SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(In thousands, except per share amounts)
Years Ended March 31,
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Interest and fee income $ 67,454 $ 60,265 $ 52,341 $ 45,870 $ 40,650
Insurance commissions and other income 7,863 9,608 5,871 4,798 3,231
--------- --------- --------- --------- ---------
Total revenues 75,317 69,873 58,212 50,668 43,881
--------- --------- --------- --------- ---------
Provision for loan losses 12,114 9,194 5,783 4,275 3,515
General and administrative expenses 46,846 41,023 35,302 33,497 28,801
Interest expense 4,322 3,498 3,598 3,719 4,298
--------- --------- --------- --------- ---------
Total expenses 63,282 53,715 44,683 41,491 36,614
--------- --------- --------- --------- ---------
Income before income taxes 12,035 16,158 13,529 9,177 7,267
Income taxes 3,952 5,602 4,910 3,390 2,868
--------- --------- --------- --------- ---------
Net income $ 8,083 $ 10,556 $ 8,619 $ 5,787 $ 4,399
========= ========= ========= ========= =========
Net income per common share (fully diluted) $ .41 $ .49 $ .41 $ .28 $ .21
========= ========= ========= ========= =========
Fully diluted weighted average common
equivalent shares 19,840 21,703 20,787 20,760 20,755
========= ========= ========= ========= =========
BALANCE SHEET DATA (END OF PERIOD):
Loans receivable $ 89,539 $ 79,624 $ 71,527 $ 58,227 $ 49,635
Allowance for loan losses (6,283) (5,007) (4,364) (3,479) (2,958)
---------- ---------- ---------- --------- ---------
Loans receivable, net 83,256 74,617 67,163 54,748 46,677
Total assets 102,163 89,423 83,518 73,200 63,448
Total debt 58,682 38,232 37,882 36,082 32,832
Shareholders' equity 38,963 44,880 35,758 26,858 21,002
OTHER OPERATING DATA:
As a percentage of average loans receivable:
Provision for loan losses 14.2% 11.9% 8.8% 7.7% 7.3%
Net charge-offs 13.7% 11.2% 7.5% 6.8% 6.8%
Number of offices open at year-end 336 282 244 217 191
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's financial performance continues to be dependent in large part
upon the growth in its outstanding loan receivables, the ongoing introduction of
new products and services for marketing to the customer base, and the
maintenance of loan quality and acceptable levels of operating expenses. Since
March 31, 1993, gross loans receivable have increased from $61.7 million to
$113.4 million at March 31, 1997. This represents in excess of 16% compounded
rate of growth in receivables over the four-year period. 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. Since March 31, 1993, the Company has grown from 191 offices to 348
offices as of June 20, 1997. The Company plans to open or acquire at least 30
new offices in each of the next two fiscal years. The Company's financial
performance also has been affected by the significant level of amortization of
intangible assets, which arose from the acquisition of the Company in 1989.
These intangibles were being written off on a rapid schedule and the final
portion was fully amortized in May 1997.
The Company continues to identify new products and services for marketing
to its customer base. In addition to several new insurance related products,
which have been introduced in selected states over the last several years, the
Company began to sell and finance electronic items and appliances to its
existing customer base. This program began in Texas in February 1995 and has
since been expanded to include Georgia, Tennessee and South Carolina. The
program was recently further expanded to include the marketing of these items to
non-World customers in an effort to enhance the growth of the program as well as
providing cross-selling opportunities of the traditional small-loan product. The
sale of these new products has provided positive contributions during the past
two fiscal years and is expected to continue to enhance revenues in fiscal 1998
and beyond.
The Company's ParaData Financial Systems subsidiary provides data
processing systems to 97 separate finance companies, including World, and
currently supports approximately 850 individual branch offices in 42 states.
Regardless of their financial contribution, one of ParaData's primary goals is
to provide state-of-the-art data processing support for the Company's in-house
integrated computer system.
During fiscal 1997, the Company expanded its product line on a limited
basis to include larger balance, lower risk and lower yielding, individual
consumer loans. Through two strategic acquisitions, the Company opened two
non-traditional offices, one each in Georgia and Tennessee. While the gross
loans outstanding in these two offices amounted to $3.9 million, or 3.4% of the
total portfolio, at March 31, 1997, this product should provide additional
opportunities to further service both existing customers as well as potential
customers not previously within our market segment. These offices should support
much larger asset balances with lower expense ratios, thus providing positive
contributions. While the Company does not intend to change its primary lending
focus, the individual "small-loan," it does intend to open at least two of the
larger loan offices in each of the next two fiscal years
The Company's operations are regulated under state laws which establish the
maximum loan amounts and interest rates and the types and maximum amounts of
fees, insurance premiums, and other costs that may be charged. Consistent with
industry practice, the Company generally charges the maximum allowable interest
rates, fees, and other costs in all states in which it operates.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table sets forth certain information derived from the
Company's consolidated statements of operations and balance sheets, as well as
operating data and ratios, for the periods indicated.
Years Ended March 31,
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
Average gross loans receivable (1) $109,206 $ 97,302 $ 82,786
Average loans receivable (2) 85,445 77,037 65,379
Expenses as a percentage of total revenue:
Provision for loan losses 16.1% 13.2% 9.9%
General and administrative 62.2% 58.7% 60.6%
Total interest expense 5.7% 5.0% 6.2%
Operating margin (3) 21.7% 28.1% 29.4%
Return on average assets 8.2% 11.9% 10.8%
Offices opened and acquired, net 54 38 27
Total offices (at period end) 336 282 244
- -------------------
(1) Average gross loans receivable have been determined by averaging
month-end gross loans receivable over the indicated period.
(2) Average loans receivable has 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.
COMPARISON OF FISCAL 1997 VERSUS FISCAL 1996
Net income amounted to $8.1 million during fiscal 1997, a 23.4% decrease
from the $10.6 million earned during fiscal 1996. This decrease resulted from a
decrease in operating income (revenues less the provision for loan losses and
general and administrative expenses) of $3.3 million, or 16.8%, and an increase
in interest expense of $824,000, or 23.5%. These reductions to net income were
partially offset by a $1.7 million decrease in income tax expense.
During fiscal 1997, interest and fee income increased by $7.2 million, or
11.9%, over the previous fiscal year. This increase resulted primarily from an
increase in average loans receivable of $8.4 million, or 10.9%, between the two
fiscal years. In addition to the larger loan base, the increase in interest and
fee income also resulted from a slight increase in the loan yields over the two
fiscal years. The overall yield increased from 78.2% in fiscal 1996 to 78.9%
during the most recent fiscal year.
Insurance commissions and other income decreased by $1.7 million, or 18.2%,
over the two fiscal years. Insurance commissions increased by 2.2%, or $102,000,
reflecting the increase in loan activity in those states where the Company is
allowed to sell credit insurance. This increase was more than offset by the $1.8
million decrease in other income, which was primarily the result of the reduced
net revenue generated by ParaData over the two fiscal years. ParaData's net
revenue decreased from $3.4 million in fiscal 1996 to $1.4 million during the
most recent fiscal year. The fiscal 1996 results were exceptionally high due to
a single large customer and are unlikely to occur on an ongoing basis. Total
revenues increased to $75.3 million during fiscal 1997, an increase of $5.4
million, or 7.8%, over the $69.9 million in fiscal 1996. Revenues from the 244
offices open throughout both fiscal years decreased slightly by .39%. At March
31, 1997, the Company had 336 offices in operation, an increase of 54 net new
offices from March 31, 1996.
