NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The consolidated financial statements of the Company at
June 30, 2016
, and for the
three
months then ended were prepared in accordance with the instructions for Form 10-Q and are unaudited; however, in the opinion of management all adjustments (consisting only of items of a normal, recurring nature) necessary for a fair presentation of the financial position at
June 30, 2016
, and the results of operations and cash flows for the periods ended
June 30, 2016
and
2015
, have been included. The results for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of consolidated 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 consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended
March 31, 2016
, included in the Company’s
2016
Annual Report to Shareholders.
NOTE 2 – SUMMARY OF SIGNIFICANT POLICIES
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. In U.S. branches, the Company offers income tax return preparation services to its loan customers and other individuals.
Seasonality
The Company's loan volume and corresponding loans receivable follow seasonal trends. The Company's highest loan demand generally occurs from October through December, its third fiscal quarter. Loan demand is generally lowest and loan repayment highest from January to March, its fourth fiscal quarter. Loan volume and average balances remain relatively level during the remainder of the year. Consequently, the Company experiences significant seasonal fluctuations in its operating results and cash needs. Operating results for the Company's third fiscal quarter are generally lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters.
Accounting Standards to be Adopted
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, which supersedes the revenue recognition requirements Topic 605 (Revenue Recognition), and most industry-specific guidance. ASU No. 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09, as amended by ASU 2015-14, is effective for fiscal years, and interim periods, beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-15, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016 with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2015-03, which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting). ASU 2015-15 allows debt issuance costs related to line-of-credit agreements to be presented on the balance sheet as an asset. ASU 2015-03 and 2015-15 were adopted April 1, 2016 with no impact on our consolidated financial statements.
Recognition, Measurement, Presentation, and Disclosure of Financial Instruments
In January 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its first quarter of 2019 and early adoption is not permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
Leases
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The ASU will require lessees to recognize assets and liabilities on leases with terms greater than 12 months and to disclose information related to the amount, timing and uncertainty of cash flows arising from leases, including various qualitative and quantitative requirements. The amendments of this ASU become effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
Technical Corrections and Improvements
In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-08, Principal versus Agent Considerations, which clarifies the implementation of the guidance on principal versus agent considerations from ASU 2014-09, Revenue from Contracts with Customers. ASU 2016-08 does not change the core principle of the guidance in ASU 2014-09, but rather clarifies the distinction between principal versus agent considerations when implementing ASU 2014-09. As these are technical corrections and improvements only, the Company does not believe that this ASU will have a material effect on its consolidated financial statements.
Stock Compensation
In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share - Based Payment Accounting, which simplifies the accounting for share-based payment transactions, income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendment in this ASU becomes effective on a modified retrospective transition for accounting in tax benefits recognized, retrospectively for accounting related to the presentation of employee taxes paid, prospective for accounting related to recognition of excess tax benefits, and either a prospective or retrospective method for accounting related to presentation of excess employee tax benefits for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
Revenue from Contracts with Customers
In April 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-10, Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying
performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
Measurement of Credit Losses on Financial Instruments
In June 2016, Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses. The amendment seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at
each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public business entities the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on the consolidated financial statements as a result of future adoption.
NOTE 3 – FAIR VALUE
Fair Value Disclosures
The Company may carry certain financial instruments and derivative assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
|
|
•
|
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
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.
|
|
|
•
|
Level 3 – Unobservable inputs for assets or liabilities reflecting the reporting entity’s own assumptions.
|
The Company’s financial instruments for the periods reported consist of the following: cash and cash equivalents, loans receivable, and senior notes payable. Fair value approximates carrying value for all of these instruments. Loans receivable are originated at prevailing market rates and have an average life of approximately
eight 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 reprices with any changes in LIBOR. The Company also considers its creditworthiness in its determination of fair value.
The carrying amount and estimated fair values of the Company’s financial instruments summarized by level are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
March 31, 2016
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
ASSETS
|
|
|
|
|
|
|
|
Level 1 inputs
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
10,123,775
|
|
|
$
|
10,123,775
|
|
|
$
|
12,377,024
|
|
|
$
|
12,377,024
|
|
Level 3 inputs
|
|
|
|
|
|
|
|
Loans receivable, net
|
713,417,116
|
|
|
713,417,116
|
|
|
706,739,376
|
|
|
706,739,376
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Level 3 inputs
|
|
|
|
|
|
|
|
Senior notes payable
|
360,360,000
|
|
|
360,360,000
|
|
|
374,685,000
|
|
|
374,685,000
|
|
There were no significant assets or liabilities measured at fair value on a non-recurring basis as of
June 30, 2016
or
March 31, 2016
.
