UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
------------------- -----------------
Commission File Number: 0-19599
WORLD ACCEPTANCE CORPORATION
----------------------------
(Exact name of registrant as specified in its charter.)
South Carolina 57-0425114
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
108 Frederick Street
Greenville, South Carolina 29607
--------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 298-9800
--------------
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period than the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date, November 16, 1998.
Common Stock, no par value 19,016,573
-------------------------- ----------
(Class) (Outstanding)
This Filing contains 19 pages.
The Exhibit Index is on page 17.
1
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30,
1998, and March 31, 1998 3
Consolidated Statements of Operations for the
three-month periods and six-month periods ended
September 30, 1998, and September 30, 1997 4
Consolidated Statements of Shareholders' Equity
for the year ended March 31, 1998, and the six-month
period ended September 30, 1998 5
Consolidated Statements of Cash Flows for the
three-month periods and six-month periods ended
September 30, 1998, and September 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three-month
periods and six-month periods ended September 30, 1998,
and September 30, 1997 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Securityholders 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
2
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
1998 1998
------------- -------------
ASSETS
Cash $ 1,293,885 1,212,611
Gross loans receivable 141,133,490 130,559,256
Less:
Unearned interest and fees (30,538,595) (27,173,845)
Allowance for loan losses (8,908,102) (8,444,563)
------------- -------------
Loans receivable, net 101,686,793 94,940,848
Property and equipment, net 6,720,509 6,424,757
Other assets, net 6,217,527 6,193,300
Intangible assets, net 9,360,767 9,610,394
------------- -------------
$ 125,279,481 118,381,910
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Senior notes payable 58,250,000 53,700,000
Subordinated notes payable 10,000,000 10,000,000
Other note payable 482,000 482,000
Accounts payable and accrued expenses 8,712,273 6,898,630
------------ ------------
Total liabilities 77,444,273 71,080,630
------------ ------------
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 935,921 864,968
Retained earnings 46,899,287 46,436,312
------------ ------------
Total shareholders' equity 47,835,208 47,301,280
------------ ------------
$125,279,481 118,381,910
============ ============
See accompanying notes to consolidated financial statements.
3
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Interest and fee income $ 19,293,990 17,241,065 37,739,282 33,674,328
Insurance and other income 2,388,103 2,061,042 4,676,420 4,013,963
------------ ------------ ------------ ------------
Total revenues 21,682,093 19,302,107 42,415,702 37,688,291
------------ ------------ ------------ ------------
Expenses:
Provision for loan losses 3,111,965 2,866,548 5,471,634 4,964,754
------------ ------------ ------------ ------------
General and administrative expenses:
Personnel 8,934,320 7,839,340 17,952,497 15,808,700
Occupancy and equipment 1,697,193 1,631,073 3,191,981 3,051,372
Data processing 368,619 303,639 720,670 599,701
Advertising 841,234 799,801 1,732,258 1,512,283
Legal 5,562,793 102,765 5,687,180 232,715
Amortization of intangible assets 316,391 300,320 627,077 785,793
Other 1,975,397 1,866,336 3,709,092 3,476,499
------------ ------------ ------------ ------------
19,695,947 12,843,274 33,620,755 25,467,063
------------ ------------ ------------ ------------
Interest expense 1,411,655 1,383,406 2,627,338 2,564,882
------------ ------------ ------------ ------------
Total expenses 24,219,567 17,093,228 41,719,727 32,996,699
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,537,474) 2,208,879 695,975 4,691,592
Income taxes (benefit) (867,000) 740,000 233,000 1,572,000
------------ ------------ ------------ ------------
Net income (loss) $ (1,670,474) 1,468,879 462,975 3,119,592
============ ============ ============ ============
Net Income (loss) per common share:
Basic $ (.09) .08 .02 .16
============ ============ ============ ============
Diluted $ (.09) .08 .02 .16
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 19,006,888 18,952,769 19,005,005 18,945,545
============ ============ ============ ============
Diluted 19,006,888 19,202,676 19,218,723 19,176,115
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional
Paid-in Retained
Capital Earnings Total
---------- ---------- ----------
<S> <C> <C> <C>
Balances at March 31, 1997 $ 625,592 38,337,871 38,963,463
Proceeds from exercise of stock options (62,000 shares),
including tax benefits of $58,543 239,376 -- 239,376
Net income for the year -- 8,098,441 8,098,441
---------- ---------- ----------
Balances at March 31, 1998 864,968 46,436,312 47,301,280
Proceeds from exercise of stock options (18,000 shares),