The provision for loan losses increased to $12.1 million during fiscal
1997, representing a $2.9 million, or 31.8% increase over the $9.2 million
recorded during fiscal 1996. This increase resulted from both an increase in the
general allowance for loan losses as well as increased levels of loans
charged-off. As a percentage of loans receivable outstanding, the allowance for
loan losses increased to 7.0% at March 31, 1997, compared to 6.3% at March 31,
1996. Net charge-offs for the current fiscal year amounted to $11.7 million, a
35.2% increase over the $8.7 million charged-off during fiscal 1996, and net
charge-offs as a percentage of average loans increased to 13.7% for the current
fiscal year from 11.2% for fiscal 1996. The continued rise in the level of loan
losses that the Company has experienced over the last two fiscal years remains
the number one challenge to the Company's management. Management believes that
these increases are consistent with a national trend affecting all phases of the
consumer financial services industry, which was brought about by increased
competition in the Company's market segment and the resulting increased
availability of credit to the Company's customer base. While the Company's
recent results reflect some signs that these trends may be dissipating, until
charge-offs return to historical levels, the results of operations of the
Company's small-loan business will be negatively affected.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
General and administrative expenses increased by $5.8 million, or 14.2%,
during fiscal 1997 compared to the previous fiscal year. This increase was
primarily the result of the 54 net new offices that were opened or acquired
during the fiscal year as well as management's decision to increase the middle
management of the Company, reducing the number of offices per supervisor to a
lower level. Overall, however, the average general and administrative expense
per open office decreased by .20% when comparing the latest two fiscal years. As
a percent of total revenues, general and administrative expenses increased from
58.7% in fiscal 1996 to 62.2% in fiscal 1997.
Interest expense increased by 23.5% to $4.3 million during fiscal 1997 from
$3.5 million in fiscal 1996. This increase was due to the increased level of
debt outstanding over the two fiscal years, primarily as a result of the $16
million spent on the Company's stock repurchase program as well as other growth.
The Company's effective income tax rate declined to 32.8% during fiscal
1997 from 34.7% during fiscal 1996. This decrease resulted from reduced state
income taxes following a Company reorganization completed during fiscal 1996, on
which the Company received a full benefit during the current fiscal year.
COMPARISON OF FISCAL 1996 VERSUS FISCAL 1995
Net income amounted to $10.6 million during fiscal 1996, a 22.5% increase
over the $8.6 million earned during fiscal 1995. This increase resulted
primarily from an increase in operating income of $2.5 million, or 14.8%, and a
decrease in interest expense of $100,000, or 2.8%. The additions to net income
were partially offset by an increase in total income tax expense.
Interest and fee income during fiscal 1996 increased by $7.9 million, or
15.1%, over fiscal 1995. This increase resulted from an increase of $11.6
million, or 17.8%, in average loans receivable between the two years. The
increase in interest and fee income resulting from the larger loan base was
partially offset by a decrease in the loan yields over the two fiscal years.
Overall, interest and fee income as a percentage of average loans receivable
decreased from 80.1% in fiscal 1995 to 78.2% during fiscal 1996. This decrease
in yield resulted from higher growth in Tennessee and Louisiana during fiscal
1996, which are lower yielding states.
Insurance commissions and other income increased by $3.7 million, or 63.7%,
over the two fiscal years. Insurance commissions increased by $571,000, or
13.7%, as a result of the increase in loan volume in states where credit
insurance may be sold. Other income increased by $3.2 million, or 186.3%, as a
result of the $2.5 million increase in net revenue generated by ParaData, as
well as an increase of $475,000 in gross profit from the Company's World Class
Buying Club program, which was implemented during the fourth quarter of fiscal
1995. ParaData's contribution to other income in fiscal 1996 was unusually
large, as the fiscal 1996 contribution included the results of a major sale of
the ParaData System to one large customer. Total revenues increased to $69.9
million in fiscal 1996, an increase of $11.7 million, or 20.0%, over the $58.2
million in fiscal 1995. Revenues from the 217 offices open throughout both years
increased approximately 10.8%. At March 31, 1996, the Company had 282 offices in
operation, an increase of 38 offices from March 31, 1995.
The provision for loan losses during fiscal 1996 increased by $3.4 million,
or 59.0%, from the previous year. This increase resulted from a combination of
increases in both the general allowance for loan losses and the amount of loans
charged off. As a percentage of loans receivable outstanding, the allowance for
loan losses increased slightly to 6.3% at March 31, 1996, compared to 6.1% at
March 31, 1995. Net charge-offs for fiscal 1996 amounted to $8.7 million, a
75.4% increase over the $4.9 million charged off during fiscal 1995, and net
charge-offs as a percentage of average loans increased to 11.2% for fiscal 1996
from 7.5% for the previous fiscal year.
General and administrative expenses during fiscal 1996 increased by $5.7
million, or 16.2%, over the previous fiscal year. This increase was due
primarily to costs associated with the 38 new offices opened or acquired during
the fiscal year. Excluding the expenses associated with ParaData, general and
administrative expenses, when divided by average open offices, increased by less
than 1% when comparing the two fiscal years and, overall, general and
administrative expenses as a percent of total revenues, decreased from 60.6% in
fiscal 1995 to 58.7% during fiscal 1996.
Interest expense decreased despite the overall growth in assets by
$100,000, or 2.8%, during fiscal 1996, as compared to the previous fiscal year.
This decrease was due to the Company's continuing ability to generate excess
cash and a slight reduction in overall interest rates during the current fiscal
year.
The Company's effective income tax rate declined to 34.7% during fiscal
1996 from 36.3% during the previous fiscal year. This decrease resulted
primarily from reduced state income taxes following a Company reorganization
accomplished during fiscal 1996 and the reduced amortization of nondeductible
goodwill.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
CREDIT LOSS EXPERIENCE
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 potential for credit 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 future losses of principal. The Company's policy is to charge off loans on
which a full contractual installment has not been received during the prior 180
days, or sooner if the loan is deemed uncollectible. Collection efforts on
charged-off loans continue until the obligation is satisfied or until it is
determined such obligation is not collectible or the cost of continued
collection efforts will exceed the potential recovery. Recoveries of previously
charged-off loans are credited to the allowance for loan losses.