NOTE 4 – FINANCE RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of gross loans receivable as of:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
March 31,
2016
|
|
June 30,
2015
|
Small loans
|
$
|
656,868,824
|
|
|
637,826,581
|
|
|
695,861,419
|
|
Large loans
|
429,849,838
|
|
|
427,723,584
|
|
|
448,157,435
|
|
Sales finance receivables
|
783,520
|
|
|
1,414,177
|
|
|
6,649,816
|
|
Total gross loans
|
$
|
1,087,502,182
|
|
|
1,066,964,342
|
|
|
1,150,668,670
|
|
The following is a summary of the changes in the allowance for loan losses for the periods indicated:
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
69,565,804
|
|
|
70,437,988
|
|
Provision for loan losses
|
32,014,277
|
|
|
26,228,009
|
|
Loan losses
|
(32,694,842
|
)
|
|
(29,875,432
|
)
|
Recoveries
(1)
|
3,722,398
|
|
|
5,374,848
|
|
Translation adjustment
|
(614,577
|
)
|
|
(205,444
|
)
|
Balance at end of period
|
$
|
71,993,060
|
|
|
71,959,969
|
|
(1)
Recoveries during the three months ended June 30, 2015 included $1.8 million of recoveries resulting from the sale of previously charged-off loans.
The following is a summary of loans individually and collectively evaluated for impairment for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
Loans individually
evaluated for
impairment
(impaired loans)
|
|
Loans collectively
evaluated for
impairment
|
|
Total
|
Gross loans in bankruptcy, excluding contractually delinquent
|
$
|
4,849,868
|
|
|
—
|
|
|
4,849,868
|
|
Gross loans contractually delinquent
|
46,926,272
|
|
|
—
|
|
|
46,926,272
|
|
Loans not contractually delinquent and not in bankruptcy
|
—
|
|
|
1,035,726,042
|
|
|
1,035,726,042
|
|
Gross loan balance
|
51,776,140
|
|
|
1,035,726,042
|
|
|
1,087,502,182
|
|
Unearned interest and fees
|
(12,655,577
|
)
|
|
(289,436,429
|
)
|
|
(302,092,006
|
)
|
Net loans
|
39,120,563
|
|
|
746,289,613
|
|
|
785,410,176
|
|
Allowance for loan losses
|
(34,476,814
|
)
|
|
(37,516,246
|
)
|
|
(71,993,060
|
)
|
Loans, net of allowance for loan losses
|
$
|
4,643,749
|
|
|
708,773,367
|
|
|
713,417,116
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
Loans individually
evaluated for
impairment
(impaired loans)
|
|
Loans collectively
evaluated for
impairment
|
|
Total
|
Gross loans in bankruptcy, excluding contractually delinquent
|
$
|
4,560,322
|
|
|
—
|
|
|
4,560,322
|
|
Gross loans contractually delinquent
|
46,373,923
|
|
|
—
|
|
|
46,373,923
|
|
Loans not contractually delinquent and not in bankruptcy
|
—
|
|
|
1,016,030,097
|
|
|
1,016,030,097
|
|
Gross loan balance
|
50,934,245
|
|
|
1,016,030,097
|
|
|
1,066,964,342
|
|
Unearned interest and fees
|
(12,726,898
|
)
|
|
(277,932,264
|
)
|
|
(290,659,162
|
)
|
Net loans
|
38,207,347
|
|
|
738,097,833
|
|
|
776,305,180
|
|
Allowance for loan losses
|
(33,840,839
|
)
|
|
(35,724,965
|
)
|
|
(69,565,804
|
)
|
Loans, net of allowance for loan losses
|
$
|
4,366,508
|
|
|
702,372,868
|
|
|
706,739,376
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
Loans individually
evaluated for
impairment
(impaired loans)
|
|
Loans collectively
evaluated for
impairment
|
|
Total
|
Gross loans in bankruptcy, excluding contractually delinquent
|
$
|
4,692,823
|
|
|
—
|
|
|
4,692,823
|
|
Gross loans contractually delinquent
|
47,139,095
|
|
|
—
|
|
|
47,139,095
|
|
Loans not contractually delinquent and not in bankruptcy
|
—
|
|
|
1,098,836,752
|
|
|
1,098,836,752
|
|
Gross loan balance
|
51,831,918
|
|
|
1,098,836,752
|
|
|
1,150,668,670
|
|
Unearned interest and fees
|
(12,820,008
|
)
|
|
(301,349,989
|
)
|
|
(314,169,997
|
)
|
Net loans
|
39,011,910
|
|
|
797,486,763
|
|
|
836,498,673
|
|
Allowance for loan losses
|
(34,518,532
|
)
|
|
(37,441,437
|
)
|
|
(71,959,969
|
)
|
Loans, net of allowance for loan losses
|
$
|
4,493,378
|
|
|
760,045,326
|
|
|
764,538,704
|
|
The average net balance of impaired loans was
$38.7 million
and
$39.5 million
, respectively, for the
three
month periods ended
June 30, 2016
, and
2015
. It is not practical to compute the amount of interest earned on impaired loans.