including tax benefit of $18,453 70,953 -- 70,953
Net income for the six months -- 462,975 462,975
---------- ---------- ----------
Balances at September 30, 1998 $ 935,921 46,899,287 47,835,208
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------- -------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Cash flows from operating activities:
Net income (loss) $(1,670,474) 1,468,879 462,975 3,119,592
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 3,111,965 2,866,548 5,471,634 4,964,754
Amortization of intangible assets 316,391 300,320 627,077 785,793
Amortization of loan costs and discounts 33,172 31,258 60,693 57,468
Depreciation 376,405 363,649 710,244 718,271
Change in accounts:
Other assets, net 171,258 (1,953,420) (84,920) (1,883,130)
Accounts payable and accrued expenses 2,794,287 683,769 1,832,096 (1,264,202)
--------- ------- --------- ----------
Net cash provided by operating activities 5,133,004 3,761,003 9,079,799 6,498,546
--------- ------- --------- ----------
Cash flows from investing activities:
Increase in loans, net (5,786,913) (5,012,704) (11,237,223) (7,977,766)
Net assets acquired from office acquisitions,
primarily loans (754,725) (4,730,288) (985,275) (5,037,552)
Purchases of premises and equipment (697,425) (813,160) (1,001,077) (1,314,610)
Purchases of intangible assets (355,100) (939,936) (377,450) (1,076,936)
--------- ------- --------- ----------
Net cash used by investing activities (7,594,163) (11,496,088) (13,601,025) (15,406,864)
--------- ------- --------- ----------
Cash flows from financing activities:
Proceeds (repayment) of senior notes payable, net 2,950,000 (2,250,000) 4,550,000 (350,000)
Proceeds from senior subordinated notes -- 10,000,000 -- 10,000,000
Proceeds from exercise of stock options 35,000 17,500 52,500 55,417
--------- ------- --------- ----------
Net cash provided by financing activities 2,985,000 7,767,500 4,602,500 9,705,417
--------- ------- --------- ----------
Increase (decrease) in cash 523,841 32,415 81,274 797,099
Cash, beginning of period 770,044 2,250,757 1,212,611 1,486,073
----------- ----------- ----------- -----------
Cash, end of period $ 1,293,885 2,283,172 1,293,885 2,283,172
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,286,218 899,903 2,773,708 2,363,686
Cash paid for income taxes 2,734,960 1,979,435 3,753,385 3,678,770
Supplemental schedule of noncash financing activities:
Tax benefits from exercise of stock options 10,090 7,786 18,453 23,204
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of the Company at September 30, 1998,
and for the periods 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 September 30, 1998, and the
results of operations and cash flows for the periods then ended, have been
included. The results for the periods ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the full year or
any other interim period.
These consolidated financial statements do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the Company's audited financial statements and related notes
for the year ended March 31, 1998, included in the Company's 1998 Annual Report
to Shareholders.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
The following is a summary of the changes in the allowance for loan losses
for the periods indicated (unaudited):
<TABLE>
<CAPTION>
Three months Six months
ended September 30, ended September 30,
------------------- -------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $ 8,799,019 6,433,534 8,444,563 6,283,459
Provision for loan losses 3,111,965 2,866,548 5,471,634 4,964,754
Loan losses (3,132,470) (2,822,196) (5,479,865) (5,039,398)
Recoveries 323,695 245,802 654,518 498,829
Allowance on acquired loans (194,107) 802,764 (182,748) 818,808
----------- --------- --------- ---------
Balance at end of period $ 8,908,102 7,526,452 8,908,102 7,526,452
=========== ========= ========= =========
NOTE 3 - PARADATA FINANCIAL SYSTEMS (PARADATA)
The following data for ParaData was included in the Consolidated Statements
of Operations for the periods ended September 30, 1998 and 1997 (unaudited):
Three months Six months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Sales and system-support $ 534,912 463,355 1,136,811 870,724
Cost of sales 100,812 75,688 218,220 163,701
--------- --------- --------- ---------
Net margin (included in other income) 434,100 387,667 918,591 707,023
--------- --------- --------- ---------
General and administrative expenses
Personnel 277,806 253,425 571,773 469,285
Occupancy and equipment 35,870 69,011 64,866 135,272
Advertising 1,162 2,575 4,318 2,825
Amortization of intangibles -- 7,189 -- 14,378
Other 44,022 38,708 92,820 78,478
--------- --------- --------- ---------
358,860 370,908 733,777 700,238
--------- --------- --------- ---------
Net income before income taxes $ 75,240 16,759 184,814 6,785
========= ========= ========= =========
</TABLE>
7
<PAGE>
NOTE 4 - LEGAL EXPENSE
Since April 1995, the Company and several of its subsidiaries have been
parties to litigation challenging the Company's non-filing insurance practices.
