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 December 31, 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
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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, February 11, 1999.
Common Stock, no par value 19,016,573
-------------------------- ------------------
(Class) (Outstanding)
1
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of December 31,
1998, and March 31, 1998 3
Consolidated Statements of Operations for the
three-month periods and nine-month periods ended
December 31, 1998, and December 31, 1997 4
Consolidated Statements of Shareholders' Equity
for the year ended March 31, 1998, and the nine-month
period ended December 31, 1998 5
Consolidated Statements of Cash Flows for the three-
month periods and nine-month periods ended December 31,
1998, and December 31, 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 nine-month periods ended December 31, 1998,
and December 31, 1997 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
2
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, March 31,
1998 1998
------------ ---------
ASSETS
Cash $ 1,505,660 1,212,611
Gross loans receivable 166,479,291 130,559,256
Less:
Unearned interest and fees (37,373,512) (27,173,845)
Allowance for loan losses (10,075,315) (8,444,563)
----------- -----------
Loans receivable, net 119,030,464 94,940,848
Property and equipment, net 6,710,051 6,424,757
Other assets, net 6,083,123 6,193,300
Intangible assets, net 9,921,058 9,610,394
----------- -----------
$ 143,250,356 118,381,910
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Senior notes payable 73,150,000 53,700,000
Subordinated notes payable 10,000,000 10,000,000
Other note payable 482,000 482,000
Accounts payable and accrued expenses 9,729,223 6,898,630
---------- ----------
Total liabilities 93,361,223 71,080,630
---------- ----------
Shareholders' equity:
Common stock, no par value - -
Additional paid-in capital 935,921 864,968
Retained earnings 48,953,212 46,436,312
----------- -----------
Total shareholders' equity 49,889,133 47,301,280
----------- -----------
$ 143,250,356 118,381,910
=========== ===========
See accompanying notes to consolidated financial statements.
3
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
December 31, December 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Interest and fee income $ 20,784,775 18,240,296 58,524,057 51,914,624
Insurance and other income 3,051,166 2,480,096 7,727,586 6,494,059
--------- --------- --------- ---------
Total revenues 23,835,941 20,720,392 66,251,643 58,408,683
---------- ---------- ---------- ----------
Expenses:
Provision for loan losses 4,261,642 3,562,229 9,733,276 8,526,983
---------- ---------- ---------- ----------
General and administrative
expenses:
Personnel 9,013,178 8,359,550 26,965,675 24,168,250
Occupancy and equipment 1,629,300 1,525,198 4,821,281 4,576,570
Data processing 344,975 354,153 1,065,645 953,854
Advertising 1,643,864 1,844,398 3,376,122 3,356,681
Legal 98,288 85,424 5,785,468 318,139
Amortization of intangible
assets 1,107,122 335,007 321,329 962,084
Other 1,947,729 1,827,404 5,656,821 5,303,903
---------- ---------- ---------- ----------
15,012,341 14,317,456 48,633,096 39,784,519
---------- ---------- ---------- ----------
Interest expense 1,456,033 1,452,844 4,083,371 4,017,726
---------- ---------- ---------- ----------
Total expenses 20,730,016 19,332,529 62,449,743 52,329,228
---------- ---------- ---------- ----------
Income before income taxes 3,105,925 1,387,863 3,801,900 6,079,455
Income taxes 1,052,000 495,000 1,285,000 2,067,000
---------- ---------- ---------- ----------
Net income $ 2,053,925 892,863 2,516,900 4,012,455
========== ========== ========== ==========
Net Income per common share:
Basic $ .11 .05 .13 .21
========= ========== ========== ==========
Diluted $ .11 .05 .13 .21
========= ========== ========== ==========
Weighted average common shares
outstanding:
Basic 19,016,573 18,960,464 19,008,861 18,950,518
========== ========== ========== ==========
Diluted 19,181,261 19,136,519 19,206,356 19,162,917
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Additional
Paid-in Retained
Capital Earnings Total
---------- -------- -----
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 nine months - 2,516,900 2,516,900
------- ---------- ----------
Balances at December 31, 1998 $ 935,921 48,953,212 49,889,133
======= ========== ==========
See accompanying notes to consolidated financial statements.