The following is an assessment of the credit quality for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
March 31,
2016
|
|
June 30,
2015
|
Credit risk
|
|
|
|
|
|
Consumer loans- non-bankrupt accounts
|
$
|
1,081,650,322
|
|
|
1,061,436,900
|
|
|
1,145,206,726
|
|
Consumer loans- bankrupt accounts
|
5,851,860
|
|
|
5,527,442
|
|
|
5,461,944
|
|
Total gross loans
|
$
|
1,087,502,182
|
|
|
1,066,964,342
|
|
|
1,150,668,670
|
|
|
|
|
|
|
|
Consumer credit exposure
|
|
|
|
|
|
|
|
Credit risk profile based on payment activity, performing
|
$
|
1,011,083,612
|
|
|
991,386,552
|
|
|
1,076,373,327
|
|
Contractual non-performing, 60 or more days delinquent
(1)
|
76,418,570
|
|
|
75,577,790
|
|
|
74,295,343
|
|
Total gross loans
|
$
|
1,087,502,182
|
|
|
1,066,964,342
|
|
|
1,150,668,670
|
|
|
|
|
|
|
|
Credit risk profile based on customer type
|
|
|
|
|
|
|
|
New borrower
|
$
|
137,421,921
|
|
|
141,980,629
|
|
|
141,644,702
|
|
Former borrower
|
121,314,533
|
|
|
111,608,375
|
|
|
126,619,807
|
|
Refinance
|
810,003,062
|
|
|
793,913,695
|
|
|
857,726,825
|
|
Delinquent refinance
|
18,762,666
|
|
|
19,461,643
|
|
|
24,677,336
|
|
Total gross loans
|
$
|
1,087,502,182
|
|
|
1,066,964,342
|
|
|
1,150,668,670
|
|
(1) Loans in non-accrual status
The following is a summary of the past due receivables as of:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
March 31,
2016
|
|
June 30,
2015
|
Contractual basis:
|
|
|
|
|
|
|
|
|
30-59 days past due
|
$
|
42,599,938
|
|
|
40,094,824
|
|
|
41,190,574
|
|
60-89 days past due
|
27,460,571
|
|
|
27,082,385
|
|
|
24,566,924
|
|
90 days or more past due
|
48,957,999
|
|
|
48,495,405
|
|
|
49,728,419
|
|
Total
|
$
|
119,018,508
|
|
|
115,672,614
|
|
|
115,485,917
|
|
|
|
|
|
|
|
Percentage of period-end gross loans receivable
|
10.9
|
%
|
|
10.8
|
%
|
|
10.0
|
%
|
NOTE 5 – AVERAGE SHARE INFORMATION
The following is a summary of the basic and diluted average common shares outstanding:
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Basic:
|
|
|
|
Weighted average common shares outstanding (denominator)
|
8,721,718
|
|
|
8,588,647
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Weighted average common shares outstanding
|
8,721,718
|
|
|
8,588,647
|
|
Dilutive potential common shares stock options
|
48,656
|
|
|
123,313
|
|
Weighted average diluted shares outstanding (denominator)
|
8,770,374
|
|
|
8,711,960
|
|
Options to purchase
804,955
and
415,372
shares of common stock at various prices were outstanding during the
three
months ended
June 30, 2016
and
2015
respectively, but were not included in the computation of diluted EPS because the option exercise price was anti-dilutive.