Non-filing insurance is an insurance product that lenders like the Company can
purchase in lieu of filing a UCC financing statement covering the collateral of
their borrowers. The litigation against the Company has been consolidated with
other litigation against other finance companies, jewelry and furniture
retailers, and insurance companies in a purported nationwide class action in the
U.S. District Court in Alabama under the caption In re: Consolidated "Non-filing
Insurance" Fee Litigation (Multidistrict Litigation Docket No. 1130), U.S.
District Court, Middle District of Alabama, Northern Division).
On November 11, 1998, the Company and its subsidiaries named in the action
entered into a settlement agreement. Pursuant to the settlement agreement, which
is subject to the court's approval, the Company has agreed to settle all claims
alleged in the litigation involving it and its subsidiaries for an aggregate
cash payment of $5 million. In addition, the terms of the settlement will
curtail certain non-filing practices by the Company and its subsidiaries and
will allow the court to approve criteria defining those circumstances in which
the Company's subsidiaries can make non-filing insurance claims going forward.
As a result of the settlement, non-filing insurance fees charged to borrowers
will be reduced by 25%. The settlement agreement, which includes the settlement
by several other defendants in the litigation, including the Company's insurer,
is subject to the court's approval because the settlement concerns a class
action. The Company anticipates that a hearing will be held by the court during
the fourth quarter of its current fiscal year with respect to approval of the
settlement.
The Company has recorded an accrual for settlement costs, including the
expected expenses to comply with the terms of the settlement, of $5.4 million in
the quarter ended September 30, 1998. Going forward, the Company expects that
the settlement will limit and reduce the coverage for the types of losses with
respect to which its subsidiaries will submit claims. The Company cannot predict
the amount of this reduction, but believes that the settlement will negatively
impact the Company in the near term, but should not have a material adverse
effect on the Company's results of operations over time.
NOTE 5 - ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD'S (FASB) STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 130
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statements and display
the balance of other comprehensive income separately in the equity section of a
statement of financial position. The Company adopted Statement 130 effective
April 1, 1998, and no adjustments were necessary and comprehensive income (loss)
is equal to net income (loss).
8
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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 (unaudited):
<TABLE>
<CAPTION>
Three months Six months
ended September 30, ended September 30,
------------------- -------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Average gross loans receivable (1) $ 139,013 121,206 136,006 118,042
Average loans receivable (2) 108,170 94,086 106,082 91,811
Expenses as a % of total revenue:
Provision for loan losses 14.4% 14.9% 12.9% 13.2%
General and administrative (3) 90.8% 66.5% 79.3% 67.6%
Total interest expense 6.5% 7.2% 6.2% 6.8%
Operating margin (4) (5.2)% 18.6% 7.8% 19.3%
Return on average assets (annualized) 6.2% 5.4% 6.6% 5.9%
Offices opened or acquired, net 8 11 14 24
Total offices (at period end) 374 360 374 360
</TABLE>
(1)Average gross loans receivable have been determined by averaging month-end
gross loans receivable over the indicated period.
(2)Average loans receivable have been determined by averaging month-end gross
loans receivable less unearned interest and deferred fees over the indicated
period.
(3)Includes $5.4 million accrual for pending legal settlement for the three and
six-month periods ended September 30, 1998. Excluding this one time charge,
the ratios would have been 65.9% and 66.5% for the three and six-month
periods, respectively.
(4)Operating margin is computed as total revenues less provision for loan
losses and general and administrative expenses, as a percentage of total
revenues. Excluding the $5.4 million charge for the pending legal settlement,
the operating margins for the three and six-month periods ended September 30,
1998 would have been 19.7% and 20.6%, respectively.
Pending Legal Settlement
Since April 1995, the Company and several of its subsidiaries have been
parties to litigation challenging the Company's non-filing insurance practices.
