,253,049
-
217,329
50,253,049
50,470,378
Balances at March 31, 2008
$16,284,723
228,346,754
169,503
244,800,980
-
-
-
-
2,975,335
(7,848,764)
1,418,031
3,232,229
Proceeds from exercise of stock
options (142,683 shares), including
tax benefits of $1,320,974
Common stock repurchases
(288,700 shares)
Issuance of restricted common stock
under stock option plan (78,592
shares)
Stock option expense
Repurchase and cancellation of Convertible
Notes
Other comprehensive loss
Net income
Total comprehensive income
2,975,335
-
(6,527,680)
(1,321,084)
-
-
1,418,031
3,232,229
(336,328)
-
-
-
-
-
56,492,590
-
-
(4,399,166)
-
-
(336,328)
(4,399,166)
56,492,590
-
(4,399,166)
56,492,590
52,093,424
Balances at March 31, 2009
$17,046,310
283,518,260
(4,229,663)
296,334,907
Proceeds from exercise of stock
options (280,350 shares), including
tax benefits of $1,671,344
Common stock repurchases
(38,500 shares)
Issuance of restricted common stock
under stock option plan (68,044
shares)
Stock option expense
Repurchase and cancellation of
Convertible Notes
Other comprehensive income
Net income
Total comprehensive income
7,424,333
(1,434,657)
1,568,600
3,281,556
(773,320)
-
-
-
-
-
-
-
-
-
-
-
7,424,333
(1,434,657)
1,568,600
3,281,556
-
-
73,661,308
-
-
2,885,227
-
-
(773,320)
2,885,227
73,661,308
-
2,885,227
73,661,308
76,546,535
Balances at March 31, 2010
$27,112,822
357,179,568
(1,344,436)
382,947,954
See accompanying notes to consolidated financial statements.
18
World Acceptance Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Years Ended March 31,
2010
2009
(As Adjusted – Note 2)
2008
$ 73,661,308
56,492,590
50,253,049
Amortization of intangible assets
2,242,517
2,454,872
2,505,465
Amortization of loan costs and discounts
411,622
745,031
763,262
Provision for loan losses
90,298,934
85,476,092
67,541,805
Depreciation
Gain on the extinguishment of debt
Amortization of convertible note discount
Deferred tax expense (benefit)
Compensation related to stock option and restricted stock plans
Unrealized (gain) loss on interest rate swap
5,766,532
(2,238,846)
3,903,999
608,244
4,850,156
(1,107,397)
4,784,014
(3,966,783)
4,497,124
3,225,577
4,650,260
773,047
3,760,461
-
4,538,863
(4,817,742)
5,286,344
1,762,662
Change in accounts:
Other assets, net
Income taxes payable
(2,375,923)
2,675,456
(361,495)
(6,813,159)
(1,305,070)
5,038,106
Accounts payable and accrued expenses
Net cash provided by operating activities
4,909,399
183,606,001
1,956,920
153,914,090
695,405
136,022,610
Cash flows from investing activities:
Increase in loans receivable, net
Net assets acquired from office acquisitions, primarily loans
Increase in intangible assets from acquisitions
Purchases of property and equipment, net
Net cash used in investing activities
(152,999,243)
(2,838,303)
(903,918)
(5,244,623)
(161,986,087)
(128,590,255)
(9,153,680)
(1,673,367)
(9,862,860)
(149,280,162)
(125,822,271)
(3,220,879)
(1,755,698)
(7,976,013)
(138,774,861)
Cash flows from financing activities:
Proceeds (repayment) of senior notes payable, net
Repayment of convertible senior subordinated notes
Repayment of other notes payable
Proceeds from exercise of stock options
Repurchase of common stock
Tax benefit from exercise of stock options
Net cash (used in) provided by financing activities
(14,160,000)
(14,447,500)
-
5,752,989
(1,434,657)
1,671,344
(22,617,824)
8,810,000
(9,179,752)
(400,000)
1,654,361
(7,848,764)
1,320,974
(5,643,181)
43,900,000
-
(200,000)
1,614,340
(41,862,144)
1,110,598
4,562,794
(Decrease) increase in cash and cash equivalents
(997,910)
(1,009,253)
1,810,543
Effect of foreign currency fluctuations on cash
182,668
(319,912)
-
Cash and cash equivalents at beginning of year
6,260,410
7,589,575
5,779,032
Cash and cash equivalents at end of year
$ 5,445,168
6,260,410
7,589,575
See accompanying notes to consolidated financial statements.
World Acceptance Corporation
19
Notes to Consolidated Financial Statements
(1)
Summary of Significant 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 following is a description of
the more significant of these policies used in preparing the consolidated financial statements.
Nature of Operations
The Company is a small-loan consumer finance company headquartered in Greenville, South Carolina, that offers
short-term small loans, medium-term larger loans, related credit insurance products and ancillary products and
services to individuals who have limited access to other sources of consumer credit. It also offers income tax return
preparation services and access to refund anticipation loans (through a third party bank) to its customer base and to
others.
The Company also markets computer software and related services to financial services companies through its
ParaData Financial Systems (“ParaData”) subsidiary.
As of March 31, 2010, the Company operated 910 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana,
Tennessee, Missouri, Illinois, New Mexico, Kentucky, and Alabama. The Company also operated 80 offices in
Mexico. The Company is subject to numerous lending regulations that vary by jurisdiction.
Principles of Consolidation
The consolidated financial statements include the accounts of World Acceptance Corporation and its wholly owned
subsidiaries (the “Company”). Subsidiaries consist of operating entities in various states and Mexico, ParaData (a
software company acquired during fiscal 1994), WAC Insurance Company, Ltd. (a captive reinsurance company
established in fiscal 1994) and Servicios World Acceptance Corporation de Mexico (a service company established
in fiscal 2006). All significant intercompany balances and transactions have been eliminated in consolidation.
The financial statements of the Company’s foreign subsidiaries in Mexico are prepared using the local currency as
the functional currency. Assets and liabilities of these subsidiaries are translated into US dollars at the current
exchange rate and income and expense are translated at an average exchange rate for the period. The resulting
translation gains and losses are recognized as a component of equity in “Accumulated Other Comprehensive
Income (Loss).”
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant item subject to such estimates and assumptions that
could materially change in the near term is the allowance for loan losses. Actual results could differ from those
estimates.
Reclassification
Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications
had no impact on previously reported net income or shareholders’ equity.
Business Segments
The Company reports operating segments in accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 280 (Prior authoritative literature: Statement on Financial
Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information”).
Operating segments are components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess
performance. FASB ASC Topic 280 requires that a public enterprise report a measure of segment profit or loss,
certain specific revenue and expense items, segment assets, information about the way that the operating segments
were determined and other items.
20
World Acceptance Corporation
Notes to Consolidated Financial Statements
The Company has one reportable segment, which is the consumer finance company. The other revenue generating
activities of the Company, including the sale of insurance products, income tax preparation, buying club and the
automobile club, are done in the existing branch network in conjunction with or as a complement to the lending
operation. There is no discrete financial information available for these activities and they do not meet the criteria
under FASB ASC 280 Topic to be reported separately.
ParaData provides data processing systems to 107 separate finance companies, including the Company. At March
31, 2010 and 2009, ParaData had total assets of $1.2 million and $1.7 million, which represented less than 1.0% of
total consolidated assets at each fiscal year end. Total net revenues (system sales and support) for ParaData for the
years ended March 31, 2010, 2009 and 2008 were $1.8 million, $2.0 million and $2.2 million, respectively, which
represented less than 1% of consolidated revenue for each year. Although ParaData is an operating segment under
FASB ASC Topic 280, it does not meet the criteria to require separate disclosure.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of
three months or less from the date of original issuance to be cash equivalents.