NOTE 6 – STOCK-BASED COMPENSATION
Stock Option Plans
The Company has a 2002 Stock Option Plan, a 2005 Stock Option Plan, a 2008 Stock Option Plan, and a 2011 Stock Option Plan for the benefit of certain directors, officers, and key employees. Under these plans, a total of
4,100,000
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
three
to
five years
for officers, directors, and key employees, and are priced at the market value of the Company's common stock on the date of grant of the option. At
June 30, 2016
, there were a total of
514,794
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. 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 consolidated financial statements based on their grant date fair values. The impact of forfeitures that may occur prior to vesting must also be estimated and considered in the amount recognized. The Company has applied the Black-Scholes valuation model in determining the grant date 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
three
months ended
June 30, 2016
and
2015
was
$21.64
and
$32.05
, respectively. Fair value was estimated at grant date using the weighted-average assumptions listed below:
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Dividend Yield
|
—%
|
|
—%
|
Expected Volatility
|
56.18%
|
|
37.64%
|
Average risk-free rate
|
1.37%
|
|
1.65%
|
Expected Life
|
5.9 years
|
|
6.0 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 the grant date. The risk-free rate reflects the interest rate at grant date on zero coupon U.S. governmental bonds having a remaining life similar to the expected option term.
Option activity for the
three months ended
June 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise
Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate Intrinsic Value
|
Options outstanding, beginning of period
|
950,651
|
|
|
$
|
67.20
|
|
|
|
|
|
Granted during period
|
600
|
|
|
41.22
|
|
|
|
|
|
Exercised during period
|
(6,000
|
)
|
|
27.81
|
|
|
|
|
|
Forfeited during period
|
(30,773
|
)
|
|
67.52
|
|
|
|
|
|
Expired during period
|
(12,600
|
)
|
|
70.23
|
|
|
|
|
|
Options outstanding, end of period
|
901,878
|
|
|
$
|
67.39
|
|
|
6.79
|
|
$
|
2,484,399
|
|
Options exercisable, end of period
|
433,477
|
|
|
$
|
68.48
|
|
|
5.78
|
|
$
|
591,213
|
|
The aggregate intrinsic value reflected in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on
June 30, 2016
and the exercise price, multiplied by the number of in-the-money options) that would have been received by option holders had all option holders exercised their options as of
June 30, 2016
. This amount will change as the stock’s market price changes. The total intrinsic value of options exercised during the periods ended
June 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
Three months ended
|
$
|
87,477
|
|
|
$
|
1,953,575
|
|
As of
June 30, 2016
, total unrecognized stock-based compensation expense related to non-vested stock options amounted to approximately
$8.4 million
, which is expected to be recognized over a weighted-average period of approximately
2.2
years.
Restricted Stock
So far during fiscal 2017, the Company has granted 2,400 shares of restricted stock (which are equity classified), to one executive officer, with a grant date weighted average fair value of $43.49 per share. One-third of these awards will vest on each anniversary of the grant date over the next three years.
During fiscal 2016, the Company granted
69,950
shares of restricted stock (which are equity classified), to certain executive officers, with a grant date weighted average fair value of
$28.11
per share. One-third of these awards will vest on each anniversary of the grant date over the next three years.
During fiscal 2014 and 2013 the Company granted
8,590
and
70,800
Group A performance based restricted stock awards to certain officers. Group A awards vested on April 30, 2015 based on the Company's achievement of the following performance goals as of March 31, 2015:
|
|
|
|
EPS Target
|
|
Restricted Shares Eligible for Vesting (Percentage of Award)
|
$10.29
|
|
100%
|
$9.76
|
|
67%
|
$9.26
|
|
33%
|
Below $9.26
|
|
0%
|
During fiscal 2014 and 2013 the Company granted
56,660
and
443,700
Group B performance based restricted stock awards to certain officers. As of
June 30, 2016
, no Group B awards remain unforfeited and outstanding. Group B awards would have vested as follows, if the Company achieved the following performance goals during any successive trailing four quarters during the measurement period ending on March 31, 2017:
|
|
|
|
Trailing 4 quarter EPS Target
|
|
Restricted Shares Eligible for Vesting (Percentage of Award)
|
$13.00
|
|
25%
|
$14.50
|
|
25%
|
$16.00
|
|
25%
|
$18.00
|
|
25%
|
The Company determined that the earnings per share targets associated with the Group B stock awards were not achievable during the measurement period which ends on March 31, 2017. Subsequently, the Compensation and Stock Option Committee of the Board of Directors amended the awards allowing 25% of the Group B awards to vest for certain officers. The officers were required to forfeit their remaining Group B shares as a part of the amendment. FASB Topic ASC 718 defines a grant modification as a change in any of the terms or conditions of a stock-based compensation award to include accelerated vesting. The Company determined that since the Group B awards would not have otherwise vested pre-modification, the accelerated vesting qualified as a Type III modification. The Company released approximately $9.7 million of compensation expense, including $2.9 million related to the Type III modification, during the year ended March 31, 2016 associated with the Group B awards.