Non-filing insurance is an insurance product that lenders like the Company can
purchase in lieu of filing a UCC financing statement covering the collateral of
their borrowers. The litigation against the Company has been consolidated with
other litigation against other finance companies, jewelry and furniture
retailers, and insurance companies in a purported nationwide class action in the
U.S. District Court in Alabama under the caption In re: Consolidated "Non-filing
Insurance" Fee Litigation (Multidistrict Litigation Docket No. 1130), U.S.
District Court, Middle District of Alabama, Northern Division).
On November 11, 1998, the Company and its subsidiaries named in the action
entered into a settlement agreement. Pursuant to the settlement agreement, which
is subject to the court's approval, the Company has agreed to settle all claims
alleged in the litigation involving it and its subsidiaries for an aggregate
cash payment of $5 million. In addition, the terms of the settlement will
curtail certain non-filing practices by the Company and its subsidiaries and
will allow the court to approve criteria defining those circumstances in which
the Company's subsidiaries can make non-filing insurance claims going forward.
As a result of the settlement, non-filing insurance fees charged to borrowers
will be reduced by 25%. The settlement agreement, which includes the settlement
by several other defendants in the litigation, including the Company's insurer,
is subject to the court's approval because the settlement concerns a class
action. The Company anticipates that a hearing will be held by the court during
the fourth quarter of its current fiscal year with respect to approval of the
settlement.
9
<PAGE>
The Company has recorded an accrual for settlement costs, including the
expected expenses to comply with the terms of the settlement, of $5.4 million in
the quarter ended September 30, 1998. Going forward, the Company expects that
the settlement will limit and reduce the coverage for the types of losses with
respect to which its subsidiaries will submit claims. The Company cannot predict
the amount of this reduction, but believes that the settlement will negatively
impact the Company in the near term, but should not have a material adverse
effect on the Company's results of operations over time.
Comparison of Three Months Ended September 30, 1998, Versus
Three Months Ended September 30, 1997
For the three months ended September 30, 1998, the Company reported a net
loss of $1.7 million. This loss was due to a $5.4 million accrual for legal
expenses resulting from a pending settlement of certain litigation (see Pending
Legal Settlement).
Excluding the effect of this one time charge, offset somewhat by a reduction
of income taxes, net income amounted to $1,909,000 for the three months ended
September 30, 1998, a 29.9% increase from the $1,469,000 earned during the
corresponding three-month period of the previous year. This increase resulted
from increases in operating income (revenues less provision for loan losses and
general and administrative expenses) of approximately $682,000, or 19.0%, and
operating margin percentage, and was offset by slight increases in interest
expense and income taxes as described below.
Interest and fee income for the quarter ended September 30, 1998, increased
by $2.1 million, or 11.9%, over the same period of the prior year. This increase
resulted primarily from the $14.1 million increase, or 15.0%, in average loans
receivables over the two corresponding periods. The increase in interest and
fees was less than the increase in average balances outstanding due to a slight
reduction in the overall yield in the loan portfolio, which was due to lower
interest rates charged on larger loans made in select offices of the Company.
Insurance commissions and other income increased by $327,000, or 15.9%, when
comparing the two quarterly periods. Insurance commissions increased by 6.3%,
tracking the growth in loans in those states that allow the sale of credit
insurance. Other income increased by $247,000, or 31.2%, primarily as the result
of gross profit increases at the Company's ParaData subsidiary and the World
Class Buying Club.
10
<PAGE>
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
Comparison of Three Months Ended September 30, 1998, Versus
Three Months Ended September 30, 1997, continued
Total revenues rose to $21.7 million during the quarter ended September 30,
1998, a 12.3% increase over the $19.3 million in total revenues for the same
quarter of the prior year. Revenues from the 336 offices open throughout both
three-month periods increased by approximately 4.9%. At September 30, 1998, the
Company had 374 offices in operation, a net increase of 8 offices during the
current quarter, and 14 offices since the beginning of the fiscal year.
The provision for loan losses amounted to $3.1 million during the quarter
ended September 30, 1998, representing an 8.6% increase over the $2.9 million
during the same quarter of fiscal 1998. This increase resulted from increases in
the general allowance for loan losses and in loan losses themselves. Although
actual net charge-offs during the quarter increased by $232,000, or 9.0%, net
charge-offs as a percentage of annualized average loans decreased from 11.0% for
the quarter ended September 30, 1997, to 10.4% for the most recent quarter. The
continuing improvement in the Company's charge-off ratios has greatly
contributed to the Company's enhanced earnings during the past three quarters.