The following table sets forth the Company's allowance for loan losses at
the end of the fiscal years ended March 31, 1997, 1996, and 1995 and the credit
loss experience over the indicated periods:
At or for the
Years Ended March 31,
1997 1996 1995
------- ------- -------
(Dollars in thousands)
Allowance for loan losses $ 6,283 $ 5,007 $ 4,364
Percentage of loans receivable 7.0% 6.3% 6.1%
Provision for loan losses $12,114 $ 9,194 $ 5,783
Net charge-offs $11,712 $ 8,664 $ 4,940
Net charge-offs as a percentage of average loans receivable (1) 13.7% 11.2% 7.5%
The following table classifies the gross loans receivable of the Company
that were delinquent on a recency and contractual basis for at least 60 days
at March 31, 1997, 1996, and 1995:
At March 31,
1997 1996 1995
------- ------- -------
(Dollars in thousands)
Recency basis:
60 - 89 days past due $ 1,812 $ 1,704 $ 1,440
90 - 179 days past due 640 439 518
------- ------- -------
Total $ 2,452 $ 2,143 $ 1,958
======= =======
Percentage of period end gross loans receivable 2.2% 2.2% 2.2%
Contractual basis:
60 - 89 days past due $ 2,227 $ 2,172 $ 1,775
90 - 179 days past due 1,912 1,662 1,396
------- ------- -------
Total $ 4,139 $ 3,834 $ 3,171
======= ======= =======
Percentage of period end gross loans receivable 3.6% 3.9% 3.6%
- ------------------
(1)Average loans receivable have been determined by averaging month-end gross
loans receivable less unearned interest and deferred fees over the indicated
period.
9
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 significantly higher than in other quarters.
The following table sets forth certain items included in the Company's
unaudited consolidated financial statements and the offices open for the period
indicated.
AT OR FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Total revenues $ 15,861 $ 17,391 $ 18,053 $ 18,568 17,307 17,995 19,169 20,847
Provision for
loan losses 1,639 2,526 3,248 1,781 2,246 3,028 4,198 2,642
General and
administrative
expenses 9,965 10,003 11,147 9,908 11,007 10,998 12,415 12,426
Net income 2,208 2,530 1,754 4,064 2,064 1,931 922 3,166
Gross loans
receivable 92,327 97,537 109,296 99,426 103,832 107,692 128,182 113,439
Number of
offices open 274 275 276 282 297 306 342 336
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" which provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of the financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. This statement is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996, and is to be applied prospectively. In
December 1996, the FASB issued SFAS 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which defers for one year the
applications of certain requirements under SFAS 125. The Company does not expect
SFAS 125 to have a significant impact on its financial condition or results of
operations.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
is effective for both interim and annual periods ending after December 15, 1997.
This statement supersedes Accounting Principles Board Opinion No. 15, Earnings
per Share. The purpose of this statement is to simplify current reporting and
make U. S. reporting comparable to international standards. The statement
requires dual presentation of basic and diluted earnings per share ("EPS") by
entities with complex capital structures (as defined by the statement). The
Company anticipates that adoption of this standard will not have a material
affect on EPS.
Also, in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which is effective for financial
statements for periods ending after December 15, 1997. This statement applies to
both public and nonpublic entities. The new statement requires no change for
entities subject to the existing requirements. The Company anticipates that
adoption of the standard will not have a material affect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations, acquisitions and office expansion
through cash flow from operations and borrowings under its revolving credit
agreement. The Company has generally applied its cash flow from operations to
fund its increasing loan volume, to fund acquisitions, to repay long-term
indebtedness and, more recently, to repurchase its common stock. As the
Company's gross loans receivable increased from $61.7 million at March 31, 1993
to $113.4 million at March 31, 1997, net cash provided by operating activities
for fiscal years 1995, 1996, and 1997 was $18.2 million, $21.7 million, and
$23.2 million, respectively.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's primary ongoing cash requirements relate to the funding of
new offices, acquisitions, and overall growth of loans outstanding and the
repayment of long-term indebtedness. Through the end of fiscal 1997, the Company
had repurchased 1,986,000 shares of its common stock under its repurchase
program, for an aggregate purchase price of approximately $16.0 million. Because
of certain loan agreement restrictions, the Company temporarily suspended its
stock repurchases, but believes stock repurchases to be a viable long-term
strategy and an excellent use of excess cash at attractive market prices. In
addition, the Company plans to open or acquire at least 30 new offices in each
of the next two fiscal years. Expenditures by the Company to open and furnish
new offices generally averaged approximately $15,000 per office during fiscal
1997. The Company believes that new offices have also required from $100,000 to
$400,000 to fund outstanding loans receivable originated during their first 12
months of operation. New offices typically have achieved monthly operating
profitability within 12 to 24 months after opening.
The Company has $12.0 million remaining principal balance of 8.5% senior
secured notes due December 1, 1999 (the "Term Notes"). The Term Notes provide
for interest payments to be made semi-annually with equal principal payments to
be made annually on each December 1.
The Company has a $50.0 million revolving credit facility with a syndicate
of banks, with a $25.0 million overline facility for the period November 30,
1996 to April 15, 1997. The credit facility will expire on November 30, 1998.
Funds borrowed under the revolving credit facility bear interest, at the
Company's option, at either the agent bank's prime rate per annum or the LIBOR
rate plus 1.60% per annum. At March 31, 1997, the interest rate on borrowings
under the revolving credit facility was 7.28%. The Company pays a commitment fee
equal to 0.375% 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, 1997, $46.2 million was
outstanding under this facility, and there was $28.8 million of unused borrowing
availability under the borrowing base limitations. As of June 20, 1997, however,
the overline facility had expired and the Company's unused borrowing
availability was $3.3 million. Borrowings under the revolving credit facility
and Term 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'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 of or interest on
subordinated debt, (iii) incurring additional indebtedness and (iv) entering
into a merger, consolidation or sale of substantial assets or subsidiaries. The
Term Notes are also subject to a prepayment penalty. The Company believes that
it is in material compliance with these agreements and does not believe that
these agreements will materially limit its business and expansion strategy.
Subsequent to March 31, 1997, the Company entered into a commitment to
borrow $10.0 million through the issuance of senior subordinated notes. This
transaction is expected to be completed in June 1997, and the proceeds will be
used to repay a portion of the revolving credit facility. These notes will
mature in five annual installments of $2.0 million beginning June 1, 2000, and
ending June 1, 2004, and bear interest at 10.0% payable quarterly. The notes
will be issued at a discounted price equal to 99.6936%, and may be prepaid
subject to certain prepayment penalties.
Additionally, the Company has received a commitment from an additional
primary bank for an additional $15 million in availability under the revolving
credit facility under the existing terms. This increase should be effective at
the same time as the funding of the subordinated notes.
If these transactions close as anticipated, the Company will have unused
borrowing availability of $28.3 million on a proforma basis. There can be no
assurance, however, that these transactions will close, and if either does not
close, the Company may be required to seek other alternative sources of capital.
The Company acquired 46 offices from competitors in five states in 16
separate transactions during fiscal 1997. Gross loans receivable purchased in
these transactions were approximately $14.7 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. On December 1, 1996, the Company paid the second installment on
its 8 1/2% Senior Term Notes of $4.0 million. The Company financed the
acquisitions and the Term Note repayment with borrowings under its revolving
credit facility.
The Company believes that cash flow from operations, borrowings under its
revolving credit facility, as amended, and the anticipated proceeds of the
subordinated debt will be adequate 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 and the scheduled repayment of the Term Notes.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 nine states in which the
Company operates allow indexing of maximum loan amounts to the Consumer Price
Index. These provisions will allow the Company to make larger loans at existing
interest rates in those states, which could offset the potential increase in
operating costs due to inflation.