5
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ ------
Cash flows from operating activities:
Net income $2,053,925 892,863 2,516,900 4,012,455
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 4,261,642 3,562,229 9,733,276 8,526,983
Amortization of intangible assets 335,007 321,329 962,084 1,107,122
Amortization of loan costs and
discounts 67,999 27,427 128,692 84,895
Depreciation 344,058 366,019 1,054,302 1,084,290
Change in accounts:
Other assets, net 66,405 (362,334) (18,515) (2,245,464)
Accounts payable and accrued
expenses 1,016,950 385,666 2,849,046 (878,536)
---------- ---------- ---------- ----------
Net cash provided by
operating activities 8,145,986 5,193,199 17,225,785 11,691,745
---------- ---------- ---------- ----------
Cash flows from investing activities:
Increase in loans, net (18,969,750) (15,322,847) (30,206,973) (23,300,613)
Net assets acquired from office
acquisitions, primarily loans (2,655,063) (198,239) (3,640,338) (5,235,791)
Purchases of premises and equipment (314,100) (137,965) (1,315,177) (1,452,575)
Purchases of intangible assets (895,298) (144,501) (1,272,748) (1,221,437)
---------- ---------- ---------- ----------
Net cash used by investing
activities (22,834,211) (15,803,552) (36,435,236) (31,210,416)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds of senior notes payable,
net 18,900,000 13,600,000 23,450,000 13,250,000
Repayment of senior term notes (4,000,000) (4,000,000) (4,000,000) (4,000,000)
Proceeds from senior subordinated
notes - - - 10,000,000
Proceeds from exercise of stock
options - 29,166 52,500 84,583
---------- --------- --------- ----------
Net cash provided by financing
activities 14,900,000 9,629,166 19,502,500 19,334,583
---------- ---------- ---------- ----------
Increase (decrease) in cash 211,775 (981,187) 293,049 (184,088)
Cash, beginning of period 1,293,885 2,283,172 1,212,611 1,486,073
---------- ----------- ---------- -----------
Cash, end of period $ 1,505,660 1,301,985 1,505,660 1,301,985
========== ========== ========== ===========
Supplemental disclosure of cash
flow information:
Cash paid for interest expense $ 1,474,498 1,717,204 4,248,206 4,080,890
Cash paid for income taxes 295,500 882,919 4,048,885 4,561,689
Supplemental schedule of noncash
financing activities:
Tax benefits from exercise of
stock options - 7,501 18,453 30,705
See accompanying notes to consolidated financial statements.
6
WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The consolidated financial statements of the Company at December 31, 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 December 31, 1998, and the
results of operations and cash flows for the periods then ended, have been
included. The results for the periods ended December 31, 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):
Three months Nine months
ended December 31, ended December 31,
----------------------- -----------------------
1998 1997 1998 1997
----- ---- ---- ----
Balance at beginning of
period $ 8,908,102 7,526,452 8,444,563 6,283,459
Provision for loan losses 4,261,642 3,562,229 9,733,276 8,526,983
Loan losses (3,450,666) (3,041,197) (8,930,531) (8,080,595)
Recoveries 317,770 341,581 972,288 840,410
Allowance on acquired
loans 38,467 9,283 (144,281) 828,091
---------- --------- ---------- ---------
Balance at end of period $ 10,075,315 8,398,348 10,075,315 8,398,348
========== ========= ========== =========
NOTE 3 - PARADATA FINANCIAL SYSTEMS (PARADATA)
- ----------------------------------------------
The following data for ParaData was included in the Consolidated Statements
of Operations for the periods ended December 31, 1998 and 1997 (unaudited):
Three months Nine months
ended December 31, ended December 31,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Sales and system-support $537,701 634,152 1,674,512 1,504,876
Cost of sales 54,811 188,777 273,031 352,478
------- ------- --------- ---------
Net margin (included in other
income) 482,890 445,375 1,401,481 1,152,398
------- ------- --------- ---------
General and administrative
expenses
Personnel 304,426 280,344 876,199 749,629
Occupancy and equipment 29,561 72,137 94,427 207,409
Advertising 559 1,855 4,877 4,680
Amortization of intangibles - 7,189 - 21,567
Other 47,730 38,095 140,550 116,573
------- ------- ------- ---------
382,276 399,620 1,116,053 1,099,858
------- ------- --------- ---------
Net income before income taxes $100,614 45,755 285,428 52,540
======= ======= ========= =========
7
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 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
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):
Three months Nine months
ended December 31, ended December 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
Average gross loans receivable (1) $150,585 131,915 141,326 122,803
Average loans receivable (2) 116,578 102,295 109,938 95,402
Expenses as a % of total revenue:
Provision for loan losses 17.9% 17.2% 14.7% 14.6%
General and administrative (3) 63.0% 69.1% 73.4% 68.1%
Total interest expense 6.1% 7.0% 6.2% 6.9%
Operating margin (4) 19.1% 13.7% 11.9% 17.3%
Return on average assets (annualized) 6.1% 3.0% 2.6% 4.8%
Offices opened or acquired, net 9 - 23 24
Total offices (at period end) 383 360 383 360
- -----------------
(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
nine-month periods ended December 31, 1998. Excluding this one time charge,
the ratio would have been 65.3% for the nine-month period.