There can be no assurance, however, that this trend will continue. Effective
with the beginning of the current fiscal year, the Company changed its method of
accounting for charge-offs to a net of unearned income basis. Prior to April 1,
1998, all loans were charged-off for the gross amount with any remaining
unearned income recognized as interest and fee income. There is no net income
effect of the change, but a reclassification between the provision for loan
losses and interest and fee income has been made. All prior year numbers have
been restated to reflect the change making the corresponding numbers comparable.
Excluding the pending legal settlement, general and administrative expenses
for the quarter ended September 30, 1998, increased by $1.5 million, or 11.3%,
over the same quarter of fiscal 1998. This increase resulted primarily from the
additional expenses associated with the 23 new offices opened or acquired
between September 30, 1997, and September 30, 1998. During the same 12-month
period, the Company has also sold or merged 9 offices with other existing
offices. These were offices that had not grown as expected to a profitable size
within a reasonable period of time. As a percentage of total revenues, total
general and administrative expenses decreased from 66.5% for the quarter ended
September 30, 1997, to 65.9% for the most recent quarter. Additionally,
excluding the expenses associated with ParaData, overall general and
administrative expenses when divided by the average open offices increased by
5.7% when comparing the two periods.
Interest expense increased by $28,000, or 2.0%, when comparing the two
corresponding quarterly periods. This increase resulted from the slight increase
in the level of debt, which grew from $67.9 million at September 30, 1997, to
$68.3 million at September 30, 1998.
Comparison of Six Months Ended September 30, 1998,
Versus Six Months Ended September 30, 1997
For the six-month period ended September 30, 1998, net income amounted to
$463,000. Excluding the effects of the $5.4 million pending legal settlement and
related income tax benefit, net income amounted to $4.0 million, an increase of
$922,000, or 29.6%, from the corresponding six-month period of the prior year.
Operating income increased by $1.5 million, or 20.2%, over the two periods. This
increase was offset by an increase in both interest expense and income taxes.
Total revenues amounted to $42.4 million during the current six-month period,
an increase of $4.7 million, or 12.5%, over the prior-year period. This increase
resulted from an increase in interest and fee income of 12.1% combined with an
increase in insurance and other income of 16.5%. Revenues from the 336 offices
open throughout both six-month periods increased approximately 4.9%.
11
<PAGE>
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
Comparison of Six Months Ended September 30, 1998,
Versus Six Months Ended September 30, 1997, continued
Interest and fee income rose by $4.1 million, or 12.1%, during the two
corresponding six-month periods primarily as a result of increases in loan
balances outstanding. Average loans receivable were $106.1 million during the
six months ended September 30, 1998, representing a 15.5% increase over the
average balances of the prior year. Other income increased by 16.5% due to
increased insurance commissions, as well as increased gross profits from
ParaData and WCBC sales.
The provision for loan losses increased by $507,000, or 10.2%, during the
current six-month period when compared to the same period of fiscal 1998. This
increase resulted in an increase in the general reserve for loan losses, which
is a function of gross loans outstanding, as well as an increase in loan losses.
Net charge-offs increased by $285,000, or 6.3%, when comparing the two six-month
periods. As an annualized percentage of average loans, this represented a
decrease to 9.1% during the current six-month period compared to 9.9% for the
same period of the prior fiscal year.
General and administrative, excluding the pending legal settlement, expenses
increased by $2,754,000, or 10.8%, during the most recent six-month period. As a
percentage of total revenues, these expenses decreased from 67.6% during the
prior year six-month period to 66.5% during the current period. The Company's
expense ratios have benefited from the merger or sale of nine unprofitable
offices during the year, as well as the opening of fewer new offices during the
current fiscal year. Excluding the expenses associated with ParaData, overall
general and administrative expenses, when divided by the average open offices,
increased by 5.3% when comparing the two six-month periods.
Interest expense increased by $62,000 when comparing the two six-month
periods, an increase of only 2.4%. This reflects the small increase in overall
debt from September 1997 to the end of the current quarter, a period during
which the Company's generated excess cash while growing total assets by 9.3% and
total debt by only 0.6%.
The effective income tax rate remained constant at 33.5% during the six
months ended September 30, 1998, from the same period ended September 30, 1997.
Liquidity and Capital Resources
The Company's primary sources of funds are cash flow from operations and
borrowings under its revolving credit agreement. The Company's primary ongoing
cash requirements are funding the opening and operation of new offices, funding
overall growth of loans outstanding (including acquisitions), the legal
settlement and the repayment of existing debt.