OTHER MATTERS
The Company and its Georgia subsidiary are named as co-defendants with a
number of other finance companies, jewelry and furniture retailers, and
insurance companies in a consolidated nationwide class action, currently pending
in 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). The
consolidated action involves the defendants' non-file insurance practices. The
complaint alleges, among other things, that the defendants' non-file insurance
coverages do not constitute true insurance, and that the defendants' practices
with respect to non-file insurance constitute alleged federal truth-in-lending,
RICO and antitrust violations. The complaint has been certified as a nationwide
class action and seeks to recover money damages and injunctive relief. The
complaint was filed on April 18, 1995, the Company has filed an answer, and the
parties are in the discovery process. The Company has been advised that certain
of the defendants in the case have agreed to settle the claims made against them
by paying money damages to the plaintiffs. The Company has also been advised
that certain of the settling defendants have agreed to change their non-file
insurance practices. If the Company's non-file insurance practices are found to
be improper, the Company could be required to refund non-file insurance fees,
pay other significant damages to the plaintiffs, and change its non-file
insurance practices going forward, and the Company could experience a reduction
in future income. The Company disputes the allegations made in the complaint,
and intends to continue to defend itself vigorously.
Management's statement of expectation with respect to this litigation may
be deemed a forward-looking statement, within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), and no assurance can be
given that management's expectation will prove correct, as such expectation is
subject to certain risks, uncertainties and assumptions based on the preliminary
nature of the case and the vagaries of litigation generally. Should one or more
of these risks materialize or should underlying assumptions prove incorrect, the
actual outcome of this litigation could differ materially from management's
expectation (See Note 6 of Notes to Consolidated Financial Statements).
FORWARD-LOOKING STATEMENTS
In addition to "Other Matters" above, the remaining portions of this
"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 Exchange Act, that are based on management's belief and
assumptions, as well as information currently available to management. 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, actual results, performance or
financial condition may vary materially from those anticipated, estimated or
expected. Among the key factors that may have a direct bearing on the Company's
results, performance or financial condition are changes in economic and industry
conditions; changes in interest rates; risks inherent in making loans including
repayment risks and value of collateral; and recently-enacted or proposed
legislation.
12
CONSOLIDATED BALANCE SHEETS
March 31,
1997 1996
------------- -------------
ASSETS
Cash $ 1,486,073 1,693,747
Gross loans receivable 113,439,027 99,425,915
Less:
Unearned interest and deferred fees (23,899,194) (19,802,649)
Allowance for loan losses (6,283,459) (5,006,703)
-------------- --------------
Loans receivable, net 83,256,374 74,616,563
Property and equipment, net 6,102,125 5,643,120
Other assets, net 2,201,757 2,609,329
Intangible assets, net 9,117,033 4,859,807
-------------- --------------
$ 102,163,362 89,422,566
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Senior notes payable 58,200,000 37,750,000
Other note payable 482,000 482,000
Income taxes payable 853,307 2,311,456
Accounts payable and accrued expenses 3,664,592 3,999,442
-------------- --------------
Total liabilities 63,199,899 44,542,898
============== ==============
Shareholders' equity:
Preferred stock, no par value
Authorized 5,000,000 shares -- --
Common stock, no par value
Authorized 95,000,000 shares;
issued and outstanding 18,936,573 and 20,686,573 shares
at March 31, 1997, and 1996, respectively -- --
Additional paid-in capital 625,592 14,625,136
Retained earnings 38,337,871 30,254,532
-------------- --------------
Total shareholders' equity 38,963,463 44,879,668
-------------- --------------
Commitments and contingencies
$ 102,163,362 89,422,566
============= =============
See accompanying notes to consolidated financial statements.
13
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended March 31,
1997 1996 1995
------------- ----------- -----------
Revenues:
Interest and fee income $ 67,454,576 60,265,321 52,340,734
Insurance commissions and other income 7,863,196 9,608,177 5,870,823
------------ ----------- ----------
Total revenues 75,317,772 69,873,498 58,211,557
------------ ----------- ----------
Expenses:
Provision for loan losses 12,114,374 9,194,422 5,783,017
------------ ----------- ----------
General and administrative expenses:
Personnel 28,161,923 24,808,100 21,944,832
Occupancy and equipment 5,037,019 4,278,456 3,519,150
Data processing 1,027,590 948,542 850,224
Advertising 2,897,659 2,576,112 1,886,383
Amortization of intangible assets 3,020,259 2,723,580 2,932,645
Other 6,701,258 5,687,731 4,168,228
------------ ----------- ----------
46,845,708 41,022,521 35,301,462
------------ ----------- ----------
Interest expense 4,322,351 3,498,497 3,598,366
------------ ----------- ----------
Total expenses 63,282,433 53,715,440 44,682,845
------------ ----------- ----------
Income before income taxes 12,035,339 16,158,058 13,528,712
Income taxes 3,952,000 5,602,000 4,910,000
------------ ----------- ----------
Net income $ 8,083,339 10,556,058 8,618,712
============ =========== ==========
Net income per common share
Primary $ .41 .49 .41
============ =========== ==========
Fully diluted $ .41 .49 .41
============ =========== ==========
Weighted average common equivalent shares outstanding
Primary 19,832,525 21,653,096 20,787,195
============ =========== ==========
Fully diluted 19,839,942 21,702,817 20,787,195
============ =========== ==========
See accompanying notes to consolidated financial statements.
14
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Additional
Paid-in Retained
Capital Earnings Total
------------ ----------- -----------
Balances at March 31, 1994 $ 15,778,016 11,079,762 26,857,778
Tax benefit from vesting of 45,000 restricted shares
of common stock 33,293 -- 33,293
Proceeds from exercise of stock options (54,000 shares),
including tax benefits of $84,744 248,183 -- 248,183
Net income -- 8,618,712 8,618,712
------------- ---------- ------------
Balances at March 31, 1995 16,059,492 19,698,474 35,757,966
Proceeds from exercise of stock options (45,000 shares),
including tax benefits of $124,140 326,168 -- 326,168
Common stock repurchases (176,000 shares) (1,760,524) -- (1,760,524)
Net income -- 10,556,058 10,556,058
------------- ---------- ------------
Balances at March 31, 1996 14,625,136 30,254,532 44,879,668
Proceeds from exercise of stock options (60,000 shares),
including tax benefits of $66,469 259,294 -- 259,294
Common stock repurchases (1,810,000 shares) (14,258,838) -- (14,258,838)
Net income -- 8,083,339 8,083,339
------------- ---------- ------------
Balances at March 31, 1997 $ 625,592 38,337,871 38,963,463
============= ========== ============
See accompanying notes to consolidated financial statements.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
1997 1996 1995
------------ ---------- ---------
Cash flows from operating activities:
Net income $ 8,083,339 10,556,058 8,618,712
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of intangible assets 3,020,259 2,723,580 2,932,645
Amortization of loan costs and discounts 80,841 86,054 205,996
Provision for loan losses 12,114,374 9,194,422 5,783,017
Depreciation 1,319,667 1,063,772 875,346
Change in accounts:
Other assets, net 326,731 (421,812) 25,316
Income taxes payable (1,391,680) (1,836,459) (235,816)
Accounts payable and accrued expenses (334,850) 371,976 (28,955)
------------ ------------ ------------
Net cash provided by operating activities 23,218,681 21,737,591 18,176,261
------------ ------------ ------------
Cash flows from investing activities:
Increase in loans receivable, net (8,146,358) (14,870,228) (17,707,816)
Net assets acquired from office acquisitions, primarily loans (12,688,099) (1,839,174) (505,536)
Increase in intangible assets from acquisitions (7,277,485) (973,500) (200,715)
Costs of organizing new subsidiaries -- (96,360) --
Purchases of property and equipment, net (1,698,400) (2,247,785) (1,831,981)
------------ ------------ ------------
Net cash used by investing activities (29,810,342) (20,027,047) (20,246,048)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from senior revolving notes payable, net 24,450,000 4,350,000 7,650,000
Repayment of senior term notes payable (4,000,000) (4,000,000) --
Repayment of senior subordinated notes payable -- -- (5,900,000)
Proceeds from exercise of stock options 192,825 202,028 163,439
Repurchase of common stock (14,258,838) (1,760,524) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 6,383,987 (1,208,496) 1,913,439
------------ ------------ ------------
Increase (decrease) in cash (207,674) 502,048 (156,348)
Cash at beginning of year 1,693,747 1,191,699 1,348,047
------------ ------------ ------------
Cash at end of year $ 1,486,073 1,693,747 1,191,699
============= ============ ============
See accompanying notes to consolidated financial statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting and reporting policies are in accordance with
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.