(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 margin for the nine-month period ended
December 31, 1998 would have been 20.1%.
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
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 December 31, 1998, Versus
- ----------------------------------------------------------
Three Months Ended December 31, 1997
- ------------------------------------
Net income amounted to $2.1 million for the three months ended December 31,
1998, a 130% increase over the $893,000 earned during the corresponding
three-month period of the previous year. This increase resulted from an increase
in operating income (revenues less provision for loan losses and general and
administrative expenses) of $1.7 million , or 60.6% offset by an increase in
income taxes.
Interest and fee income for the quarter ended December 31, 1998, increased by
$2.5 million, or 13.9%, over the same period of the prior year. This increase
resulted primarily from the $14.3 million increase, or 14.0%, in average loans
receivables over the two corresponding periods. The increase in interest and
fees was slightly 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 $571,000, or 23.0%,
when comparing the two quarterly periods. Insurance commissions increased by
13.8%, tracking the growth in loans in those states that allow the sale of
credit insurance. Other income increased by $3927,000, or 33.1%, primarily as
the result of gross profit increases at the Company's ParaData subsidiary and
the World Class Buying Club.
Total revenues rose to $23.8 million during the quarter ended December 31,
1998, a 15.0% increase over the $20.7 million in total revenues for the same
quarter of the prior year. Revenues from the 314 offices open throughout both
three-month periods increased by approximately 10.5%. The strong revenue growth
from the 314 offices open throughout both three-month periods resulted primarily
from loans acquired that were added to certain of these offices as well as
increased volume from the sale finance program. At December 31, 1998, the
Company had 383 offices in operation, a net increase of 9 offices during the
current quarter, and 23 offices since the beginning of the fiscal year.
The provision for loan losses amounted to $4.3 million during the quarter
ended December 31, 1998, representing an 19.6% increase over the $3.6 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 $433,000, or 16.0%,
annualized net charge-offs as a percentage of average loans increased slightly
from 10.6% for the quarter ended December 31, 1997, to 10.7% for the most recent
quarter. 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.
General and administrative expenses for the quarter ended December 31, 1998,
increased by $695,000, or 4.9%, over the same quarter of fiscal 1998. This
increase resulted primarily from the additional expenses associated with the 33
new offices opened or acquired between December 31, 1997, and December 31, 1998.
During the same 12-month period, the Company has also sold or merged 10 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 69.1%
for the quarter ended December 31, 1997, to 63.0% for the most recent quarter.
Additionally, excluding the expenses associated with ParaData, overall general
and administrative expenses when divided by the average open offices decreased
by .5% when comparing the two periods.
Interest expense increased by $3,000, or .2%, when comparing the two
corresponding quarterly periods. This increase resulted from an increase in the
level of debt, which grew from $77.9 million at December 31, 1997, to $83.6
million at December 31, 1998, offset by a decrease in the overall interest rates
over the two corresponding quarters.
10
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------
Comparison of Nine Months Ended December 31, 1998,
- --------------------------------------------------
Versus Nine Months Ended December 31, 1997
- ------------------------------------------
For the nine-month period ended December 31, 1998, net income amounted to
$2.5 million. The results for this period were greatly affected by the accrual
for legal expenses resulting from a pending settlement of certain litigation
(see Pending Legal Settlement). Excluding the effects of this $5.4 million
pending legal settlement and related income tax benefit, net income amounted to
$6.1 million, an increase of $2.1 million, or 51.9%, from the corresponding
nine-month period of the prior year. Operating income increased by $3.2 million,
or 31.6%, over the two periods. This increase was offset by a slight increase in
both interest expense as well as income taxes.
Total revenues amounted to $66.3 million during the current nine-month
period, an increase of $7.8 million, or 13.4%, over the prior-year period. This
increase resulted from an increase in interest and fee income of 12.7% combined
with an increase in insurance and other income of 19.0%. Revenues from the 314
offices open throughout both nine-month periods increased approximately 8.2%.
Interest and fee income rose by $6.6 million, or 12.7%, during the two
corresponding nine-month periods primarily as a result of increases in loan
balances outstanding. Average loans receivable were $109.9 million during the
nine months ended December 31, 1998, representing a 15.2% increase over the
average balances of the prior year. Other income increased by 19.0% due to
increased insurance commissions, as well as increased gross profits from
ParaData and WCBC sales.