The Company has a $65.0 million revolving credit agreement, $8.0 million of
senior term notes, and $10.0 million of subordinated notes.
The revolving credit facility expires on September 30, 1999, and bears
interest, at the Company's option, at the agent's prime rate or LIBOR plus
1.60%. At September 30, 1998, the interest rate under the facility was 7.17%,
and the Company's outstanding balance was $50.25 million, leaving $14.75 million
in borrowing availability under existing borrowing base limitations (based on
eligible loans receivable).
The senior term notes provide for interest payments to be made semi-annually
at a fixed rate of 8.5%, with annual principal payments of $4.0 million to be
made on December 1, 1998 and 1999.
The subordinated notes provide for interest payments to be made quarterly at
a fixed rate of 10.0%. Annual principal payments of $2.0 million will be due
beginning June 1, 1999, with a final maturity date of June 1, 2004.
Borrowings under the revolving credit agreement, the senior term notes, and
the subordinated notes are secured by a lien on substantially all the tangible
and intangible assets of the Company and its subsidiaries pursuant to various
security agreements.
The Company believes that cash flow from operations and borrowings under its
revolving credit facility will be adequate to fund the cost of the pending legal
settlement, to fund the principal payment due under the senior term and
subordinated notes as well as fund the expected costs of opening and operating
new offices, including funding initial operating losses of new offices, acquired
offices and funding loans receivable originated by those offices and the
Company's other offices.
12
<PAGE>
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
Inflation
The Company does not believe that inflation has a material adverse effect on
its financial condition or results of operations. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. While increases in operating costs would adversely affect the Company's
operations, the consumer lending laws of three of the six states in which the
Company currently operates allow indexing of maximum loan amounts to the
Consumer Price Index. These provisions will allow the Company to make larger
loans at existing interest rates, which could partially offset the effect of
inflationary increases in operating costs.
Quarterly Information and Seasonality
The Company's loan volume and corresponding loans receivable follow seasonal
trends. The Company's highest loan demand occurs each year from October through
December, its third fiscal quarter. Loan demand is generally the lowest and loan
repayment is highest from January to March, its fourth fiscal quarter. Loan
volume and average balances remain relatively level during the remainder of the
year. This seasonal trend causes fluctuations in the Company's cash needs and
quarterly operating performance through corresponding fluctuations in interest
and fee income and insurance commissions earned, since unearned interest and
insurance income are accreted to income on a collection method. Consequently,
operating results for the Company's third fiscal quarter are significantly lower
than in other quarters and operating results for its fourth fiscal quarter are
generally higher than in other quarters.
Year 2000
The Company recognizes that there is a business risk in computerized systems
and products as the calendar rolls over into the next century. Failure of these
systems and products to correctly process the date could cause miscalculations,
unpredictable or inconsistent results, or complete system failures. This problem
is commonly called the "year 2000 problem." In particular, in the Company's line
of business, the year 2000 problem could cause results such as miscalculations
of interest on loans or other significant problems.
The Company has determined that its primary software package, the "Loan
Manager System" developed and maintained by its wholly owned subsidiary,
ParaData Financial Systems, is year 2000 compliant.
The Company is also dependent upon several outside vendors for processing
information such as payroll, general ledger, benefits administration, etc.
Inquiries have been made of and assurances received from, each of these
providers that these systems are also prepared for the year 2000. Nevertheless,
the Company intends to conduct tests of all primary and secondary systems during
the next 12 months to ensure the accuracy of information to the extent possible.
The Company believes that its total costs of addressing the year 2000 problem
has been, and will continue to be, immaterial.
The Company believes the most reasonably likely worst case year 2000 scenario
would be the failure of key suppliers (e.g. utility providers, phone and data
communication vendors, banks, etc.) to achieve year 2000 compliance, resulting
in lost revenues due to forced office closings or loss of communications for
extended periods of time. Currently, based on responses obtained from third
parties to date, the Company is not aware of any material third parties that do
not expect to be year 2000 compliant. However, due to the uncertainty
surrounding the readiness of third parties, the Company is unable to determine
whether the consequences of year 2000 failures will materially affect the
Company's financial condition or results of operations. The Company maintains a
contingency plan that allows individual offices to operate in a manual
environment for short periods of time; however, these alternatives would not be
sufficient should year 2000 failures cause blackouts for extended periods.