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, ParaData
Financial Systems, a software company acquired during fiscal 1994, and
WAC Holdings Ltd., a captive reinsurance company established in fiscal
1994. All significant intercompany balances and transactions have been
eliminated in consolidation.
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, and New Mexico. During fiscal 1997, the
Company originated loans generally ranging up to $1,500, with terms of
15 months or less. Experience indicates that a majority of the direct
cash consumer loans are renewed.
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 renewed or paid in full.
Loans are carried at the gross amount outstanding reduced by unearned
interest and insurance income, net deferred origination fees and direct
costs, and an allowance for loan losses. Unearned interest is deferred
at the time the loans are made and accreted to income on a collection
method, which approximates the level yield method. Charges for late
payments are credited to income when collected.
The Company generally offers its loans at the prevailing statutory
rates at terms not to exceed 15 months. Management believes that the
carrying value approximates the fair value of its loan portfolio.
ALLOWANCE FOR LOAN LOSSES
Additions to the allowance for loan losses are based on management's
evaluation of the loan portfolio under current economic conditions, the
volume of the loan portfolio, overall portfolio quality, review of
specific loans, charge-off experience, and such other factors which, in
management's judgment, deserve recognition in estimating loan losses.
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 payment. The gross balance of loans deemed to be uncollectible is
charged against the loan loss allowance and any unearned income on the
loans is recognized at that time. Recoveries of previously charged-off
loans are credited to the allowance for loan losses. While management
uses the best information available to make evaluations, future
adjustments to the allowance may be necessary if conditions differ
substantially from the assumptions used in making the calculations.
At March 31, 1997 and 1996, there were no concentrations of loans in
any local economy, type of property, or to any one borrower.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements
are amortized using the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principals 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. Actual results could differ from those
estimates.
OTHER ASSETS
Other assets include costs incurred in connection with originating
long-term debt. Such remaining unamortized costs aggregated $104,351
and $123,692 at March 31, 1997 and 1996, respectively, and are
amortized as interest expense over the life of the respective
indebtedness.
INTANGIBLE ASSETS
Intangible assets include the cost of acquiring existing customers, the
value assigned to noncompete agreements, costs incurred in connection
with the acquisition of loan offices, and goodwill (the excess cost
over the fair value of the net assets acquired). These assets are being
amortized on a straight-line basis over the estimated useful lives of
the respective assets as follows: 8 to 10 years for customer lists, 5
to 10 years for noncompete agreements and acquisition costs, and 10
years for goodwill. Management periodically evaluates the
recoverability of the unamortized balances of these assets and adjusts
them as necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 107, "Disclosures about the Fair Value
of Financial Instruments" ("SFAS 107") in December 1991. SFAS 107
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 carrying amount of financial
instruments included in the financial statements are deemed reasonable
estimates of their fair value. The Company adopted the provisions of
SFAS 107 in 1996.
INSURANCE PREMIUMS
Insurance premiums for credit life, accident and health, and property
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 fees are charged on certain loans at inception and renewal in
lieu of recording and perfecting the Company's security interest in the
assets pledged on certain loans and are remitted as premiums to a third
party insurance company for non-file insurance coverage. Such insurance
and the related insurance premiums, claims, and recoveries are not
reflected in the accompanying consolidated financial statements (see
note 6).
Certain losses related to such loans, which are not recoverable through
life, accident and health, or property insurance claims are reimbursed
through non-file insurance claims subject to policy limitations. Any
remaining losses are charged to the allowance for loan losses.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes required by SFAS No. 109, ACCOUNTING FOR INCOME TAXES.
Under the asset and liability method of Statement 109, 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
basis. 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.
Under Statement 109, 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.
SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended March 31, 1997, 1996, and 1995, the Company paid
interest of $4,302,473, $3,473,149, and $3,350,028, respectively.
For the years ended March 31, 1997, 1996, and 1995, the Company paid
income taxes of $5,343,680, $6,981,463, and $5,145,816, respectively.
Supplemental non-cash financing activities for the years ended March
31, 1997, 1996, and 1995, consist of:
1997 1996 1995
-------------- ------------ ------------
Tax benefits from issuance of restricted executive stock $ - - 33,293
Tax benefits from exercise of stock options 66,469 124,140 84,744
EARNINGS PER COMMON SHARE
Net income per common share is computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding during the period using the treasury stock
method. On August 31, 1995, the Company effected a three-for-one stock
split, which was paid in the form of a share dividend of two shares of
common stock for each outstanding share. Prior period average shares
outstanding and net income per share have been restated to reflect this
stock split.
STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based Compensation," issued in October
1995, allows a company to either adopt the fair value method of
valuation or continue using the intrinsic valuation method presented
under Accounting Principles Board ("APB") Opinion 25 to account for
stock-based compensation. The fair value method recommended in SFAS 123
requires a company to recognize compensation expense based on the fair
value of the option on the grant date. The intrinsic value method
measures compensation expense as the difference between the quoted
market price of the stock and the exercise price of the option on the
date of grant. The Company has elected to continue using APB Opinion 25
and has disclosed in the footnotes pro forma net income and earnings
per share information as if the fair value method had been applied.
RECLASSIFICATION
Certain reclassification entries have been made for fiscal 1996 and
1995 to conform with fiscal 1997 presentation. There was no impact on
shareholders' equity or net income as a result of these
reclassifications.