The provision for loan losses increased by $1.2 million, or 14.1%, during the
current nine-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 $718,000, or 9.9%, when comparing the two
nine-month periods. As an annualized percentage of average loans, this
represented a decrease to 9.7% during the current nine-month period compared to
10.1% for the same period of the prior fiscal year.
General and administrative, excluding the pending legal settlement, expenses
increased by $3,449,000, or 8.7%, during the most recent nine-month period. As a
percentage of total revenues, these expenses decreased from 68.1% during the
prior year nine-month period to 65.3% during the current period. The Company's
expense ratios have benefited from the merger or sale of ten 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 3.3% when comparing the two nine-month periods.
Interest expense increased by $66,000 when comparing the two nine-month
periods, an increase of only 1.6%. This reflects the small increase in overall
debt from December 1997 to the end of the current quarter, a period during which
the Company's generated excess cash while growing total assets by 14.9% and
total debt by only 7.3%. The Company also benefited by a reduction in the prime
lending rate 14.9% during the past 12 months.
The effective income tax rate decreased slightly during the current
nine-month period to 33.8% from 34.0% for the prior year period primarily as a
result of the legal settlement.
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, $4.0 million of
senior term notes, and $10.0 million of subordinated notes. The revolving credit
facility has been temporarily increased by an additional $12 million for the
period December 1, 1998 to March 15, 1999 to provide for additional seasonal
funding needs.
The revolving credit facility expires on December 31, 2000, and bears
interest, at the Company's option, at the agent's prime rate or LIBOR plus
1.60%. At December 31, 1998, the interest rate under the facility was 7.21%, and
the Company's outstanding balance was $69.15 million, leaving $7.85 million in
borrowing availability under existing borrowing base limitations (based on
eligible loans receivable).
11
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------
The senior term notes provide for interest payments to be made semi-annually
at a fixed rate of 8.5%, with the fixed annual principal payments of $4.0
million to be made on December 1, 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.
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.
12
WORLD ACCEPTANCE CORPORATION
MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------
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.
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.
13
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In addition to the litigation discussed 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
WORLD ACCEPTANCE CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION, CONTINUED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Filed
Herewith (*) or
Previous Company
Exhibit Exhibit Registration
Number Description Number No. or Report
3.1 Second Amended and Restated Articles
of Incorporation of the Company 3.1 1992 10-K
Company
3.2 First Amendment to Second Amended and
Restated Articles of Incorporation 3.2 1995 10-K
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 Amended and Restated
Articles of Incorporation (as amended) 3.1, 3.2 1995 10-K
4.3 Article II, Section 9 of the Company's
Second Amended and Restated Bylaws 3.2 1995 10-K
4.4 Amended and Restated Revolving Credit
Agreement, dated as of June 30, 1997,
between Harris Trust and Savings Bank,
the Banks signatory thereto from time
to time and the Company 4.4 9-30-97 10-Q
4.5 Amended and Restated Note Agreements,
dated as of June 30, 1997, between
Jefferson-Pilot Life Insurance Company
and the Company 4.5 9-30-97 10-Q
4.6# Amended and Restated Note Agreement,
dated as of June 30, 1997, between
Principal Mutual Life Insurance Company
and the Company 4.6 9-30-97 10-Q
4.7 Note Agreement, dated as of June 30, 1997,
between Principal Mutual Life Insurance
Company and the Company re: 10%
Senior Subordinated Secured Notes 4.7 9-30-97 10-Q
4.8 Amended and Restated Security Agreement,
Pledge and Indenture of Trust, dated as of
June 30, 1997, between the Company and
Harris Trust and Savings Bank, as
Security Trustee 4.8 9-30-97 10-Q
10.1 Employment Agreement of Charles D. Walters,
effective April 1, 1994 10.1 1994 10-K
10.2 Employment Agreement of A. Alexander McLean,
III, effective April 1, 1994 10.2 1994 10-K
10.3 Employment Agreement of R. Harold Owens,
effective June 26, 1995 10.3 1995 10-K
15
10.4 Securityholders' Agreement, dated as of
September 19, 1991, between the Company
and certain of its securityholders 10.5 33-42879
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 Strategic Incentive Plan 10.9 1996 10-K
27 Financial Data Schedule (for SEC purposes only)
# 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 December 31,
1998.
16
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: February 12, 1999 /s/ C. D. Walters
---------------------------------------
C. D. Walters, Chief Executive Officer
Dated: February 12, 1999 /s/ A. A. McLean III
---------------------------------------
A. A. McLean III, Executive Vice President
and Chief Financial Officer
17