The year 2000 disclosure set forth above should be read in connection with
"Forward-Looking Information," which follows.
13
<PAGE>
Forward-Looking Information
This report on Form 10-Q, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations," may contain various
"forward-looking statements," within the meaning of Section 21E of the
Securities Exchange Act of 1934, that are based on management's belief and
assumptions, as well as information currently available to management.
Specifically, management's statements of expectations with respect to the
litigation and pending settlement (the "Settlement") described above in
"--Pending Legal Settlement" the litigation described below in "Legal
Proceedings," and the matters discussed above in "--Year 2000," may be deemed
forward-looking statements. When used in this document, the words "anticipate,"
"estimate," "expect," and similar expressions may identify forward-looking
statements. Although the Company believes that the expectations reflected in any
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Any such statements are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual financial results, performance or financial condition may
vary materially from those anticipated, estimated or expected. Among the key
factors that could cause the Company's actual financial results, performance or
condition to differ from the expectations expressed or implied in such
forward-looking statements are the following: changes in interest rates; risks
inherent in making loans, including repayment risks and value of collateral;
recently-enacted or proposed legislation; whether, and the terms upon which,
court approval of the Settlement is obtained; the occurrence of non-filing
claims at historical levels in circumstances validated by the Settlement; the
timing and amount of revenues that may be recognized by the Company; changes in
current revenue and expense trends (including trends affecting charge-offs);
changes in the Company's markets and general changes in the economy
(particularly in the markets served by the Company); the ability of the Company
and third parties with whom the Company deals to achieve year 2000 compliance;
the unpredictable nature of litigation; and other matters discusses in this
Report and the Company's other filings with the Securities and Exchange
Commission.
Legal Proceedings
The Company is a party to certain legal proceedings. See Part II, Item 1.
14
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In addition to the litigation discusses in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company
has been named as a defendant in an action, Turner v. World Acceptance
Corp. pending in District Court for the Fourteenth Judicial District,
Tulsa County, Oklahoma (No. CJ-97-1921). The action, commenced against
the Company on May 20, 1997, names numerous other consumer finance
companies as defendants, and seeks certification as a statewide class
action. The action alleges that the Company and other consumer finance
defendants collected excess finance charges in connection with
refinancing certain consumer finance loans in Oklahoma and seeks money
damages and an injunction against further collection of such charges.
The Company has filed an answer in the action denying liability, and
discovery is proceeding. The plaintiff's claim is based on a recent
opinion of the Oklahoma Attorney General interpreting a provision of the
Oklahoma Consumer Credit Code with respect to the permitted amount of
certain loan refinance charges in a manner contrary to prior regulatory
practice in existence in Oklahoma since 1969. Enforcement of the
Oklahoma Attorney General's opinion has been enjoined, and such action
is currently pending before the Oklahoma Supreme Court. In addition, the
State of Oklahoma has recently enacted legislation to clarify the
interpretation of the disputed provision of the Oklahoma Consumer Credit
Code consistent with prior regulatory practice. The Company intends to
defend this action vigorously.
From time to time the Company is involved in other routine litigation
relating to claims arising out of its operations in the normal course of
business. The Company believes that it is not presently a party to any
such other pending legal proceedings that would have a material adverse
effect on its financial condition.
Item 2. Changes in Securities
None. The Company's credit agreements contain certain restrictions on
the payment of cash dividends on its capital stock.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Securityholders
(a) The 1998 Annual Meeting of Shareholders was held on August 4, 1998.
(b) Pursuant to Instruction 3 to Item 4, this paragraph need not be
answered.
(c) At the 1998 Annual Meeting of Shareholders, the following two
matters were voted upon and passed. The tabulation of votes was:
(1) The election of seven Directors to serve until the 1999 Annual
Meeting of Shareholders:
VOTES IN FAVOR VOTES WITHHELD*
Ken R. Bramlett, Jr. 15,025,240 61,885
--------------------- ---------
James R. Gilreath 15,019,240 67,885
--------------------- ---------
William S. Hummers III 15,025,240 61,885
--------------------- ---------
A. Alexander McLean III 15,025,240 61,885
--------------------- ---------
R. Harold Owens 15,019,240 67,885
--------------------- ---------
Charles D. Walters 15,056,990 30,135
--------------------- ---------
Charles D. Way 15,024,940 62,185
--------------------- ---------
(2) The ratification of the selection of KPMG Peat Marwick as
Independent Auditors:
VOTES IN FAVOR VOTES AGAINST ABSTENTIONS*
-------------- ------------- ------------
15,087,125 7,050 51,250
---------- ----- ------
*There were no broker non-votes on these routine items.