Loans and Interest Income
The Company is licensed to originate direct cash consumer loans in the states of Georgia, South Carolina, Texas,
Oklahoma, Louisiana, Tennessee, Missouri, Illinois, New Mexico, Kentucky, and Alabama. In addition, the
Company also originates direct cash consumer loans in Mexico. During fiscal 2010 and 2009, the Company
originated loans generally ranging up to $4,000, with terms of 36 months or less. Experience indicates that a
majority of the direct cash consumer loans are refinanced, and the Company accounts for the refinancing as a new
loan. Generally a customer must make multiple payments in order to qualify for refinancing. Furthermore, the
Company’s lending policy has predetermined lending amounts, so that in most cases a refinancing will result in
advancing additional funds. The Company believes that the advancement of additional funds constitutes more than
a minor modification to the terms of the existing loan, as the present value of the cash flows under the terms of the
new loan will be 10% or more of the present value of the remaining cash flows under the terms of the original loan.
Fees received and direct costs incurred for the origination of loans are deferred and amortized to interest income
over the contractual lives of the loans. Unamortized amounts are recognized in income at the time that loans are
refinanced or paid in full.
Loans are carried at the gross amount outstanding, reduced by unearned interest and insurance income, net of
deferred origination fees and direct costs, and an allowance for loan losses. The Company generally calculates
interest revenue on its loans using the rule of 78s, and recognizes the interest revenue using the collection method,
which is a cash method of recognizing the revenue. The Company believes that the combination of these two
methods does not differ materially from the interest method, which is an accrual method for recognizing the
revenue. Charges for late payments are credited to income when collected.
The Company generally offers its loans at the prevailing statutory rates for terms not to exceed 36 months.
Management believes that the carrying value approximates the fair value of its loan portfolio.
Allowance for Loan Losses
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. The allowance for loan losses has an allocated and an unallocated component. The
Company uses historical and current economic information for net charge-offs by loan type and average loan life by
loan type to estimate the allocated component of the allowance for loan losses.
World Acceptance Corporation
21
Notes to Consolidated Financial Statements
This method is based on the fact that many customers refinance their loans prior to the contractual maturity.
Average contractual loan terms are approximately 11 months and the average loan life is approximately four
months. The allowance for loan loss model also reserves 100% of the principal on loans greater than 90 days past
due on a recency basis. 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.
FASB ASC Topic 310 (Prior authoritative literature: Statement of Position No. 03-3, “Accounting for Certain Loans
or Debt Securities Acquired in a Transfer,”) prohibits carryover or creation of valuation allowances in the initial
accounting of all loans acquired in a transfer that are within the scope of this authoritative literature. The Company
believes that loans acquired since the adoption of FASB ASC Topic 310 have not shown evidence of deterioration
of credit quality since origination, and therefore, are not within the scope of FASB ASC Topic 310. Therefore, the
Company records acquired loans (not within the scope of FASB ASC Topic 310) at fair value based on current
interest rates, less an allowance for loan losses.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is recorded
using the straight-line method over the estimated useful life of the related asset as follows: building, 40 years;
furniture and fixtures, 5 to 10 years; equipment, 3 to 7 years; and vehicles, 3 years. Amortization of leasehold
improvements is recorded using the straight-line method over the lesser of the estimated useful life of the asset or
the term of the lease. Additions to premises and equipment and major replacements or improvements are added at
cost. Maintenance, repairs, and minor replacements are charged to operating expense as incurred. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain
or loss is reflected in the consolidated statement of operations.
Operating Leases
The Company’s office leases typically have a lease term of three years and contain lessee renewal options and
cancellation clauses in the event of regulatory changes. The Company typically renews its leases for one or more
option periods. Accordingly, the Company amortizes its leasehold improvements over the shorter of their economic
lives, which are generally five years, or the lease term that considers renewal periods that are reasonably assured.
Other Assets
Other assets include cash surrender value of life insurance policies, prepaid expenses, debt issuance costs and other
deposits.
Derivatives and Hedging Activities
The Company uses interest rate swaps and foreign currency options to economically hedge the variable cash flows
associated with $50 million of its LIBOR-based borrowings and currency fluctuations. Interest rate swap
agreements and foreign currency options are carried at fair value. Changes to fair value are recorded each period as
a component of the consolidated statement of operations. See Note 10 for further discussion related to the interest
rate swaps. As of March 31, 2010 and 2009 the Company did not have any foreign currency options outstanding.
Intangible Assets and Goodwill
Intangible assets include the cost of acquiring existing customers, and the value assigned to non-compete
agreements. Customer lists are amortized on a straight line or accelerated basis over their estimated period of
benefit, ranging from 5 to 20 years with a weighted average of approximately 9 years. Non-compete agreements are
amortized on a straight line basis over the term of the agreement.
The Company evaluates goodwill annually for impairment in the fourth quarter of the fiscal year using the market
value-based approach. The Company has one reporting unit, the consumer finance company, and the Company has
multiple components, the lowest level of which are individual offices. The Company’s components are aggregated
for impairment testing because they have similar economic characteristics. The Company writes off goodwill when
it closes an office that has goodwill assigned to it. As of March 31, 2010, the Company had 84 offices with
recorded goodwill.
22
World Acceptance Corporation
Notes to Consolidated Financial Statements
Impairment of Long-Lived Assets
The Company assesses impairment of long-lived assets, including property and equipment and intangible assets,
whenever changes or events indicate that the carrying amount may not be recoverable. The Company assesses
impairment of these assets generally at the office level based on the operating cash flows of the office and the
Company’s plans for office closings. The Company will write down such assets to fair value if, based on an
analysis, the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets. The
Company did not record any impairment charges for the fiscal years 2010, 2009 and 2008.
Fair Value of Financial Instruments
FASB ASC Topic 825 (Prior authoritative literature: SFAS No. 107, "Disclosures about the Fair Value of Financial
Instruments,") requires disclosures about the fair value of all financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other valuation techniques. The Company’s
financial instruments consist of the following: cash and cash equivalents, loans receivable, senior notes payable,
convertible senior subordinated notes payable and interest rate swaps. Fair value approximates carrying value for
all of these instruments, except the convertible subordinated notes payable. 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 revolving credit facility has a variable
rate based on a margin over LIBOR and reprice with any changes in LIBOR. The fair value of convertible
subordinated notes payable is based on the current quoted market price which was $73,388,700 and $61,701,550 as
of March 31, 2010 and 2009, respectively. The carrying value of the convertible subordinated notes payable, net of
discount, was $71,492,041 and $83,731,538 at March 31, 2010 and 2009, respectively. The swaps are valued based
on information from a third party broker.
Insurance Premiums
Insurance premiums for credit life, accident and health, property and unemployment insurance written in connection
with certain loans, net of refunds and applicable advance insurance commissions retained by the Company, are
remitted monthly to an insurance company. All commissions are credited to unearned insurance commissions and
recognized as income over the life of the related insurance contracts using a method similar to that used for the
recognition of interest income.
Non-file Insurance
Non-file premiums are charged on certain loans in lieu of recording and perfecting the Company's security interest
in the assets pledged. The premiums are remitted to a third-party insurance company. Such insurance and the
related insurance premiums, claims, and recoveries are not reflected in the accompanying consolidated financial
statements except as a reduction in loan losses (see Note 12).
Certain losses related to such loans, which are not recoverable through life, accident and health, property, or
unemployment insurance claims are reimbursed through non-file insurance claims subject to policy limitations.
Any remaining losses are charged to the allowance for loan losses.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
Beginning with the adoption of FASB ASC Topic 740-10 (Prior authoritative literature: FASB Interpretation No.
48, “Accounting For Uncertainty in Income Taxes”) as of April 1, 2007, the Company recognizes the effect of
income tax positions only if those positions are more likely than not of being sustained. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the
adoption, the Company recognized the effect of income tax positions only if the likelihood of such positions being
sustained was probable.
World Acceptance Corporation
23
Notes to Consolidated Financial Statements
Supplemental Cash Flow Information
For the years ended March 31, 2010, 2009, and 2008, the Company paid interest of $9,354,502, $9,373,237 and
$10,788,530, respectively.
For the years ended March 31, 2010, 2009, and 2008, the Company paid income taxes of $40,628,124, $37,302,456
and $32,018,340, respectively.