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 compensation expense of
$0.2 million
and a net reduction in compensation expense of
$3.4 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, which is included as a component of general and administrative expenses in the Company’s Consolidated Statements of Operations.
As of
June 30, 2016
, there was approximately
$1.2 million
of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over the next
2.3
years based on current estimates.
A summary of the status of the Company’s restricted stock as of
June 30, 2016
, and changes during the
three months ended June 30, 2016
, are presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Fair Value at Grant Date
|
Outstanding at March 31, 2016
|
93,550
|
|
|
$
|
40.92
|
|
Granted during the period
|
2,400
|
|
|
43.49
|
|
Vested during the period
|
—
|
|
|
—
|
|
Forfeited during the period
|
(32,150
|
)
|
|
65.06
|
|
Outstanding at June 30, 2016
|
63,800
|
|
|
$
|
28.85
|
|
Total share-based compensation included as a component of net income during the
three
month periods ended
June 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Share-based compensation related to equity classified awards:
|
|
|
|
Share-based compensation related to stock options
|
365,664
|
|
|
1,276,961
|
|
Share-based compensation related to restricted stock, net of adjustments and exclusive of cancellations
|
187,862
|
|
|
(3,409,820
|
)
|
Total share-based compensation related to equity classified awards
|
553,526
|
|
|
(2,132,859
|
)
|
NOTE 7 – ACQUISITIONS
The Company evaluates each acquisition to determine if the acquired enterprise meets the definition of a business. Those acquired enterprises that meet the definition of a business are accounted for as a business combination under FASB ASC Topic 805-10 and all other acquisitions are accounted for as asset purchases. There were no acquisitions during the three months ended June 30, 2016 and 2015.
When the acquisition results in a new branch, 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 branch 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.
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.
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
eight months
, and that these loans are priced at current rates, management believes the net loan balances approximate their fair value.
Furniture and equipment are valued at the specific purchase price as agreed to by both parties at the time of acquisition, which management believes approximates their fair values.
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 consolidated results of operations as reported.
NOTE 8 – DEBT
At
June 30, 2016
the Company's notes payable consist of a
$500.0 million
senior revolving credit facility with borrowings of
$360.4 million
outstanding and
$1.5 million
standby letters of credit related to workers compensation and surety bonds outstanding. To the extent that the letters of credit are drawn upon, the disbursement will be funded by the credit facility. There are no amounts due related to the letters of credit as of
June 30, 2016
, and they expire on December 31, 2016. The Letters of Credit are automatically extended for one year on the expiration date. Subject to a borrowing base formula, the Company may borrow at the rate of
LIBOR
plus
4.0%
with a minimum rate of
5.0%
. For the
three
months ended
June 30, 2016
and fiscal year ended
March 31, 2016
, the Company’s effective interest rate, including the commitment fee, was
6.0%
and
5.6%
, respectively, and the unused amount available under the revolver at
June 30, 2016
was
$138.1 million
. The revolving credit facility has a commitment fee of
0.50%
per annum on the unused portion of the commitment. Borrowings under the revolving credit facility mature on
June 15, 2017
.
In July 2016, the credit facility was amended to, among other things, extend the term through June 15, 2018 and reduce the aggregate commitments to $460.0 million. The aggregate commitments will reduce from $460.0 million to $370.0 million on March 31, 2017. The amended facility has an accordion feature pursuant to which the Company may request an increase in the aggregate amount of the commitments under the revolving credit facility, provided that the aggregate amount of the commitments will not exceed $500.0 million.
Substantially all of the Company’s assets, excluding the assets of the Company's Mexican subsidiaries, are pledged as collateral for borrowings under the revolving credit agreement.