16
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION, CONTINUED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Filed
Herewith (*) or
Previous Company
Exhibit Exhibit Registration
Number Description Number No. or Report
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3.1 Second Amended and Restated Articles of Incorporation of the 3.1 1992 10-K
Company
3.2 First Amendment to Second Amended and Restated Articles 3.2 1995 10-K
of Incorporation
3.3 Amended Bylaws of the Company 3.4 33-42879
4.1 Specimen Share Certificate 4.1 33-42879
4.2 Articles 3, 4 and 5 of the Form of Company's Second 3.1, 3.2 1995 10-K
Amended and Restated Articles of Incorporation (as amended)
4.3 Article II, Section 9 of the Company's Second Amended 3.2 1995 10-K
and Restated Bylaws
4.4 Amended and Restated Revolving Credit Agreement, dated as 4.4 9-30-97 10-Q
of June 30, 1997, between Harris Trust and Savings Bank, the Banks
signatory thereto from time to time and the Company
4.5 Amended and Restated Note Agreements, dated as of June 30, 1997, 4.5 9-30-97 10-Q
between Jefferson-Pilot Life Insurance Company and the Company
4.6# Amended and Restated Note Agreement, dated as of June 30, 1997, 4.6 9-30-97 10-Q
between Principal Mutual Life Insurance Company and the Company
4.7 Note Agreement, dated as of June 30, 1997, between Principal 4.7 9-30-97 10-Q
Mutual Life Insurance Company and the Company re: 10%
Senior Subordinated Secured Notes
4.8 Amended and Restated Security Agreement, Pledge and Indenture 4.8 9-30-97 10-Q
of Trust, dated as of June 30, 1997, between the Company and
Harris Trust and Savings Bank, as Security Trustee
10.1 Employment Agreement of Charles D. Walters, effective April 1, 10.1 1994 10-K
1994
10.2 Employment Agreement of A. Alexander McLean, III, effective 10.2 1994 10-K
April 1, 1994
10.3 Employment Agreement of R. Harold Owens, effective June 26, 10.3 1995 10-K
1995
17
<PAGE>
10.4 Securityholders' Agreement, dated as of September 19, 1991, 10.5 33-42879
between the Company and certain of its securityholders
10.5 1992 Stock Option Plan of the Company 4 33-52166
10.6 1994 Stock Option Plan of the Company, as amended 10.6 1995 10-K
10.7 The Company's Executive Incentive Plan 10.6 1994 10-K
10.8 The Company's Executive Strategic Incentive Plan 10.8 1995 10-K
10.9+ Amendment No. 1, dated as of April 1, 1996, to the Executive 10.9 1996 10-K
Strategic Incentive Plan
27 Financial Data Schedules (for SEC purposes only)
</TABLE>
# Omitted from filing -- substantially identical to immediately preceding
exhibits, except for the parties thereto and the principal amount involved.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended September
30, 1998.
18
<PAGE>
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORLD ACCEPTANCE CORPORATION
Dated: November 16, 1998 /s/ C. D. Walters
------------------------------------------
C. D. Walters, Chief Executive Officer
Dated: November 16, 1998 /s/ A. A. McLean III
------------------------------------------
A. A. McLean III, Executive Vice President
and Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000108385
<NAME> WORLD ACCEPTANCE CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> APR-01-1998 APR-01-1998
<PERIOD-END> JUN-30-1998 SEP-30-1998
<CASH> 770 1,294
<SECURITIES> 0 0
<RECEIVABLES> 107,061 110,595
<ALLOWANCES> 8,799 8,908
<INVENTORY> 0 0
<CURRENT-ASSETS> 99,032 102,981
<PP&E> 6,395 6,721
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 121,171 125,279
<CURRENT-LIABILITIES> 5,928 8,712
<BONDS> 65,782 68,732
0 0
0 0
<COMMON> 49,461 47,835
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 121,171 125,279
<SALES> 0 0
<TOTAL-REVENUES> 20,734 42,416
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 13,925 33,621
<LOSS-PROVISION> 2,360 5,472
<INTEREST-EXPENSE> 1,216 2,627
<INCOME-PRETAX> 3,233 696
<INCOME-TAX> 1,100 233
<INCOME-CONTINUING> 2,133 463
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 2,133 463
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