(2) ALLOWANCE FOR LOAN LOSSES
The following is a summary of the changes in the allowance for loan
losses for the years ended March 31, 1997, 1996, and 1995:
March 31,
-----------------------------------------------
1997 1996 1995
-------------- ------------ -----------
Balance at the beginning of the year $ 5,006,703 4,363,612 3,479,077
Provision for loan losses 12,114,374 9,194,422 5,783,017
Loan losses (12,659,683) (9,345,509) (5,252,343)
Recoveries 947,999 681,030 312,595
Allowance on acquired loans 874,066 113,148 41,266
------------- ----------- -----------
Balance at the end of the year $ 6,283,459 5,006,703 4,363,612
============== =========== ===========
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) PROPERTY AND EQUIPMENT
Summaries of property and equipment follow: March 31,
--------------------------
1997 1996
----------- -----------
Land $ 269,443 269,443
Buildings and leasehold improvements 2,367,432 1,743,896
Furniture and equipment 7,342,971 6,305,207
----------- -----------
9,979,846 8,318,546
Less accumulated depreciation and amortization 3,877,721 2,675,426
----------- -----------
Total $ 6,102,125 5,643,120
=========== ===========
(4) INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of: March 31,
--------------------------
1997 1996
----------- -----------
Cost of acquiring existing customers $ 390,804 2,567,326
Value assigned to noncompete agreements 6,587,458 1,894,876
Goodwill 1,603,364 --
Other 535,407 397,605
----------- -----------
Total $ 9,117,033 4,859,807
=========== ===========
(5) NOTES PAYABLE
Summaries of the Company's notes payable follow:
SENIOR CREDIT FACILITIES
$12,000,000 Senior Secured Term Notes -- These notes mature in three
annual installments of $4,000,000 due December 1, 1997, 1998 and
1999, and bear interest at 8.5%, payable semi-annually. The notes may
be prepaid subject to certain prepayment penalties.
$50,000,000 Revolving Credit Facility - This facility provides for
borrowings of up to $50 million (increased from $20 million to $25
million in September 1994, to $35 million in September 1995, and to
$50 million in June 1996), subject to a borrowing base formula. The
maximum borrowings were temporarily increased to $75 million for the
period November 30, 1996, to April 15, 1997. The Company may borrow,
at its option, at the rate of prime or LIBOR plus 1.60%. At March 31,
1997, the Company's interest rate was 7.28% and the unused amount
available under the revolver was $28,800,000. The revolving credit
facility has a commitment fee of 3/8 of 1% on the unused portion of
the commitment, except for the $25 million temporary increase in the
commitment, which has a commitment fee of 1/4 of 1% on the unused
portion. Borrowings under the revolving credit facility mature on
November 30, 1998.
Subsequent to March 31, 1997, the Company entered into a commitment
to borrow $10.0 million through the issuance of senior subordinated
notes. This transaction is expected to be completed in June 1997.
These notes mature in five annual installments of $2.0 million
beginning June 1, 2000 and ending June 1, 2004, and bear interest at
10.0%, payable quarterly. The notes will be issued at a discounted
price equal to 99.6936% and may be prepaid subject to certain
prepayment penalties.
Additionally, the Company has received a commitment from an
additional bank for an additional $15 million in availability under
the revolving credit facility under the existing terms. This increase
should be effective at the same time as the funding of the
subordinated notes.
Substantially all of the Company's assets are pledged as collateral
for borrowings under senior credit agreements. If the senior
subordinated notes are closed, the Company's assets will also be
pledged as collateral for those notes on a subordinated basis.
OTHER NOTE PAYABLE
The Company also has a $482,000 note payable to an unaffiliated
insurance company, bearing interest at 10%, payable annually, which
matures in June 1999.
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, 1997, approximately
$14,558,000 was available under these covenants for the payment of cash
dividends, or the repurchase of the Company's common stock. In
addition, the agreements restrict liens on assets and the sale or
transfer of subsidiaries. The Company was in compliance with the
various debt covenants for all periods presented.
The aggregate annual maturities of the notes payable for each of the
fiscal years subsequent to March 31, 1997, are as follows: 1998,
$4,000,000; 1999, $50,200,000; 2000, $4,482,000.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NON-FILE INSURANCE
The Company maintains non-file insurance coverage with an unaffiliated
insurance company. Premiums, claims paid, and recoveries under this
coverage are not included in the accompanying financial statements. The
following is a summary of the non-file insurance activity for the years
ended March 31, 1997, 1996, and 1995:
1997 1996 1995
------------- ----------- -----------
Insurance premiums written $ 3,566,960 3,787,289 3,512,106
Recoveries on claims paid $ 315,112 313,703 236,827
Claims paid $ (3,971,106) (4,228,665) (3,240,856)
(7) LEASES
The Company conducts most of its operations from leased facilities,
except for its owned corporate office building. 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.
The future minimum lease payments under noncancellable operating leases
as of March 31, 1997, are as follows:
1998 $2,133,077
1999 1,452,978
2000 843,730
2001 367,221
2002 61,005
Thereafter 725
-----------
Total future minimum lease payments $ 4,858,736
===========
Rental expense for cancellable and noncancellable operating leases for
the years ended March 31, 1997, 1996, and 1995 was $2,345,068,
$2,000,352, and $1,674,860, respectively.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) INCOME TAXES
Income tax expense for the years ended March 31, 1997, 1996, and 1995,
consists of:
1997 1996 1995
-------------- ----------- -----------
Current:
Federal $ 4,834,000 6,084,000 5,368,000
State 292,000 627,000 750,000
-------------- ----------- -----------
Total 5,126,000 6,711,000 6,118,000
-------------- ----------- -----------
Deferred:
Federal (1,107,000) (1,047,000) (1,084,000)
State (67,000) (62,000) (124,000)
-------------- ----------- -----------
Total (1,174,000) (1,109,000) (1,208,000)
--------------- ------------ ------------
$ 3,952,000 5,602,000 4,910,000
================ ============ ============
The income tax expense for the years ended March 31, 1997, 1996, and
1995 differs from the amount computed by applying the U.S. Federal
income tax rate of 35% as a result of the following:
1997 1996 1995
------------ ---------- -----------
Computed "expected" income tax expense $ 4,212,000 5,655,000 4,735,000
Increase resulting from:
State income tax, net of Federal benefit 146,000 368,000 407,000
Amortization of goodwill 19,000 13,000 50,000
Insurance income exclusion (235,000) (238,000) (239,000)
Other, net (190,000) (196,000) (43,000)
------------ ---------- -----------
Total income tax expense $ 3,952,000 5,602,000 4,910,000
============ ========== ===========
Temporary differences between the financial statement carrying amounts
and tax basis of assets and liabilities that give rise to significant
portions of the deferred tax asset (liability) at March 31, 1997 and
1996, and 1995, relate to the following:
Deferred tax assets: 1997 1996 1995
----------- ---------- ---------
Allowance for doubtful accounts $ 2,293,000 1,953,000 1,658,000
Unearned insurance commissions 501,000 465,000 395,000
Accounts payable and accrued expenses primarily
related to employee benefits 193,000 213,000 139,000
Accrued state taxes -- 55,000 99,000
Other 110,000 29,000 41,000
----------- ----------- ---------
Gross deferred tax assets 3,097,000 2,715,000 2,332,000
Less valuation allowance (30,000) (29,000) (41,000)
----------- ----------- ----------
Net deferred tax assets $ 3,067,000 2,686,000 2,291,000
----------- ----------- ----------
Deferred tax liabilities:
Intangible assets -- (1,051,000) (1,853,000)
Deferred net loan origination fees (325,000) (323,000) (287,000)
Purchase accounting adjustments (115,000) -- --
Other (304,000) (163,000) (111,000)
----------- ----------- -----------
Gross deferred tax liabilities (744,000) (1,537,000) (2,251,000)
----------- ----------- -----------
Net deferred tax assets $ 2,323,000 1,149,000 40,000
=========== =========== ===========
A valuation allowance is established for any portion of the gross
deferred tax asset that is not more likely than not to be realized. The
realization of net deferred tax assets is based on utilization of loss
carrybacks to prior taxable periods, anticipation of future taxable
income and the utilization of tax planning strategies. Management has
determined that it is more likely than not that the net deferred tax
asset can be realized based upon these criteria.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) 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 15% of their gross pay. 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 $268,214,
$258,240, and $257,822 for the years ended March 31, 1997, 1996, and
1995, respectively.