NOTE 9 – INCOME TAXES
The Company is required to assess whether the earnings of our
two
Mexican foreign subsidiaries, Servicios World Acceptance Corporation de México, S. de R.L. de C.V. (“SWAC”) and WAC de México, S.A. de C.V., SOFOM ENR (“WAC de Mexico”), will be permanently reinvested in the respective foreign jurisdiction or if previously untaxed foreign earnings of the Company will no longer be permanently reinvested and thus become taxable in the United States. If these earnings were ever repatriated to the United States, the Company would be required to accrue and pay taxes on the cumulative undistributed earnings. As of
June 30, 2016
, the Company has determined that approximately
$1.4 million
of cumulative undistributed net earnings of SWAC and approximately
$20.0 million
of cumulative undistributed net earnings of WAC de México, as well as the future net earnings and losses of both foreign subsidiaries, will be permanently reinvested. At
June 30, 2016
, there was an unrecognized taxable temporary difference in the amount of $2.6 million related to investment in the Mexican subsidiaries.
As of
June 30, 2016
and
March 31, 2016
, the Company had
$11.0 million
and
$10.7 million
, respectively, of total gross unrecognized tax benefits including interest. Approximately
$8.4 million
and
$8.2 million
, respectively, represent the amount of net unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate.
At
June 30, 2016
, approximately
$5.7 million
of gross unrecognized tax benefits are expected to be resolved during the next twelve months through the expiration of the statute of limitations and settlement with taxing authorities. The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of
June 30, 2016
, the Company had approximately
$1.4 million
accrued for gross interest, of which
$130,118
was a current period-end expense for the
three
months ended
June 30, 2016
.
The Company is subject to U.S. and Mexican income taxes, as well as various other state and local jurisdictions. With the exception of a few states, 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 2011, although carryforward attributes that were generated prior to 2011 may still be adjusted upon examination by the taxing authorities if they either have been or will be used in a future period.
The Company’s effective income tax rate decreased slightly to
37.4%
for the quarter ended
June 30, 2016
compared to
37.7%
for the prior year quarter.
NOTE 10 – COMMITMENT AND CONTINGENCIES
See Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Regulatory Matters-CFPB Investigation,” for information regarding the Company’s previously disclosed receipt of a Civil Investigative Demand (“CID”) from the Consumer Financial Protection Bureau (“CFPB”) on March 12, 2014 and receipt of a Notice and Opportunity to Respond and Advise ("NORA") letter from the CFPB on August 7, 2015 and the Company’s responses thereto.
As previously disclosed, on April 22, 2014, a shareholder filed a putative class action complaint, Edna Selan Epstein v. World Acceptance Corporation et al., in the United States District Court for the District of South Carolina (case number 6:14-cv-01606) (the "Edna Epstein Putative Class Action"), against the Company and certain of its current and former officers on behalf of all persons who purchased or otherwise acquired the Company’s common stock between April 25, 2013 and March 12, 2014. Two amended complaints have been filed by the plaintiffs, and several other motions have been filed in the proceedings. The complaint, as currently amended, alleges that (i) the Company made false and misleading statements in various SEC reports and other public statements in violation of federal securities laws preceding the Company’s disclosure in a Form 8-K filed March 13, 2014 that it had received the above-referenced CID from the CFPB (ii) the Company’s loan growth and volume figures were inflated because of a weakness in the Company’s internal controls relating to its accounting treatment of certain small-dollar loan re-financings and (iii) additional allegations regarding, among other things, the Company's receipt of a Notice and Opportunity to Respond and Advise letter from the CFPB on August 7, 2015. The complaint seeks class certification for a class consisting of all persons who purchased or otherwise acquired the Company's common stock between January 30, 2013 and August 10, 2015, unspecified monetary damages, costs and attorneys' fees. The Company believes the complaint is without merit. On November 16, 2015, the Lead Plaintiff filed a motion seeking to certify the action as a class action. The time for the Company to respond to the Lead Plaintiff’s motion for class certification has not yet expired. On January 29, 2016, defendants moved to dismiss the second amended complaint. The Lead Plaintiff has filed a response in opposition, the Company filed a reply in further support of its motion to dismiss, and the Company’s motion to dismiss is currently pending before the Court.