Earnings Per Share
Earnings per share (“EPS”) are computed in accordance with FASB ASC Topic 260 (Prior authoritative literature:
SFAS No. 128, “Earnings per Share.”) Basic EPS includes no dilution and is computed by dividing net income by
the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings of the Company. Potential common stock included in the
diluted EPS computation consists of stock options, restricted stock and warrants, which are computed using the
treasury stock method. Potential common stock related to convertible senior notes are included in the diluted EPS
computation using the method prescribed by FASB ASC Topic 260-10-45 (Prior authoritative literature: EITF 04-8
“The Effect of Contingently Convertible Instruments on Dilutive Earnings Per Share.”) See Note 15 for the
reconciliation of the numerators and denominators for basic and dilutive EPS calculations.
Stock-Based Compensation
FASB ASC Topic 718-10 (Prior authoritative literature: SFAS No. 123R, “Share-Based Payment,”) requires
companies to recognize in the income statement the grant-date fair value of stock options and other equity-based
compensation issued to employees. FASB ASC Topic 718-10 does not change the accounting guidance for share-
based payment transactions with parties other than employees provided in FASB ASC Topic 718-10. Under FASB
ASC Topic 718-10, the way an award is classified will affect the measurement of compensation cost. Liability-
classified awards are remeasured to fair value at each balance-sheet date until the award is settled. Equity-classified
awards are measured at grant-date fair value, amortized over the subsequent vesting period, and are not
subsequently remeasured. The fair value of non-vested stock awards for the purposes of recognizing stock-based
compensation expense is the market price of the stock on the grant date. The fair value of options is estimated on the
grant date using the Black-Scholes option pricing model (see Note 16).
At March 31, 2010, the Company had several share-based employee compensation plans, which are described more
fully in Note 16. Effective April 1, 2006, the Company adopted FASB ASC Topic 718 using the modified
prospective transition method. Under that method of transition, compensation cost recognized during fiscal years
2008, 2009 and 2010 includes: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of
FASB ASC Topic 718, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions of FASB ASC Topic 718. Since this
compensation cost is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The Company has elected to expense grants of
awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting
portion of the award.
Comprehensive Income
Total comprehensive income consists of net income and other comprehensive income (loss). The Company’s other
comprehensive income (loss) and accumulated other comprehensive income (loss) are comprised of foreign
currency translation adjustments.
Concentration of Risk
During the year ended March 31, 2010, the Company operated in 11 states in the United States as well as in
Mexico. For the years ended March 31, 2010, 2009 and 2008, total revenues within the Company's four largest
states (measured by total revenues) accounted for approximately 58%, 59% and 62%, respectively, of the
Company's total revenues.
24
World Acceptance Corporation
Notes to Consolidated Financial Statements
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs were approximately $12.8 million, $13.1 million
and $12.6 million for fiscal years 2010, 2009 and 2008, respectively
Recently Issued Accounting Pronouncements
FASB Accounting Standards Codification
In June 2009, the FASB issued FASB ASC Topic 105 (Prior authoritative literature SFAS 168), “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” FASB ASC
Topic 105 replaces SFAS No. 162 and establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. FASB ASC Topic 105 is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The adoption of this
pronouncement did have an impact to the Company’s financial statement disclosures, as all references to
authoritative accounting literature have been referenced in accordance with the Codification.
Business Combinations
In December 2007, the FASB issued FASB ASC Topic 805-10 (Prior authoritative literature: SFAS No. 141 (R),
“Business Combinations,” which replaces SFAS No. 141). FASB ASC 805-10 is effective for the Company April 1,
2009 and establishes principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and
the goodwill acquired. FASB ASC Topic 805-10 also establishes disclosure requirements which enable users to
evaluate the nature and financial effects of the business combination. FASB ASC Topic 805-10 changes how
business combinations are accounted for and impacts financial statements both on the acquisition date and in
subsequent periods. The adoption of FASB ASC Topic 805-10 did not have an impact on the Company’s financial
position and results of operations, although it may have a material impact on accounting for business combinations
in the future which cannot currently be determined.
In April 2009, the FASB issued FASB ASC Topic 805-10-05 (Prior authoritative literature: FSP 141(R)-1
“Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from
Contingencies”). For business combinations, the standard requires the acquirer to recognize at fair value an asset
acquired or liability assumed from a contingency if the acquisition date fair value can be determined during the
measurement period. FASB ASC Topic 805-10-05 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The Company adopted these
provisions as of April 1, 2009. FASB ASC Topic 805-10-05 was applied prospectively for acquisitions in fiscal
2010.
Subsequent Events
In May 2009, the FASB issued FASB ASC Topic 855 (Prior authoritative literature: “SFAS No. 165”), “Subsequent
Events,” which establishes general standards for accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, FASB
ASC Topic 855 sets forth the period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies
the circumstances under which an entity should recognize events or transactions occurring after the balance sheet
date in its financial statements and the disclosures that should be made about events or transactions that occur after
the balance sheet date. FASB ASC Topic 855 provides largely the same guidance on subsequent events that
previously existed only in auditing literature. The disclosure is required in financial statements for interim and
annual periods ending after June 15, 2009. The Company has performed an evaluation of subsequent events through
the date these Consolidated Financial Statements are filed.
On May 11, 2010, the Board of Directors authorized the Company to repurchase up to $20 million of the
Company’s common stock. This repurchase authorization follows, and is in addition to, a similar repurchase
authorization of $15 million announced May 11, 2009. Through June 8, 2010, the Company repurchased 779,321
shares for approximately $27.4 million. Taking into consideration these repurchases the Company has $6.2 million
in aggregate remaining repurchase capacity under all of the company’s outstanding repurchase authorizations.
World Acceptance Corporation
25
Notes to Consolidated Financial Statements
Useful Life of Intangible Assets
In April 2008, the FASB issued FASB ASC Topic 350-30-55-1c (Prior authoritative literature: FASB Staff Position
No. FAS 142-3), “Determination of the Useful Life of Intangible Assets.” FASB ASC Topic 350-30-55-1c applies
to all recognized intangible assets and its guidance is restricted to estimating the useful life of recognized intangible
assets. FASB ASC Topic 350-30-55-1c is effective for the first fiscal period beginning after December 15, 2008
and must be applied prospectively to intangible assets acquired after the effective date. The Company adopted
FASB ASC Topic 350-30-55-1c effective April 1, 2009 with no significant impact to the Consolidated Financial
Statements.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions that Are Not Orderly
FASB ASC Topic 820-10-65-4 (Prior authoritative literature: FASB Staff Position No. FAS 157-4), “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions that Are Not Orderly,” provides additional guidance for estimating fair value in accordance
with FASB ASC Topic 820 when the volume and level of activity for the asset or liability have significantly
decreased. FASB ASC Topic 820-10-65-4 also provides guidance for determining when a transaction is an orderly
one. The Company adopted FASB ASC Topic 820-10-65-4 during the quarter ended June 30, 2009 and the
adoption did not have a significant impact on the Company’s Consolidated Financial Statements.
Instruments Indexed to an Entity’s Own Stock
In June 2008, the FASB ratified FASB ASC Topic 815-40 (Prior authoritative literature: EITF Issue 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” ). FASB ASC
Topic 815-40 provides a new two-step model to be applied to any freestanding financial instrument or embedded
feature that has all the characteristics of a derivative in FASB ASC Topic 815-10-15 (Prior authoritative literature:
FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities,”) in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for scope
exception. It also adds clarity on the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. FASB ASC Topic 815-40 also applies to any
freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the
instrument has all the characteristics of a derivative in FASB ASC Topic 815-10-15. The Company adopted FASB
ASC Topic 815-40 during the quarter ended June 30, 2009 and the adoption did not have a material impact on the
Company’s Consolidated Financial Statements.
(2)
Change in Accounting Principle
In May 2008, the FASB issued FASB ASC Topic 470-20 (Prior authoritative literature: FASB Staff Position No.
APB 14-1 “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including
Partial Cash Settlement)”). FASB ASC Topic 470-20 applies to any convertible debt instrument that at conversion
may be settled wholly or partly with cash, requires cash-settleable convertibles to be separated into their debt and
equity components at issuance and prohibits the use of the fair-value option for such instruments. FASB ASC
Topic 470-20 was effective for the first fiscal period beginning after December 15, 2008 and was applied
26
World Acceptance Corporation
Notes to Consolidated Financial Statements
retrospectively to all periods presented with a cumulative effect adjustment being made as of the earliest period
presented. The Company adopted FASB ASC Topic 470-20 effective April 1, 2009. The impact on our
Consolidated Financial Statements is as follows:
Year Ended March 31,
2009
2008
As
Previously
Reported ASC 470-20 ASC 470-20
Impact of
FASB
Upon
Adoption
of FASB
Impact of
As
Previously
FASB
Reported ASC 470-20 ASC 470-20
Upon
Adoption
FASB
Consolidated Statements of Operations
Insurance
(in thousands, except per share data)
commissions and
other income
Interest expense
Income before income
taxes
Income taxes
$ 62,251
10,389
(1,553)
4,497
60,698
14,886
53,590
11,569
-
4,369
53,590
15,938
97,624
36,920
(6,050)
(1,839)
91,574
35,081
87,717
34,721
(4,368)
(1,625)
83,349
33,096
Net income
60,703
(4,210)
56,493
52,996
(2,743)
50,253
Earnings per common share
Basic
Diluted
$
3.74
3.69
(0.26)
(0.26)
3.48
3.43
3.11
3.05
(0.16)
(0.16)
2.95
2.89
As of March 31, 2009
As
Previously
Impact of
FASB
Upon
Adoption
of FASB
Reported ASC 470-20 ASC 470-20
Consolidated Balance Sheets
Deferred income taxes
Other assets, net
Total assets
$ 16,983
9,970
531,254
Convertible senior
subordinated notes
payable, net of discount
Income taxes payable
Total liabilities
95,000
11,253
240,868
Additional paid-in capital
Retained earnings
Total shareholders’ equity
2,421
292,195
290,386
(in thousands)
(4,732)
(428)
(5,160)
12,251
9,542
526,094
(11,268)
160
(11,109)
14,625
(8,677)
5,949
83,732
11,413
229,759
17,046
283,518
296,335
Total liabilities and
shareholders’ equity
531,254
(5,160)
526,094
World Acceptance Corporation
27
Notes to Consolidated Financial Statements
(3)
Accumulated Other Comprehensive Loss
The Company applies the provisions of FASB ASC Topic 220-10 (Prior authoritative literature: SFAS No. 130,
“Reporting Comprehensive Income.”) The following summarizes accumulated other comprehensive (loss) income
as of March 31, 2010, 2009 and 2008:
Balance at beginning of year
Unrealized gain (loss) from foreign exchange
translation adjustment
Total accumulated other comprehensive (loss) income
2010
2009
2008
$ (4,229,663)
169,503
(47,826)
2,885,227
$ (1,344,436)
(4,399,166)
(4,229,663)
217,329
169,503
(4)
Allowance for Loan Losses
The following is a summary of the changes in the allowance for loan losses for the years ended March 31, 2010,
2009, and 2008:
Balance at the beginning of the year
Provision for loan losses
Loan losses
Recoveries
Translation adjustment
Allowance on acquired loans
Balance at the end of the year
2010
$ 38,020,770
90,298,934
(94,782,185)
9,139,923
219,377
-
$ 42,896,819
March 31,
2009
33,526,147
85,476,092
(88,728,498)
7,590,928
(306,340)
462,441
38,020,770
2008
27,840,239
67,541,805
(68,985,269)
6,989,297
18,135
121,940
33,526,147
The Company follows FASB ASC Topic 310 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 accounting literature.
Management believes that a loan has shown deterioration if it is over 60 days delinquent. The Company believes
that loans acquired have not shown evidence of deterioration of credit quality since origination, and therefore,
are not within the scope of FASB ASC Topic 310 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 FASB ASC Topic 310 and, therefore, subsequent refinances or restructures of these loans would not be
accounted for as a new loan.
For the years ended March 31, 2009 and 2008, the Company recorded adjustments of approximately $0.5 million
and $0.1 million, respectively, to the allowance for loan losses in connection with its acquisitions in accordance
generally accepted accounting principles. No adjustment was made for the year ended March 31, 2010. These
adjustments represent the allowance for loan losses on acquired loans that do not meet the scope of FASB ASC
Topic 310 (also see Note 1).
(5)
Property and Equipment
Property and equipment consist of:
Land
Buildings and leasehold improvements
Furniture and equipment
Less accumulated depreciation and amortization
Total
March 31,
2010
2009
$
250,443
12,794,625
31,403,537
44,448,605
(21,462,775)
$ 22,985,830
250,443
11,323,770
31,086,255
42,660,468
(19,600,108)
23,060,360
Depreciation expense was approximately $5,767,000, $4,784,000 and $3,760,000 for the years ended March 31,
2010, 2009 and 2008, respectively.
28
World Acceptance Corporation
Notes to Consolidated Financial Statements
(6)
Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of definite-lived
intangible assets:
March 31, 2010
Gross Carrying Accumulated
Amortization
Amount
March 31. 2009
Gross Carrying
Amount
Accumulated
Amortization
Cost of acquiring
existing customers
Value assigned to
$ 20,304,885
$ (12,940,041)
$ 19,522,401
$ (10,827,445)
non-compete agreements
$ 8,042,643
(7,793,969)
7,956,643
(7,664,048)
Total
$ 28,347,528
$ (20,734,010)
$ 27,479,044
$ (18,491,493)
The estimated amortization expense for intangible assets for future years ended March 31 is as follows: $1.8 million
for 2011; $1.5 million for 2012, $1.1 million for 2013; $0.8 million for 2014; $0.4 million for 2015; and an
aggregate of $2.0 million for the years thereafter.
(7)
Goodwill
The following summarizes the changes in the carrying amount of goodwill for the year ended March 31, 2010 and
2009:
Balance at beginning of year
Goodwill
Accumulated goodwill impairment losses
Goodwill acquired during the year
Impairment losses
Balance at end of year
Goodwill
Accumulated goodwill impairment losses
March 31,
2010
2009
$ 5,580,946
-
$
5,580,946
$
35,434
-
5,352,675
-
5,352,675
228,271
-
$ 5,616,380
-
$
5,616,380
5,580,946
-
5,580,946
The Company performed an annual impairment test during the fourth quarter of fiscal 2010 and determined that
none of the recorded goodwill was impaired.
(8)
Notes Payable
The Company's notes payable consist of:
Senior Notes Payable $238,317,000 Revolving Credit Facility
This facility provides for borrowings of up to $238,317,000, with $99,150,000 outstanding at March 31, 2010,
subject to a borrowing base formula. The Company may borrow, at its option, at the rate of prime or LIBOR plus
3.00% with a minimum of 4.00%. At March 31, 2010 and 2009, the Company’s interest rate was 4.25% and 3.25%,
respectively, and the unused amount available under the revolver at March 31, 2010 was $139.2 million. The
revolving credit facility has a commitment fee of 0.375% per annum on the unused portion of the commitment.
Borrowings under the revolving credit facility mature on July 31, 2011.
A member of the Company’s Board of Directors serves as a Director of The South Financial Group, which is the
parent of Carolina First Bank. As of March 31, 2010, Carolina First Bank had committed to fund up to $25.9
million under the credit facility.
Substantially all of the Company’s assets are pledged as collateral for borrowings under the revolving credit
agreement.
World Acceptance Corporation
29
Notes to Consolidated Financial Statements
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 contingent conversion feature was not required to be bifurcated and accounted for separately under the
provisions of FASB ASC Topic 815-10-15.
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.
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 1933, as amended,
30
World Acceptance Corporation
Notes to Consolidated Financial Statements
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 FASB ASC Topic 815-40 (Prior authoritative literature: 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.
Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
On April 1, 2009, we adopted FASB ASC Topic 470-20 (Prior authoritative literature: FSP APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FASB ASC Topic 470-20 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 FASB ASC 470-20.
The carrying amounts of the debt and equity components are as follows:
Face value of convertible debt
Unamortized discount
Net carrying amount of debt component
Carrying amount of equity component
2010
At March 31,
(in thousands)
2009
$ 77,000
(5,508)
$ 71,492
$ 22,586
95,000
(11,268)
83,732
23,359
The interest expense relating to both the contractual interest coupon and amortization of the discount on the liability
component are as follows:
2010
At March 31,
(in thousands)
2009
Contractual interest coupon
Amortization of the discount on the liability component
Total interest expense on convertible notes
$ 2,560
3,904
$ 6,464
3,234
4,497
7,731
For fiscal 2010 and 2009, the effective interest rate on the liability component was 8.4%. 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.
Debt Covenants
The various debt agreements contain restrictions on the amounts of permitted indebtedness, investments, working
capital, repurchases of common stock and cash dividends. At March 31, 2010, $67.1 million was available under
these covenants for the payment of cash dividends, or the repurchase of the Company's common stock, or the
repurchase of subordinated debt. In addition, the agreements restrict liens on assets and the sale or transfer of
subsidiaries.
The aggregate annual maturities of the notes payable for each of the fiscal years subsequent to March 31, 2010, are
as follows: 2011, $0; 2012, $176,150,000; and none thereafter.
(9)
Extinguishment Of Debt
During fiscal 2010, the Company repurchased, in privately negotiated transactions, an aggregate principal amount
of $18.0 million of its Convertible Notes at an average discount to face value of approximately 19.7%. The
Company spent approximately $14.4 million in the aggregate on these repurchases. The transactions were treated as
an extinguishment of debt for accounting purposes. The Company recorded a gain of approximately $2.2 million on
World Acceptance Corporation
31
Notes to Consolidated Financial Statements
the repurchase of the Convertible Notes, which was partially offset by the write-off of $230,000 of deferred
financing costs associated with the repurchase and cancellation of Convertible Notes.
During fiscal 2009, the Company repurchased, in privately negotiated transactions, an aggregate principal amount
of $15.0 million of its Convertible Notes at an average discount to face value of approximately 38.8%. The
Company spent approximately $9.2 million in the aggregate on these repurchases. The transactions were treated as
an extinguishment of debt for accounting purposes. The Company recorded a gain of approximately $4.0 million on
the repurchase of the Convertible Notes, which was partially offset by the write-off of $300,000 of deferred
financing costs associated with the repurchase and cancellation of Convertible Notes.
(10)
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.
The fair value of the Company’s interest rate derivative instruments is included in the Consolidated Balance Sheets
as follows:
March 31, 2010:
Accounts payable and accrued expenses
Fair value of derivative instrument
March 31, 2009:
Accounts payable and accrued expenses
Fair value of derivative instrument
Interest
Rate Swaps
$ 1,336,269
$ 1,336,269
$ 2,443,666
$ 2,443,666
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:
March 31,
2010
Year Ended
March 31,
2009
March 31,
2008
Realized losses:
Interest rate swaps – included as a component
of interest expense
$ (1,784,575)
(895,813)
39,042
Foreign currency exchange option – included as a
component of other income
$
-
(1,548,500)
-
Unrealized gains (losses) included as a component
of other income
Interest rate swaps
$ 1,107,397
(773,047)
1,762,662
Foreign currency exchange option
$
-
-
6,900
32
World Acceptance Corporation
Notes to Consolidated Financial Statements
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 FASB ASC Topic 815-10-15;
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.
(11)
Insurance Commissions and other income
Insurance commissions and other income for the years ending March 31, 2010, 2009 and 2008 consist of:
2010
2009
2008
Insurance commissions
Tax return preparation revenue
Gain on extinguishment of debt, net
Auto club membership revenue
World Class Buying Club revenue
Other
Insurance commissions and other income
$ 37,194,717
10,850,852
2,238,846
4,536,074
3,832,884
6,951,774
$ 65,605,147
32,430,496
9,868,849
3,966,783
4,088,500
3,780,851
6,562,541
60,698,020
30,403,085
9,657,325
-
4,297,327
4,582,273
4,649,586
53,589,596
(12) Non-file Insurance
The Company maintains non-file insurance coverage with an unaffiliated insurance company. The following is a
summary of the non-file insurance activity for the years ended March 31, 2010, 2009 and 2008:
Insurance premiums written
Recoveries on claims paid
Claims paid
(13)
Leases
2010
2009
2008
$ 6,227,752
$
646,229
$ 6,136,490
5,768,316
598,887
5,620,489
5,885,108
553,035
5,987,181
The Company conducts most of its operations from leased facilities, except for its owned corporate office building.
The Company's leases typically have a lease term of three years and contain lessee renewal options. A majority of
the leases provide that the lessee pays property taxes, insurance, and common area maintenance costs. It is expected
that in the normal course of business, expiring leases will be renewed at the Company's option or replaced by other
leases or acquisitions of other properties. All of the Company’s leases are operating leases.
The future minimum lease payments under noncancelable operating leases as of March 31, 2010, are as follows:
2011
2012
2013
2014
2015
Thereafter
14,882,455
9,865,701
4,670,054
657,511
138,777
-
Total future minimum lease payments $30,214,498
Rental expense for cancelable and noncancelable operating leases for the years ended March 31, 2010, 2009 and
2008, was $15,865,447, $14,257,168 and $12,198,271, respectively.
World Acceptance Corporation
33
Notes to Consolidated Financial Statements
(14)
Income Taxes
Income tax expense (benefit) consists of:
Year ended March 31, 2010:
U.S. Federal
State and local
Foreign
Year ended March 31, 2009:
U.S. Federal
State and local
Foreign
Year ended March 31, 2008:
U.S. Federal
State and local
Foreign
Current
Deferred
Total
$ 39,979,719
4,918,495
276,209
$ 45,174,423
27,459,617
4,351,570
44,026
$ 31,855,213
525,900
82,344
-
608,244
40,505,619
5,000,839
276,209
45,782,667
3,311,357
(85,780)
-
3,225,577
30,770,974
4,265,790
44,026
35,080,790
$ 33,340,513
3,987,193
585,632
$ 37,913,338
(3,954,130)
(863,612)
-
(4,817,742)
29,386,383
3,123,581
585,632
33,095,596
Income tax expense was $45,782,667, $35,080,790 and $33,095,596, for the years ended March 31, 2010, 2009 and
2008, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 35% to
pretax income from continuing operations as a result of the following:
Expected income tax
Increase (reduction) in income taxes resulting from:
State tax, net of federal benefit
Change in valuation allowance
Insurance income exclusion
Uncertain tax positions
Other, net
2010
2009
2008
$ 41,805,391
32,050,683
29,172,026
3,250,545
60
(237,574)
420,594
543,651
$ 45,782,667
2,772,764
(405,425)
(108,636)
539,211
232,193
35,080,790
2,030,328
(335,361)
(117,834)
1,408,734
937,703
33,095,596
34
World Acceptance Corporation
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at March 31, 2010 and 2009 are presented below:
Deferred tax assets:
Allowance for doubtful accounts
Unearned insurance commissions
Accounts payable and accrued expenses
primarily related to employee benefits
Accrued interest receivable
Convertible notes
Unrealized losses
Other
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Fair value adjustment for loans
Property and equipment
Intangible assets
Deferred net loan origination fees
Prepaid expenses
Convertible notes
Other
Gross deferred liabilities
2010
2009
$ 13,726,075
9,841,960
14,167,863
8,790,135
7,119,122
2,606,892
1,016,063
499,030
34,810,416
(1,274)
34,809,142
(15,393,253)
(3,492,473)
(1,944,965)
(1,437,409)
(554,549)
-
(343,903)
(23,166,552)
6,512,665
2,595,154
-
909,896
33,090,517
(1,214)
33,089,303
(13,669,377)
(2,342,782)
(1,845,039)
(1,402,423)
(544,657)
(703,030)
(331,161)
(20,838,469)
Net deferred tax assets
$ 11,642,590
12,250,834
The valuation allowance for deferred tax assets as of March 31, 2010 and 2009 was $1,274 and $1,214,
respectively. The valuation allowance against the total deferred tax assets as of March 31, 2010 and 2009 relates to
state net operating losses. In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the
deferred tax asset, the Company will need to generate future taxable income prior to the expiration of the deferred
tax assets governed by the tax code. Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation
allowances at March 31, 2010. The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
The Company is required to assess whether the earnings of the Company’s Mexican foreign subsidiary 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 March 31,
2010, the Company has determined that $20,097 of cumulative undistributed net losses, as well as the future net
earnings, of the Mexican foreign subsidiaries will be permanently reinvested.
The Company adopted the provision of FASB ASC Topic 740-10, on April 1, 2007. As a result of the
implementation, the Company recognized a charge of approximately $550,000 to the April 1, 2007 balance of
retained earnings. As of March 31, 2010 and March 31, 2009, the Company had $5,762,087 and $4,715,681 of
total gross unrecognized tax benefits including interest, respectively. Of this total, approximately $3,168,539 and
$2,747,945, respectively, represents the amount of unrecognized tax benefits that are permanent in nature and, if
recognized, would affect the annual effective tax rate.
World Acceptance Corporation
35
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits balance at March 31, 2009
Gross increases for tax positions of current year
Lapse of statute of limitations
Unrecognized tax benefits balance at March 31, 2010
$ 3,872,025
1,059,041
(245,546)
$ 4,685,520
The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax
expense. As of March 31, 2010, the Company had $1,076,567 accrued for gross interest, of which $232,911 was a
current period expense. The Company has determined that it is possible that the total amount of unrecognized tax
benefits related to various state examinations will significantly increase or decrease within twelve months of the
reporting date. However, at this time, a reasonable estimate of the range of possible change cannot be made until
further correspondence has been conducted with the state taxing authorities.
The Company is subject to U.S. and Mexican income taxes, as well as various other state and local jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years before 2006, although carryforward attributes that were generated prior to
2006 may still be adjusted upon examination by the taxing authorities if they either have been or will be used in a
future period. The income tax returns (2001 through 2006) are under examination by a state authority which has
completed its examinations and issued a proposed assessment for tax years 2001 and 2006. In consideration of the
proposed assessment, the total gross unrecognized tax benefit was increased to $3.2 million in fiscal 2010. At this
time, it is too early to predict the final outcome on this tax issue and any future recoverability of this charge. Until
the tax issue is resolved, the Company expects to accrue approximately $55,000 per quarter for interest.
(15)
Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS calculations:
Income
(Numerator)
For the year ended March 31, 2010
Shares
(Denominator)
Per Share
Amount
Basic EPS
Income available to common shareholders
$73,661,308
16,304,207
$
4.52
Effect of Dilutive Securities
Options and restricted stock
-
241,496
Diluted EPS
Income available to common shareholders
plus assumed exercises of stock options
$73,661,308
16,545,703
$
4.45
Income
(Numerator)
For the year ended March 31, 2009
Shares
(Denominator)
Per Share
Amount
Basic EPS
Income available to common shareholders
$56,492,590
16,239,883
$
3.48
Effect of Dilutive Securities
Options and restricted stock
Diluted EPS
Income available to common shareholders
plus assumed exercises of stock options
-
224,520
$56,492,590
16,464,403
$
3.43
36
World Acceptance Corporation
Notes to Consolidated Financial Statements
Income
(Numerator)
For the year ended March 31, 2008
Shares
(Denominator)
Per Share
Amount
Basic EPS
Income available to common shareholders
$50,253,049
17,044,122
$
2.95
Effect of Dilutive Securities
Options and restricted stock
Diluted EPS
Income available to common shareholders
plus assumed exercises of stock options
-
330,624
$50,253,049
17,374,746
$
2.89
Options to purchase 100,152, 130,583 and 183,030 shares of common stock at various prices were outstanding
during the years ended March 31, 2010, 2009 and 2008, respectively, but were not included in the computation of
diluted EPS because the option exercise price was greater than the average market price of the common shares. The
shares related to the convertible senior notes payable (1,762,519) and related warrants were not included in the
computation of diluted EPS because the effect of such instruments was antidilutive.
(16)
Benefit Plans
Retirement Plan
The Company provides a defined contribution employee benefit plan (401(k) plan) covering full-time employees,
whereby employees can invest up to the maximum designated for that year. The Company makes a matching
contribution equal to 50% of the employees' contributions for the first 6% of gross pay. The Company's expense
under this plan was $1,059,884, $1,078,987 and $1,078,896, for the years ended March 31, 2010, 2009 and 2008,
respectively.
Supplemental Executive Retirement Plan
The Company has instituted a Supplemental Executive Retirement Plan (“SERP”), which is a non-qualified
executive benefit plan in which the Company agrees to pay the executive additional benefits in the future, usually at
retirement, in return for continued employment by the executive. The Company selects the key executives who
participate in the SERP. The SERP is an unfunded plan, which means there are no specific assets set aside by the
Company in connection with the establishment of the plan. The executive has no rights under the agreement
beyond those of a general creditor of the Company. For the years ended March 31, 2010, 2009 and 2008,
contributions of $928,407, $806,792 and $836,977, respectively were charged to operations related to the SERP.
The unfunded liability was $5,385,106, $4,722,000 and $4,000,000, as of March 31, 2010, 2009 and 2008,
respectively.
In May 2009, the Company instituted a second Supplemental Executive Retirement Plan (“SERP”) to provide to
one executive the same type of benefits as are in the original SERP but for which he would not have qualified due to
age. This second SERP is also an unfunded plan with no specific assets set aside by the Company in connection
with the plan.
For the three years presented, the unfunded liability was estimated using the following assumptions; an annual
salary increase of 3.5% for all 3 years; a discount rate of 6% for all 3 years; and a retirement age of 65.
Executive Deferred Compensation Plan
The Company has an Executive Deferral Plan. Eligible executives may elect to defer all or a portion of their
incentive compensation to be paid under the Executive Incentive Plan. As of March 31, 2010 and 2009, no
executive had deferred compensation under this plan.
World Acceptance Corporation
37
Notes to Consolidated Financial Statements
Stock Option Plans
The Company has a 1994 Stock Option Plan, a 2002 Stock Option Plan, a 2005 Stock Option Plan, and a 2008
Stock Option Plan for the benefit of certain directors, officers, and key employees. Under these plans, 4,850,000
shares of authorized common stock have been reserved for issuance pursuant to grants approved by the
Compensation and Stock Option Committee of the Board of Directors. Stock options granted under these plans
have a maximum duration of 10 years, may be subject to certain vesting requirements, which are generally one year
for directors and 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 March 31, 2010, there were 516,895 shares available for grant
under the plans.
Stock based compensation is recognized as provided under FASB ASC Topic 718-10 and FASB ASC Topic 505-50
(Prior authoritative literature: SFAS No. 123(R), “Share Based Payment”). FASB ASC Topic 718-10 requires all
share-based payments to employees, including grants of employee stock options, to be recognized as compensation
expense over the requisite service period (generally the vesting period) in the financial statements based on their fair
values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount
recognized. The Company elected to use the modified prospective transition method, and did not retroactively
adjust results from prior periods. Under this transition method, stock option compensation is recognized as an
expense over the remaining unvested portion of all stock option awards granted prior to April 1, 2006, based on the
fair values estimated at grant date in accordance with the provisions of FASB ASC Topic 718-10. The Company
has applied the Black-Scholes valuation model in determining the fair value of the stock option awards.
Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on
historical experience and future expectations.
The weighted-average fair value at the grant date for options issued during the years ended March 31, 2010, 2009
and 2008 was $15.32, $8.51 and $14.41 per share, respectively. The following is a summary of the Company’s
weighted-average assumptions used to estimate the weighted-average per share fair value of options granted on the
date of grant using the Black-Scholes option-pricing model:
Dividend yield
Expected volatility
Average risk-free interest rate
Expected life
Vesting period
2010
0%
56.69%
2.69%
6.6 years
5 years
2009
2008
0%
50.67%
2.75%
5.9 years
5 years
0%
43.0%
4.00%
6.9 years
5 years
The expected stock price volatility is based on the historical volatility of the Company’s stock for a period
approximating the expected life. The expected life represents the period of time that options are expected to be
outstanding after their grant date. The risk-free interest rate reflects the interest rate at grant date on zero-coupon
U.S. governmental bonds that have a remaining life similar to the expected option term.
Option activity for the year ended March 31, 2010, was as follows:
2010
Weighted
Average
Exercise
Shares
Price
1,390,900
295,750
(280,350)
(12,950)
1,393,350
560,100
$ 25.00
$ 26.73
$ 20.52
$ 29.07
$ 26.23
$ 26.06
Weighted
Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
7.04
5.02
$ 16,316,003
$ 7,161,021
Options outstanding, beginning of year
Granted
Exercised
Forfeited
Options outstanding, end of year
Options exercisable, end of year
38
World Acceptance Corporation
Notes to Consolidated Financial Statements
The aggregate intrinsic value reflected in the table above represents the total pre-tax intrinsic value (the difference
between the closing stock price on March 31, 2010 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
March 31, 2010. This amount will change as the market price per share changes. The total intrinsic value of
options exercised during the periods ended March 31, 2010, 2009 and 2008 were as follows:
2010
$ 4,638,423
2009
2008
$ 2,833,497
$ 2,503,399
As of March 31, 2010, total unrecognized stock-based compensation expense related to non-vested stock options
amounted to $7,460,763 which is expected to be recognized over a weighted-average period of approximately 3.65
years.
The following table summarizes information regarding stock options outstanding at March 31, 2010:
Range of
Exercise Price
Options
Outstanding
$ 4.90 - $5.99
$ 6.00 - $ 7.99
$ 8.00 - $ 9.99
$11.00 - $11.99
$15.00 - $16.99
$23.00 - $23.99
$25.00 - $25.99
$26.00 - $27.99
$28.00 - $28.99
$43.00 - $43.99
$46.00 - $49.00
$ 4.90 - $49.00
Restricted Stock
13,150
18,000
60,900
31,500
303,300
44,100
139,200
295,750
279,400
7,000
201,050
1,393,350
Weighted
Average
Remaining
Contractual
Life
0.56
1.08
1.91
3.13
7.78
4.58
5.83
9.62
7.05
7.15
6.62
7.04
Weighted
Average
Exercise
Price
$ 5.03
$ 6.75
$ 8.48
$ 11.44
$ 16.71
$ 23.53
$ 25.08
$ 26.73
$ 28.22
$ 43.00
$ 48.72
$ 26.23
Weighted
Average
Exercise
Price
$ 5.03
$ 6.75
$ 8.48
$ 11.44
$ 16.18
$ 23.53
$ 25.08
-
$
$ 28.25
$ 43.00
$ 48.72
$ 26.06
Options
Exercisable
13,150
18,000
60,900
31,500
64,700
44,100
104,000
-
100,000
2,800
120,950
560,100
On November 9, 2009, the Company granted 41,346 shares of restricted stock (which are equity classified), with a
grant date fair value of $26.73 per share, to certain executive officers and other officers of the Company. One-third
of the restricted stock vested immediately and one-third will vest on the first and second anniversary of the grant.
On that same date, the Company granted an additional 23,159 shares of restricted stock (which are equity
classified), with a grant date fair value of $26.73 per share, to the same executive officers. The 23,159 shares will
vest on April 30, 2012 based on the Company’s compounded annual EPS growth according to the following
schedule:
Vesting
Percentage
100%
67%
33%
0%
Compounded
Annual
EPS Growth
15% or higher
12% - 14.99%
10% - 11.99%
Below 10%
On April 30, 2009 and May 11, 2009 the Company granted 15,000 shares and 3,000 shares of restricted stock
(which are equity classified), respectively, with a grant date fair value of $29.68 and $20.41 per share, respectively,
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 grant vested
immediately and one-third will vest on the first and second anniversary of 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
World Acceptance Corporation
39
Notes to Consolidated Financial Statements
$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:
Vesting
Percentage
100%
67%
33%
0%
Compounded
Annual
EPS Growth
15% or higher
12% - 14.99%
10% - 11.99%
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 independent directors and a certain officer. One-half of the restricted stock
vested immediately and the other half vested on the first anniversary of grant.
On November 28, 2007, the Company granted 20,800 shares of restricted stock (which are equity classified), with a
grant date fair value of $30.94 per share, to certain executive officers. One-third of the restricted stock vested
immediately and one-third vested on the first and second anniversaries of grant. 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:
Vesting
Percentage
100%
67%
33%
0%
Compounded
Annual
EPS Growth
15% or higher
12% - 14.99%
10% - 11.99%
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 vested on each of the first and second anniversaries 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 $1.95 million, $1.7 million and $1.6
million of compensation expense for the years ended March 31, 2010, 2009 and 2008, respectively, related to
restricted stock, which is included as a component of general and administrative expenses in the Consolidated
Statements of Operations. For purposes of accruing the expense, all shares are expected to vest.
As of March 31, 2010, there was approximately $1.49 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 March 31, 2010, and changes during the year
ended March 31, 2010, are presented below:
Outstanding at March 31, 2009
Granted during the period
Vested during the period, net
Cancelled during the period
Outstanding at March 31, 2010
Number of
Shares
80,246
82,505
(64,063)
(14,461)
84,227
Weighted Average Fair
Value at Grant Date
$ 22.94
27.04
26.68
26.41
$23.52
40
World Acceptance Corporation
Notes to Consolidated Financial Statements
Total share-based compensation included as a component of net income during the years ended March 31, was as
follows:
Share-based compensation related to equity classified units:
Share-based compensation related to stock options
Share-based compensation related to restricted stock units
$ 3,281,556
1,950,488
3,232,229
1,685,616
3,937,925
1,556,902
2010
2009
2008
Total share-based compensation related to equity
classified awards
$ 5,232,044
4,917,845
5,494,827
(17)
Acquisitions
The following table sets forth the acquisition activity of the Company for the last three fiscal years:
Number of offices purchased
Merged into existing offices
Purchase Price
Tangible assets:
Net loans
Furniture, fixtures & equipment
Other
Excess of purchase price over
fair value of net tangible assets
Customer lists
Non-compete agreements
Goodwill
Total intangible assets
2010
2009
($ in thousands)
23
22
22
11
2008
25
12
$
3,742
10,826
4,977
2,832
3
3
2,838
904
783
86
35
$
9,083
68
2
9,153
3,086
128
7
3,221
1,673
1,756
1,360
85
228
1,327
116
313
$
904
1,673
1,756
The Company evaluates each acquisition to determine if the transaction meets the definition of a business
combination. Those transactions that meet the definition of a business combination are accounted for as such under
FASB ASC Topic 805-10 (Prior authoritative literature: SFAS No. 141(R)) and all other acquisitions are accounted
for as asset purchases. All acquisitions have been with 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 year ended March 31, 2010, one acquisition was recorded
as a business combination.
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 year ended March 31, 2010, 22 acquisitions were recorded as asset
acquisitions.
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 repricing at current rates, management believes the net loan
balances approximate their fair value.
World Acceptance Corporation
41
Notes to Consolidated Financial Statements
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 FASB ASC Topic 360-10-05 (Prior authoritative literature: SFAS No. 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 generally 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.
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.
(18) Fair Value
Effective April 1, 2008, the first day of fiscal 2009, the Company adopted the provisions of FASB ASC Topic 820
(Prior authoritative literature: SFAS No. 157, “Fair Value Measurements”) for financial assets and liabilities, as
well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. FASB
ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FASB ASC Topic 820 applies under other accounting pronouncements in which the
FASB has previously concluded that fair value is the relevant measurement attribute. Accordingly, FASB ASC
Topic 820 does not require any new fair value measurements. Effective April 1, 2009, the Company adopted the
provisions of FASB ASC Topic 820 for nonfinancial assets and liabilities which were previously deferred under the
provisions of FASB ASC Topic 820-10-65 (Prior authoritative literature: FSP FAS 157-2).
Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to
measure the fair value of the assets or liabilities. These levels are:
o Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
o Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or
indirectly. These inputs include quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities in 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 March 31:
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
March 31,
Interest rate swaps
2010
2009
$1,336,269
$2,443,666
$ -
$ -
$1,336,269
$2,443,666
$ -
$ -
42
World Acceptance Corporation
Notes to Consolidated Financial Statements
The Company’s interest rate swaps were valued using the “income approach” valuation technique. This method
used valuation techniques to convert future amounts to a single present amount. The measurement was based on the
value indicated by current market expectations about those future amounts.
There were no assets or liabilities measured at fair value on a non recurring basis during fiscal 2010.
Fair Value of Long-Term Debt
The book value and estimated fair value of our long-term debt was as follows (in thousands):
Book value:
Senior Notes Payable
Convertible Notes, net of
discount
Estimated fair value:
Senior Notes Payable
Convertible Notes
March 31,
2010
March 31,
2009
$ 99,150
113,310
71,492
$ 170,642
83,732
197,042
$ 99,150
73,389
$ 172,539
113,310
61,702
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 March 31, 2010 and March 31, 2009 relates primarily to market
quotations for the Company’s 3.0% Convertible Senior Subordinated Notes due October 1, 2011.
(19) Quarterly Information (Unaudited)
The following sets forth selected quarterly operating data:
2010
2009
First
Second Third
Fourth
First Second Third
Fourth
(Dollars in thousands, except earnings per share data)
Total revenues
Provision for loan losses
General and administrative
expenses
Interest expense
Income tax expense
Net income
Earnings per share:
Basic
Diluted
(20)
Litigation
$100,230 104,206 112,310 123,890 88,421
15,082 17,857
20,428
25,156
29,633
91,721 99,161 112,849
14,822
23,307 29,490
53,333
3,110
8,724
$ 14,635
51,755
3,617
9,066
14,612
55,537
3,756
8,633
14,751
56,387 48,790
3,609
3,398
19,360
6,822
29,663 11,343
48,379 51,716
3,928
5,164
8,863
3,892
6,197
9,946
51,331
3,457
16,898
26,341
$
$
.90
.90
.90
.89
.91
.89
1.80
1.76
.70
.68
.61
.60
.55
.54
1.63
1.62
At March 31, 2010, 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 results of operations or financial
condition taken as a whole.
World Acceptance Corporation
43
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules
13a – 15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of internal control over financial
reporting as of March 31, 2010. Our assessment was based on criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO, Internal Control-Integrated Framework.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions
and dispositions of the assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and board of
directors: and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
any assumptions regarding internal control over financial reporting in future periods based on an evaluation of effectiveness
in a prior period are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Based on using the COSO criteria, we believe our internal control over financial reporting as of March 31, 2010 was
effective.
Our independent registered public accounting firm has audited the consolidated financial statements included in this Annual
Report and has issued an attestation report on the effectiveness of our internal control over financial reporting, as stated in
their report.
A. A. McLean III
Chairman and Chief Executive Officer
Kelly M. Malson
Senior Vice President and Chief Financial Officer
44
World Acceptance Corporation
REPORT ON INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
World Acceptance Corporation:
We have audited World Acceptance Corporation and subsidiaries’ (the “Company’s”) internal control over financial
reporting as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
March 31, 2010, based on criteria established in Internal Control –Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of the Company as of March 31, 2010 and 2009, and the related consolidated statements of
operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period
ended March 31, 2010, and our report dated June 8, 2010 expressed an unqualified opinion on those consolidated financial
statements.
Greenville, South Carolina
June 8, 2010
World Acceptance Corporation
45
REPORT ON INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
World Acceptance Corporation:
We have audited the accompanying consolidated balance sheets of World Acceptance Corporation and subsidiaries (the
“Company”) as of March 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2010. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of World Acceptance Corporation and subsidiaries as of March 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the three-year period ended March 31, 2010, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
World Acceptance Corporation’s internal control over financial reporting as of March 31, 2010, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated June 8, 2010 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Greenville, South Carolina
June 8, 2010
46
World Acceptance Corporation
BOARD OF DIRECTORS
Ken R. Bramlett Jr.
Retired
James R. Gilreath
Attorney
The Gilreath Law Firm, P.A.
William S. Hummers III
Retired
A. Alexander McLean III
Chairman of the Board and Chief Executive Officer
World Acceptance Corporation
Darrell E. Whitaker
President and Chief Operating Officer
IMI Resort Holdings, Inc.
Charles D. Way
Retired
Mark C. Roland
President and Chief Operating Officer
World Acceptance Corporation
World Acceptance Corporation
47
COMPANY OFFICERS
A. Alexander McLean III
Chairman of the Board and Chief Executive Officer
Mark C. Roland
President and Chief Operating Officer
Kelly M. Malson
Senior Vice President, Chief Financial Officer and Treasurer
James D. Walters
Senior Vice President, Southern Division
D. Clinton Dyer
Senior Vice President, Central Division
Jeff L. Tinney
Senior Vice President, Western Division
Francisco Javier Sauza Del Pozo
Senior Vice President, Mexico
James J. Rosenauer
President, ParaData Financial Systems
Judson K. Chapin III
Senior Vice President, Secretary and General Counsel
Marilyn Messer
Senior Vice President, Human Resources
Iris E. Snow
Vice President and Assistant Secretary
Robyn D. Yarborough
Vice President, Internal Audit
Stacey K. Estes
Vice President, Lease Administration
Yvette Drake
Vice President, Director of Marketing
Scot H. Mozingo
Vice President of Operations, Georgia
Stephen A. Bifano
Vice President of Operations, Illinois
Jeanne Davis
Vice President of Operations, New Mexico
Delia A. Brigman
Vice President of Operations, TexasCaliente
Rodney D. Ernest
Vice President of Operations, Northeast Texas
Rudolph R. Cruz
Vice President of Operations, Northwest Texas
James E. Creagor
Vice President of Operations, Southwest Texas
Jackie C. Willyard
Vice President of Operations, Kentucky
James W. Littlepage
Vice President of Operations, Tennessee
D. Scott Phillips
Vice President of Operations, South Carolina
Erik T. Brown
Vice President of Operations, Missouri
Rodney Owens
Vice President of Operations, Oklahoma
Anthony B. Seney
Vice President of Operations, Louisiana
Fidencio Reyna
Vice President of Operations, Mexico
Pedro Arizpe
Vice President of Operations, Mexico
Ricardo Cavazos
Vice President of Operations, Mexico
Juan Valdez
Vice President of Operations, Mexico
48
World Acceptance Corporation
CORPORATE INFORMATION
Common Stock
World Acceptance Corporation’s common stock
trades on The Nasdaq Stock Market under the
symbol: WRLD. As of June 8, 2010, there were 63
shareholders of record and the Company believes
there are a significant number of persons or entities
who hold their stock in nominee or “street” names
through various brokerage firms. On this date there
were 15,765,054
stock
shares of
outstanding.
common
The
table below reflects
the stock prices
published by Nasdaq by quarter for the last two
fiscal years. The last reported sale price on June 7,
2010, was $34.15.
Market Price of Common Stock
Fiscal 2010
Quarter
High
Low
First
Second
Third
Fourth
$ 30.87
28.16
37.42
44.10
$16.09
18.12
23.25
35.67
Fiscal 2009
Quarter
High
Low
First
Second
Third
Fourth
$ 45.99
43.50
36.25
22.90
$ 31.91
31.00
13.44
10.31
The Company has never paid a dividend on its
Common Stock. The Company presently intends to
retain its earnings to finance the growth and
development of its business and does not expect to
pay cash dividends in the foreseeable future. The
Company’s debt agreements also contain certain
to pay
limitations on
dividends.
the Company’s
Consolidated Financial Statements.
the Company’s ability
See note 8
to
Executive Offices
World Acceptance Corporation
Post Office Box 6429 (29606)
108 Frederick Street (29607)
Greenville, South Carolina
(864) 298-9800
Transfer Agent
American Stock Transfer & Trust Company
10150 Mallard Creek Drive, Suite 307
Charlotte, North Carolina 28262
(718) 921-8522
Legal Counsel
Robinson, Bradshaw, & Hinson, P.A.
1900 Independence Center
101 North Tryon Street
Charlotte, North Carolina 28246
Independent Registered Public Accounting Firm
KPMG LLP
55 Beattie Place, Suite 900
Greenville, South Carolina 29601
Annual Report
A copy of the Company’s Annual Report on Form
10-K, as filed with the Securities and Exchange
Commission, may be obtained without charge by
writing to the Corporate Secretary at the executive
offices of the Company. The Form 10-K also can be
the Company’s
reviewed or downloaded from
website: http://www.worldacceptance.com.
For Further Information
A. Alexander McLean III
Chief Executive Officer
World Acceptance Corporation
(864) 298-9800
World Acceptance Corporation
49
Printed by:
PO Box 6429
Greenville, South Carolina 29606
(864) 298-9800
Annual Report