STOCK OPTION PLANS
The Company has a 1992 Stock Option Plan and a 1994 Stock Option Plan
for the benefit of certain directors, officers, and key employees.
Under these plans, 3,750,000 shares of authorized common stock have
been reserved for issuance pursuant to grants approved by the Stock
Option Committee. The options have a maximum duration of 10 years, may
be subject to certain vesting requirements, and are priced at the
market value of the Company's common stock on the date of grant of the
option.
The Company applies APB Opinion 25 in accounting for the stock-based
option plans which are described in the preceding paragraph.
Accordingly, no compensation expense has been recognized for the
stock-based option plans. Had compensation cost been recognized for the
stock-based option plans applying the fair-value-based method as
prescribed by SFAS 123, the Company's net income and earning per share
would have been reduced to the pro forma amounts indicated below:
($ in thousands except per share amounts)
1997 1996
Net Income
As reported $ 8,083 10,556
Pro forma 7,639 10,338
Primary earnings per share
As reported $ .41 .49
========== ======
Pro forma $ .39 .48
========== ======
Fully diluted earnings per share
As reported $ .41 .49
========== ======
Pro forma $ .39 .48
========== ======
The effects of applying SFAS 123 may not be representative of the
effects on reported net income in future years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997 and 1996: dividend yield of zero;
expected volatility of 44%; risk-free interest rate of 6.63%; and
expected lives of 10 years for all plans in both years.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 1997, the Company had the following options outstanding:
SHARES SHARES SHARES PRICE EXPIRATION
GRANT DATE GRANTED EXERCISABLE EXERCISED PER SHARE DATE
---------- ------- ----------- --------- --------- -----------
April 22, 1992 150,000 120,000 - $ 2.98 April 22, 2002
April 30, 1992 24,000 24,000 6,000 $ 3.04 April 30, 2002
October 20, 1992 361,500 297,000 138,500 $ 2.92 October 20, 2002
January 20, 1993 36,000 21,600 - $ 5.04 January 20, 2003
April 7, 1993 90,000 54,000 4,000 $ 6.33 April 7, 2003
April 30, 1993 18,000 18,000 - $ 5.54 April 30, 2003
October 19, 1993 373,500 228,300 13,500 $ 6.88 October 19, 2003
April 30, 1994 24,000 24,000 - $ 5.75 April 30, 2004
October 13, 1994 591,000 238,200 6,000 $ 7.48 October 13, 2004
April 1,1995 211,692 141,128 - $ 8.63 April 1, 2005
April 30, 1995 24,000 24,000 - $ 9.50 April 30, 2005
June 26, 1995 75,000 15,000 - $11.33 June 26, 2005
October 31, 1995 150,500 30,100 - $13.00 October 31, 2005
January 23, 1996 15,000 - - $10.25 January 23, 2006
April 1, 1996 196,177 65,392 - $10.75 April 1, 2006
April 1, 1996 45,300 - - $10.75 April 1, 2006
April 30, 1996 24,000 24,000 - $10.06 April 30, 2006
July 18, 1996 14,600 14,600 - $6.75 July 18, 2006
October 25, 1996 227,000 - - $6.96 October 25, 2006
January 27, 1997 36,000 - - $5.94 January 27, 2007
March 31, 1997 38,300 - - $5.41 March 31, 2007
---------- -------- -------
Total 2,725,569 1,339,320 168,000
========= ========= =======
On April 1, 1997, and on April 29, 1997, the Company granted options
for an additional 78,662 shares and 24,000 shares, respectively, under
the plans to certain executives and on April 30, 1997, an additional
24,000 shares under the plans were granted to non-management directors
pursuant to the terms of the plan, leaving 897,769 shares of common
stock available for future grants. No expense has been recorded
relative to stock options granted to date.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) ACQUISITIONS
During fiscal 1997, the Company purchased the net assets of forty-six
consumer loan offices for a total consideration of $17,282,138. Total
net loans receivable acquired amounted to $10,051,841, and the Company
paid $7,292,652 for non-compete agreements with predecessor owners and
other intangible assets. Nine of the forty-six offices acquired were
merged into existing offices.
During fiscal 1996, the Company purchased the net assets of twenty-one
consumer loan offices for a total consideration of $2,817,090. Total
net loans receivable acquired amounted to $1,777,441, and the Company
paid $973,500 for non-compete agreements with predecessor owners and
other intangible assets. Thirteen of the twenty-one offices acquired
were merged into existing offices.
During fiscal 1995, the Company purchased the net assets of eight
consumer loan offices for a total consideration of $707,051. Total net
loans receivable acquired amounted to $490,536, and the Company paid
$200,715 for non-compete agreements with predecessor owners and other
intangible assets. Six of the eight offices acquired were merged into
existing Company offices.
(11) PARADATA SUBSIDIARY
The Company operates a wholly owned subsidiary doing business as
ParaData Financial Systems (ParaData). ParaData has developed and
markets a proprietary data processing software package for use in the
finance industry. The Company completed the conversion of substantially
all of its consumer finance offices to this new system in April 1994.
The following statements of operations data for ParaData were included
in the Consolidated Statements of Operations for the fiscal years ended
March 31, 1997, 1996 and 1995:
Years Ended March 31,
1997 1996 1995
----------- ------------ -----------
Sales and system support $ 1,689,204 6,632,897 1,537,411
Cost of sales 253,584 3,209,818 360,688
----------- ------------ -----------
Net margin 1,435,620 3,423,079 1,176,723
----------- ------------ -----------
General and administrative expenses:
Personnel 1,026,172 974,299 756,829
Occupancy and equipment 276,342 256,843 241,707
Advertising 7,601 5,729 2,799
Amortization of intangibles 28,756 28,754 28,748
Other 181,575 214,819 147,921
----------- ------------ -----------
1,520,446 1,480,444 1,178,004
Interest expense -- 23,898 15,294
----------- ------------ -----------
Net income (loss) before income taxes $ (84,826) 1,918,737 (16,575)
=========== ============ ===========
Included in sales and system support is $278,000 of data
processing fees that were charged to the parent for fiscal 1995.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) QUARTERLY INFORMATION (UNAUDITED)
The following sets forth selected quarterly operating data:
1997 1996
------------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth
------- ------ ------ ------- ------ ------- ------ ------
(in thousands, except earnings per share date)
Total revenues $17,307 17,995 19,169 20,847 15,861 17,391 18,053 18,568
Provision for loan losses 2,246 3,028 4,198 2,642 1,639 2,526 3,248 1,781
General and administrative expenses 11,007 10,998 12,415 12,426 9,965 10,003 11,147 9,908
Interest expense 880 997 1,138 1,308 799 917 899 883
Income tax expense 1,110 1,041 496 1,305 1,250 1,415 1,005 1,932
------- ------ ------ ------ ------ ------ ------ ------
Net income 2,064 1,931 922 3,166 2,208 2,530 1,754 4,064
======= ====== ====== ====== ====== ====== ====== ======
Fully diluted per share data:
Earnings per share $ .10 .10 .05 .16 .10 .12 .08 .19
======= ====== ====== ====== ====== ====== ====== ======
Weighted average shares outstanding 20,812 20,085 19,325 19,138 21,660 21,908 21,661 21,582
======= ====== ====== ====== ====== ====== ====== ======
(13) LITIGATION
The Company and its Georgia subsidiary are named as co-defendants with
a number of other finance companies, jewelry and furniture retailers,
and insurance companies in a consolidated nationwide class action,
currently pending in 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). The consolidated action
involves the defendants' non-file insurance practices. The complaint
alleges, among other things, that the defendants' non-file insurance
coverages do not constitute true insurance, and that the defendants'
practices with respect to non-file insurance constitute alleged federal
truth-in-lending, RICO and antitrust violations. The complaint has been
certified as a nationwide class action and seeks to recover money
damages and injunctive relief. The complaint was filed on April 18,
1995, the Company has filed an answer, and the parties are in the
discovery process. The Company has been advised that certain of the
defendants in the case have agreed to settle the claims made against
them by paying money damages to the plaintiffs. The Company has also
been advised that certain of the settling defendants have agreed to
change their non-file insurance practices. If the Company's non-file
insurance practices are found to be improper, the Company could be
required to refund non-file insurance fees, pay other significant
damages to the plaintiffs, and change its non-file insurance practices
going forward, and the Company could experience a reduction in future
income. The Company disputes the allegations made in the complaint, and
intends to continue to defend itself vigorously.
Management's statement of expectation with respect to this litigation
may be deemed a forward-looking statement, within the meaning of
Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act"), and no assurance can be given that management's expectation will
prove correct, as such expectation is subject to certain risks,
uncertainties and assumptions based on the preliminary nature of the
case and the vagaries of litigation generally. Should one or more of
these risks materialize or should underlying assumptions prove
incorrect, the actual outcome of this litigation could differ
materially from management's expectation.
At March 31, 1997, the Company and certain of its subsidiaries have
been named as defendants in various other 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 other matters cannot be determined, in the opinion of
management, and based upon the advice of counsel, any such liability
will not have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
(14) COMMITMENTS
The Company has entered into employment agreements with certain key
executive employees. The employment agreements have terms of three
years and call for aggregate minimum annual base salaries of $504,000,
adjusted annually as determined by the Company's Compensation
Committee. The agreements also provide for annual incentive bonuses,
which are based on the achievement of certain predetermined operational
goals.
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
World Acceptance Corporation
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of World
Acceptance Corporation and subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1997. The
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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1997, in conformity with generally accepted
accounting principles.
Greenville, South Carolina
April 23, 1997
27
BOARD OF DIRECTORS
Standing: Seated:
William S. Hummers III R. Harold Owens
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF OPERATING OFFICER
CAROLINA FIRST CORPORATION WORLD ACCEPTANCE CORPORATION
Ken R. Bramlett Jr. Charles D. Walters
SENIOR VICE PRESIDENT AND GENERAL COUNSEL CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PERSONNEL GROUP OF AMERICA, INC. WORLD ACCEPTANCE CORPORATION
James R. Gilreath A. Alexander McLean III
ATTORNEY EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
JAMES R. GILREATH, P.A. WORLD ACCEPTANCE CORPORATION
Charles D. Way
CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER
RYAN'S FAMILY STEAK HOUSES, INC.
COMPANY OFFICERS
Charles D. Walters Harley E. Carlton
CHAIRMAN AND CHIEF EXECUTIVE OFFICER VICE PRESIDENT OF OPERATIONS
OKLAHOMA AND MISSOURI
R. Harold Owens Jimmy T. Galloway
PRESIDENT AND CHIEF OPERATING OFFICER VICE PRESIDENT OF OPERATIONS, GEORGIA
A. Alexander McLean III Charles F. Gardner, Jr.
EXECUTIVE VICE PRESIDENT VICE PRESIDENT OF OPERATIONS
AND CHIEF FINANCIAL OFFICER SOUTHWEST TEXAS AND NEW MEXICO
Mark C. Roland Casey K. Johnson
SENIOR VICE PRESIDENT, EASTERN DIVISION VICE PRESIDENT OF OPERATIONS, WEST TEXAS
Jeffrey W. Ohly Tommy E. Marr
SENIOR VICE PRESIDENT, SECRETARY AND TREASURER VICE PRESIDENT OF OPERATIONS, EAST TEXAS
James J. Rosenauer William M. Strange
PRESIDENT, PARADATA FINANCIAL SYSTEMS VICE PRESIDENT OF OPERATIONS, SOUTH CAROLINA
Iris E. Snow Jeff L. Tinney
VICE PRESIDENT AND ASSISTANT SECRETARY VICE PRESIDENT OF OPERATIONS, LOUISIANA
B. Dale Hall J. Daniel Walters
VICE PRESIDENT, ADMINISTRATION VICE PRESIDENT OF OPERATIONS
TENNESSEE AND ILLINOIS
28
CORPORATE INFORMATION
Common Stock
World Acceptance Corporation's common stock trades on the NASDAQ Stock
Market under the symbol: WRLD. As of June 20, 1997, there were approximately 182
shareholders of record and approximately 4,500 persons or entities who hold
their stock in nominee or "street" names through various brokerage firms. On
this date there were 18,946,573 shares of common stock outstanding.
The table below reflects the stock prices published by NASDAQ by quarter
for the last three fiscal years. The last reported sale price on June 20, 1997,
was 6 1/8.
Market Price of Common Stock
Fiscal 1995*
Quarter High Low
First 6 2/3 5 1/2
Second 7 1/3 5 5/6
Third 8 6 5/8
Fourth 8 11/12 7
Fiscal 1996*
Quarter High Low
First 11 1/2 8 1/2
Second 16 1/4 11 1/6
Third 15 3/4 10
Fourth 11 3/8 8 3/4
Fiscal 1997
Quarter High Low
First 11 1/2 7 1/4
Second 8 5 5/8
Third 7 1/4 5 5/8
Fourth 7 5/8 5
*All market prices have been adjusted to reflect 3-for-1 stock split in
August 1995.
29