As previously disclosed, on July 15, 2015, a shareholder filed a putative derivative complaint, Irwin J. Lipton, et al. v. McLean, et al., in the United States District Court for the District of South Carolina (case number 6:15-cv-02796-MGL) (the “Lipton Derivative Action”), on behalf of the Company against certain of its current and former officers and directors. On September 21, 2015, another shareholder filed a putative derivative complaint, Paul Parshall, et al. v. McLean, et al., in the United States District Court for the District of South Carolina (case number 6:15-cv-03779-MGL) (the “Parshall Derivative Action”), asserting substantially similar claims on behalf of the Company against certain of its current and former officers and directors. On October 14, 2015, the Court entered an order consolidating the Lipton Derivative Action and the Parshall Derivative Action as In re World Acceptance Corp. Derivative Litigation (Lead Case No. 6:15-cv-02796-MGL). The plaintiffs subsequently filed an amended consolidated complaint, and the amended consolidated complaint alleges, among other things: (i) that the defendants breached their fiduciary duties by disseminating false and misleading information to the Company’s shareholders regarding the Company’s loan growth, loan renewals, allowances for loan losses, revenue sources, revenue growth, compliance with GAAP, and the sufficiency of the Company’s internal controls and accounting procedures; (ii) that the defendants breached their fiduciary duties by failing to ensure that the Company maintained adequate internal controls; (iii) that the defendants breached their fiduciary duties by failing to exercise prudent oversight and supervision of the Company’s officers and other employees to ensure conformity with all applicable laws and regulations; (iv) that the defendants were unjustly enriched as a result of the compensation they received while allegedly breaching their fiduciary duties owed to the Company; (v) that the defendants wasted corporate assets by paying excessive compensation to certain of the Company’s executive officers, awarding self-interested stock options to certain of the Company’s officers and directors, incurring legal liability and legal costs to defend the defendants’ unlawful actions, and authorizing the repurchase of Company stock at artificially inflated prices; (vi) that certain of the defendants breached their fiduciary duty to the Company by selling shares of the Company’s stock at artificially inflated prices while in the possession of material, nonpublic information regarding the Company’s financial condition; (vii) that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 by making false and misleading statements regarding the Company’s practices regarding loan renewals, loan modifications, and accounting for loans; (viii) that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 by failing to disclose alleged material facts in the Company’s 2014 and 2015 proxy statements; and (ix) allegations similar to those made in connection with the Edna Epstein Putative Class Action described above. The amended consolidated complaint seeks, among other things, unspecified monetary damages and an order directing the Company to take steps to reform and improve its corporate governance and internal procedures to comply with applicable laws and to protect the Company and its shareholders from future wrongdoing such as that described in the consolidated complaint. The defendants filed motions to dismiss the amended consolidated complaint on April 13, 2016. The plaintiffs filed responses in opposition, the defendants filed replies in further support of their motions to dismiss, and the defendants’ motions to dismiss the amended consolidated complaint are currently pending before the Court.
In addition, from time to time the Company is involved in routine litigation matters relating to claims arising out of its operations in the normal course of business, including matters in which damages in various amounts are claimed.
Estimating an amount or range of possible losses resulting from litigation, government actions and other legal proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, may involve fines, penalties or damages that are discretionary in amount, involve a large number of claimants or significant discretion by regulatory authorities, represent a change in regulatory policy or interpretation, present novel legal theories, are in the early stages of the proceedings, are subject to appeal or could result in a change in business practices. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based on information currently available, the Company does not believe that any reasonably possible losses arising from currently pending legal matters will be material to the Company’s results of operations or financial condition. However, in light of the inherent uncertainties involved in such matters, an adverse outcome in one or more of these matters could materially and adversely affect the Company’s financial condition, results of operations or cash flows in any particular reporting period.
NOTE 11 – SUBSEQUENT EVENTS
Tenth Amendment to Amended and Restated Revolving Credit Facility
On July 12, 2016, World Acceptance Corporation (the “Company”) entered into a tenth amendment (the “Tenth Amendment”) to the Amended and Restated Revolving Credit Agreement, originally dated as of September 17, 2010 (as cumulatively amended, the “Revolving Credit Agreement”), among the Company, the lenders named therein, and Wells Fargo Bank, National Association (“Wells Fargo”), as successor Administrative Agent and successor Collateral Agent. The credit facility was amended to, among other things, extend the term through June 15, 2018 and reduce the aggregate commitments to $460 million. The aggregate commitments will reduce from $460.0 million to $370.0 million on March 31, 2017. The amended facility has an accordion feature pursuant to which the Company may request an increase in the aggregate amount of the commitments under the revolving credit facility, provided that the aggregate amount of the commitments will not exceed $500 million.
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES