-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QD/XUibmvoJdpC4sWL5EiOZPYIAEf4rwXwz7Iq5Evt2fAiHFCKJsqj0W2YIWQ7DI BMrac+trCHJIgtEzRE0/sw== 0000950168-98-002128.txt : 19980630 0000950168-98-002128.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950168-98-002128 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLD ACCEPTANCE CORP CENTRAL INDEX KEY: 0000108385 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 570425114 STATE OF INCORPORATION: SC FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19599 FILM NUMBER: 98656865 BUSINESS ADDRESS: STREET 1: 108 FREDRICK STREET CITY: GREENVILLE STATE: SC ZIP: 29607 BUSINESS PHONE: 8642989800 MAIL ADDRESS: STREET 1: P O BOX 6429 CITY: GREENVILLE STATE: SC ZIP: 29606 10-K405 1 WORLD ACCEPTANCE CORPORATION 10-K405 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ----------------- (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _____________ Commission file number 0-19599 WORLD ACCEPTANCE CORPORATION (Exact name of registrant as specified in its charter) South Carolina 570425114 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 108 Frederick Street Greenville, South Carolina 29607 - ---------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) (864) 298-9800 ------------------------------------------------------ (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, no par value --------------------------- (Title of Class) 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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant as of June 19, 1998, computed by reference to the closing sale price on such date, was $99,354,068. As of the same date, 19,004,573 shares of Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's 1998 Annual Report ("the Annual Report") furnished to the Commission pursuant to Rule 14a-3(b) and the Notice of Annual Meeting of Shareholders and definitive Proxy Statement pertaining to the 1998 Annual Meeting of Shareholders ("the Proxy Statement") and filed pursuant to Regulation 14A are incorporated herein by reference into Parts II and IV, and Part III, respectively. ================================================================================ WORLD ACCEPTANCE CORPORATION FORM 10-K REPORT TABLE OF CONTENTS Item No. Page PART I 1. Description of Business............................................................................. 1 2. Properties.......................................................................................... 8 3. Legal Proceedings................................................................................... 9 4. Submission of Matters to a Vote of Security Holders................................................. 10 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters............................... 10 6. Selected Financial Data............................................................................. 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operation................ 10 8. Financial Statements and Supplementary Data......................................................... 10 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 10 PART III 10. Directors and Executive Officers of the Registrant................................................. 10 11. Executive Compensation............................................................................. 11 12. Security Ownership of Certain Beneficial Owners and Management..................................... 11 13. Certain Relationships and Related Transactions..................................................... 11 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 11
INTRODUCTION World Acceptance Corporation, a South Carolina corporation, operates a small-loan consumer finance business in nine states. As used herein, the "Company" includes World Acceptance Corporation and each of its subsidiaries, except that when used with reference to the Common Stock or other securities described herein and in describing the positions held by management or agreements of the Company, it includes only World Acceptance Corporation. All references in this report to "fiscal 1998" are to the Company's fiscal year ended March 31, 1998. PART I. ITEM 1. DESCRIPTION OF BUSINESS GENERAL. The Company is engaged in the small-loan consumer finance business, offering short-term loans, related credit insurance and ancillary products and services to individuals. The Company generally offers standardized installment loans of between $130 to $1,350 through 365 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, and New Mexico as of June 19, 1998. The Company generally serves individuals with limited access to other sources of consumer credit from banks, savings and loans, other consumer finance businesses and credit cards. The Company's customers typically use their loans to meet temporary or unanticipated cash needs, such as holiday gift purchases, car repairs, medical bills and back-to-school needs. Small-loan consumer finance companies operate in a highly structured regulatory environment. Consumer loan offices are individually licensed under state laws, which establish allowable interest rates, fees and other charges on small loans made to consumers and, in many states, the maximum principal amounts and maturities of these loans. The Company believes that virtually all participants in the small-loan consumer finance industry charge the maximum rates permitted under applicable state laws. The small-loan consumer finance industry is a highly fragmented segment of the consumer lending industry. Small-loan consumer finance companies generally make loans to individuals of up to $1,000 with maturities of one year or less. These companies approve loans on the basis of the personal creditworthiness of their customers and maintain close contact with borrowers to encourage the repayment or refinancing of loans. By contrast, commercial banks, savings and loans and other consumer finance businesses typically make loans of more than $1,000 with maturities of more than one year. Those financial institutions generally approve consumer loans on the security of qualifying personal property pledged as collateral or impose more stringent credit requirements than those of small-loan consumer finance companies. As a result of their higher credit standards and specific collateral requirements, commercial banks, savings and loans and other consumer finance businesses typically charge lower interest rates and fees and experience lower delinquency and charge-off rates than do small-loan consumer finance companies. Small-loan consumer finance companies generally charge higher interest rates and fees to compensate for the greater credit risk of delinquencies and charge-offs and increased loan administration and collection costs. The lending activities of small-loan consumer finance companies also differ from those of pawnshops. Pawnshops generally make smaller loans with shorter original maturities than small-loan consumer finance companies. Pawnshops also extend loans based exclusively on the assessed value of the personal property that is pledged to secure their loans rather than on the personal creditworthiness of the borrower. Pawnshops experience default or forfeiture rates on their loans that are significantly greater than those experienced by small-loan consumer finance companies and, as a result, derive a large portion of their revenues from the sale of forfeited collateral in the ordinary course of their operations. EXPANSION. The Company opened or acquired 24 new offices (net) during fiscal 1998. The Company plans to open or acquire at least 25 new offices in each of the next two fiscal years by increasing the number of offices in its existing market areas and in new states where it believes demographic profiles and state regulations are attractive. The Company's ability to expand operations into new states is dependent upon its ability to obtain necessary regulatory approvals and licenses, and there can be no assurance that the Company will be able to obtain any such approvals or consents. 1 The Company's expansion is also dependent upon its ability to identify attractive locations for new offices and hire suitable personnel to staff, manage and supervise new offices. In evaluating a particular community, the Company examines several factors, including the demographic profile of the community, the existence of an established small-loan consumer finance market and the availability of suitable personnel to staff, manage and supervise the new offices. The Company generally locates new offices in communities already served by at least one small-loan consumer finance company. The small-loan consumer finance industry is highly fragmented in the nine states in which the Company currently operates. The Company believes that its competitors in these markets are principally independent operators with fewer than 20 offices. The Company also believes that attractive opportunities to acquire offices from competitors in its existing markets and to acquire offices in communities not currently served by the Company will become available as conditions in the local economies and the financial circumstances of the owners change. The following table sets forth the number of offices of the Company at the dates indicated: At March 31, ---------------------------------------------------------------------------------------- At June 19, STATE 1991 1992 1993 1994 1995 1996 1997 1998 1998 - ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- South Carolina........ 52 52 53 56 59 62 68 64 64 Georgia............... 31 34 35 35 38 39 45 49 49 Texas................. 58 62 66 81 93 104 131 128 128 Oklahoma.............. 21 23 27 31 33 39 40 41 41 Louisiana (1)......... - 5 10 12 15 20 18 21 21 Tennessee (2)......... - - - 2 6 18 24 28 30 Illinois (3).......... - - - - - - 3 11 14 Missouri (4).......... - - - - - - 1 9 9 New Mexico (5)........ - - - - - - 6 9 9 ---- ---- ----- ----- ----- ----- ---- ---- ---- Total............ 162 176 191 217 244 282 336 360 365 ==== ==== ===== ===== ===== ===== ==== ==== ====
- ---------------------- (1) The Company commenced operations in Louisiana in May 1991. (2) The Company commenced operations in Tennessee in April 1993. (3) The Company commenced operations in Illinois in September 1996. (4) The Company commenced operations in Missouri in August 1996. (5) The Company commenced operations in New Mexico in December 1996. LOAN AND OTHER PRODUCTS. In each state in which it operates, the Company offers loans that are standardized by amount and maturity in an effort to reduce documentation and related processing costs. Substantially all of the Company's loans are payable in monthly installments with terms of four to fifteen months, and all loans are prepayable at any time without penalty. In fiscal 1998, the Company's average originated loan size and term were approximately $488 and eight months, respectively. State laws regulate lending terms, including the maximum loan amounts and interest rates and the types and maximum amounts of fees, insurance premiums and other costs that may be charged. As of March 31, 1998, the annual percentage rates on loans offered by the Company, which include interest, fees and other charges as calculated for the purposes of federal consumer loan disclosure requirements, ranged from 36% to 204% depending on the loan size, maturity and the state in which the loan is made. In addition, in certain states, the Company sells credit insurance in connection with its loans as agent for an unaffiliated insurance company, which may increase its yields on loans originated in those states. Specific allowable charges vary by state and, consistent with industry practice, the Company generally charges the maximum rates allowable under applicable state law. Statutes in Texas, Oklahoma and South Carolina allow for indexing the maximum loan amounts to the Consumer Price Index. Fees charged by the Company include origination and account maintenance fees, monthly handling charges and, in South Carolina, Georgia, Louisiana and Tennessee, non-file fees, which are collected by the Company and paid as premiums to an unaffiliated insurance company for non-recording insurance. 2 The Company, as an agent for an unaffiliated insurance company, markets and sells credit life, credit accident and health, credit property, and unemployment insurance in connection with its loans in states where the sale of such insurance is permitted by law. Credit life insurance provides for the payment in full of the borrower's credit obligation to the lender in the event of death. Credit accident and health insurance provides for repayment of loan installments to the lender that come due during the insured's period of income interruption resulting from disability from illness or injury. Credit property insurance insures payment of the borrower's credit obligation to the lender in the event that the personal property pledged as security by the borrower is damaged or destroyed. Unemployment insurance provides for repayment of loan installments to the lender that come due during the insured's period of involuntary unemployment. The Company requires each customer to obtain credit insurance in the amount of the loan for all loans originated in South Carolina, and Georgia, and encourages customers to obtain credit insurance for loans originated in Tennessee and Louisiana. Customers in those states typically obtain such credit insurance through the Company. Charges for such credit insurance are made at maximum authorized rates and are stated separately in the Company's disclosure to customers, as required by the Truth-in-Lending Act. In the sale of insurance policies, the Company as agent writes policies only within limitations established by its agency contracts with the insurer. The Company does not sell credit insurance to non-borrowers. The Company also markets automobile club memberships to its borrowers in Georgia, Tennessee and Louisiana as an agent for an unaffiliated automobile club. Club memberships entitle members to automobile breakdown and towing insurance and related services. The Company is paid a commission on each membership sold, but has no responsibility for administering the club, paying insurance benefits or providing services to club members. The Company generally does not market automobile club memberships to non-borrowers. In fiscal 1995 the Company implemented its World Class Buying Club, and began marketing certain electronic products and appliances to its Texas borrowers. Since implementation, the Company has expanded this program to Georgia, Tennessee, South Carolina, and Louisiana and plans to introduce the program in Oklahoma and New Mexico in the summer of 1998. Borrowers participating in this program can purchase a product from a catalog available at a branch office and finance the purchase with a retail installment sales loan provided by the Company. Products sold through this program are shipped directly by the suppliers to the Company's customers and, accordingly, the Company is not required to maintain any inventory to support the program. LOAN ACTIVITY AND SEASONALITY. The following table sets forth the composition of the Company's gross loans receivable by state at March 31 of each year from 1991 through 1998: At March 31, ------------------------------------------------------------------------- State 1991 1992 1993 1994 1995 1996 1997 1998 ----- ---- ---- ---- ---- ---- ---- ---- ---- South Carolina........... 40% 38% 37% 37% 35% 33% 26% 23% Georgia.................. 13 13 14 14 13 13 13 14 Texas.................... 39 39 38 38 38 35 39 35 Oklahoma................. 8 8 8 7 7 8 7 7 Louisiana (1)............ - 2 3 3 4 5 3 4 Tennessee (2)............ - - - 1 3 6 10 11 Illinois (3)............. - - - - - - - 2 Missouri (4)............. - - - - - - - 1 New Mexico (5)........... - - - - - - 2 3 ---- ----- ----- ----- ----- ---- ---- ---- Total................ 100% 100% 100% 100% 100% 100% 100% 100% ==== ===== ===== ===== ===== ==== ==== ====
_______________________________ (1) The Company commenced operations in Louisiana in May 1991. (2) The Company commenced operations in Tennessee in April 1993. (3) The Company commenced operations in Illinois in September 1996. (4) The Company commenced operations in Missouri in August 1996. (5) The Company commenced operations in New Mexico in December 1996. 3 The following table sets forth the total number of loans and the average loan balance by state at March 31, 1998: Total Number Average Gross Loan of Loans Balance ------------ ------------------ South Carolina..................... 70,730 431 Georgia............................ 36,432 513 Texas.............................. 129,970 354 Oklahoma........................... 24,404 378 Louisiana.......................... 12,055 394 Tennessee.......................... 25,322 555 Illinois........................... 5,193 418 Missouri........................... 3,767 279 New Mexico......................... 7,569 549 -------- Total.......................... 315,442 -------- The Company's highest loan demand occurs generally from October through December, its third fiscal quarter. Loan demand is generally lowest and loan repayment highest from January to March, its fourth fiscal quarter. Consequently, the Company experiences significant seasonal fluctuations in its operating results and cash needs. Operating results from the Company's third fiscal quarter are generally significantly lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters. LENDING AND COLLECTION OPERATIONS. The Company seeks to provide short-term loans to the segment of the population that has limited access to other sources of credit. In evaluating the creditworthiness of potential customers, the Company primarily examines the individual's discretionary income, length of current employment, duration of residence and prior credit experience. Loans are made to individuals on the basis of the customer's discretionary income and other factors and are limited to amounts that the customer can reasonably be expected to repay from that income. All of the Company's new customers are required to complete standardized credit applications in person or by telephone at local Company offices. Each of the Company's local offices is equipped to perform immediate background, employment and credit checks and approve loan applications promptly, often while the customer waits. The Company's employees verify the applicant's employment and credit histories through telephone checks with employers, other employment references and a variety of credit services. Substantially all new customers are required to submit a listing of personal property that will be pledged as collateral to secure the loan, but the Company does not rely on the value of such collateral in the loan approval process and generally does not perfect its security interest in that collateral. Accordingly, if the customer were to default in the repayment of the loan, the Company may not be able to recover the outstanding loan balance by resorting to the sale of collateral. The Company generally approves less than 50% of applications for loans to new customers. The Company believes that the development and continual reinforcement of personal relationships with customers improve the Company's ability to monitor their creditworthiness, reduce credit risk and generate repeat loans. It is not unusual for the Company to have made a number of loans to the same customer over the course of several years, many of which were refinanced with a new loan after two or three payments. In determining whether to refinance existing loans, the Company typically requires loans to be current on a recency basis, and repeat customers are generally required to complete a new credit application if they have not completed one within the prior two years. In fiscal 1998, approximately 88% of the Company's loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers. A refinancing represents a new loan transaction with a present customer in which a portion of the new loan is used to repay the balance of an existing loan and the remaining portion is advanced to the customer. The Company actively markets the opportunity to refinance existing loans prior to maturity, thereby increasing the amount borrowed and increasing the fees and other income realized. For fiscal 1996, 1997, and 1998, the percentages of the Company's loan originations that were refinancings of existing loans were 80.0%, 81.8%, and 79.1% respectively. 4 The Company allows refinancing of delinquent loans on a case-by-case basis for those customers who otherwise satisfy the Company's credit standards. Each such refinancing is carefully examined before approval to avoid increasing credit risk. A delinquent loan may generally be refinanced only if the customer has made payments which, together with any credits of insurance premiums or other charges to which the customer is entitled in connection with the refinancing, reduce the balance due on the loan to an amount equal to or less than the original cash advance made in connection with the loan. The Company does not allow the amount of the new loan to exceed the original amount of the existing loan. The Company believes that refinancing delinquent loans for certain customers who have made periodic payments allows the Company to increase its average loans outstanding and its interest, fee and other income without experiencing a material increase in loan losses. These refinancings also provide a resolution to temporary financial setbacks for these borrowers and sustains their credit rating. To reduce late payment risk, local office staff encourage customers to inform the Company in advance of expected payment problems. Local office staff also promptly contact delinquent customers following any payment due date and thereafter remain in close contact with such customers through phone calls, letters or personal visits to the customer's residence or place of employment until payment is received or some other resolution is reached. When representatives of the Company make personal visits to delinquent customers, the Company's policy is to encourage the customers to return to the Company's office to make payment. Company employees are instructed not to accept payment outside of the Company's offices except in unusual circumstances. In Georgia and Oklahoma, the Company is permitted under state laws to garnish customers' wages for repayment of loans, but the Company does not otherwise generally resort to litigation for collection purposes, and rarely attempts to foreclose on collateral. INSURANCE-RELATED OPERATIONS. In Georgia, Louisiana, South Carolina, Tennessee, and on a limited basis, New Mexico, the Company sells credit insurance to customers in connection with its loans as an agent for an unaffiliated insurance company. These insurance policies provide for the payment of the outstanding balance of the Company's loan upon the occurrence of an insured event. The Company earns a commission on the sale of such credit insurance, which is based in part on the claims experience of the insurance company on policies sold on its behalf by the Company. The Company has a wholly owned captive insurance subsidiary, which reinsures a portion of the credit insurance sold in connection with loans made by the Company. Certain coverages currently sold by the Company on behalf of the unaffiliated insurance carrier are ceded by the carrier to the captive insurance subsidiary, providing the Company with an additional source of income derived from the earned reinsurance premiums. In fiscal 1998, the captive insurance subsidiary reinsured less than 11% of the credit insurance sold by the Company and contributed approximately $927,000 to the Company's total revenues. The Company typically does not perfect its security interest in collateral securing its loans by filing Uniform Commercial Code financing statements. Statutes in Georgia, Louisiana, South Carolina and Tennessee permit the Company to charge a non-file or non-recording insurance fee in connection with loans originated in these states. These fees are equal in aggregate amount to the premiums paid by the Company to purchase non-file insurance coverage from an unaffiliated insurance company. Under its non-file insurance coverage, the Company is reimbursed for losses on loans resulting from its policy not to perfect its security interest in collateral pledged to secure the loans. MONITORING AND SUPERVISION. The Company's loan operations are organized into Eastern and Western Divisions, with the Eastern Division consisting of South Carolina, Georgia, Tennessee and Illinois and the Western Division consisting of Louisiana, Texas, Oklahoma, Missouri and New Mexico. Several levels of management monitor and supervise the operations of each of the Company's offices. Branch managers are directly responsible for the performance of their respective offices and must approve all credit applications. District supervisors are responsible for the performance of eight to ten offices in their districts, typically communicate with the branch managers of each of their offices at least weekly and visit the offices monthly. Each of the state Vice Presidents of Operations monitor the performance of all offices within their states (or partial state in the case of Texas), primarily through communication with district supervisors. These Vice Presidents of Operations typically communicate with the district supervisors of each of their districts weekly and visit each office in their states quarterly. 5 Senior management receives daily delinquency loan volume, charge-off, and other statistical reports consolidated by state and has access to these daily reports for each branch office. At least monthly, district supervisors audit the operations of each office in their geographic area and submit standardized reports detailing their findings to the Company's senior management. At least once every nine months, each office undergoes an audit by the Company's internal auditors. These audits include an examination of cash balances and compliance with Company loan approval, review and collection procedures and federal and state laws and regulations. In fiscal 1994 the Company converted all of its loan offices to a new computer system following its acquisition of Paradata Financial Systems, Inc., a small software company located near St. Louis, Missouri. This system uses a proprietary data processing software package developed by Paradata, and has enabled the Company to fully automate all loan account processing and collection reporting. The system also provides significantly enhanced management information and control capabilities. The Company also markets the system to other finance companies, but there can be no assurance that revenues from sales of the system to third parties will be material. STAFF AND TRAINING. Local offices are generally staffed with three employees. The branch manager supervises operations of the office and is responsible for approving all loan applications. Each office generally has one assistant manager, who contacts delinquent customers, reviews loan applications and prepares operational reports and one customer service representative, who takes and processes loan applications and payments and assists in the preparation of operational reports and collection and marketing activities. Large offices may employ additional assistant managers and service representatives. New employees are required to review a detailed training manual that outlines the Company's operating policies and procedures. The Company tests each employee on the training manual during the first year of employment. In addition, each branch provides in-office training sessions once every week and training sessions outside the office for one full day every two months. COMPENSATION. The Company administers a performance-based compensation program for all of its district supervisors and branch managers. The Company annually reviews the performance of branch managers and adjusts their base salaries based upon a number of factors, including office loan growth, delinquencies and profitability. Branch managers also receive incentive compensation based upon office profitability and delinquencies. In addition, branch managers are paid a cash bonus for training personnel who are promoted to branch manager positions. Assistant managers and service representatives are paid a base salary and incentive compensation based primarily upon their office's loan volume and delinquency ratio. ADVERTISING. The Company actively advertises through direct mail, targeting both its present and former customers and potential customers who have used other sources of consumer credit. The Company creates mailing lists from public records of collateral filings by other consumer credit sources, such as furniture retailers and other consumer finance companies and obtains or acquires mailing lists from other sources. In addition to the general promotion of its loans for vacations, back-to-school needs and other uses, the Company advertises extensively during the October through December holiday season and in connection with new office openings. The Company believes its advertising contributes significantly to its ability to compete effectively with other providers of small-loan consumer credit. In fiscal 1998, advertising expenses were approximately 5.0% of total revenues. COMPETITION. The small-loan consumer finance industry is highly fragmented, with numerous competitors. The majority of the Company's competitors are independent operators with fewer than 20 offices. Pawnshops also provide competition in most of the communities served by the Company. Competition from nationwide consumer finance businesses is limited because these companies typically do not make loans of less than $1,000. The Company believes that competition between small-loan consumer finance companies occurs primarily on the basis of the strength of customer relationships, customer service and reputation in the local community, rather than pricing, as participants in this industry generally charge comparable interest rates and fees. The Company believes that its relatively larger size affords it a competitive advantage over smaller companies by increasing its access to, and reducing its cost of, capital. 6 Most of the states in which the Company currently operates limit the size of loans made by small-loan consumer finance companies and prohibit the extension of more than one loan to a customer by any one company. As a result, many customers borrow from more than one finance company, enabling the Company to obtain information on the credit history of specific customers from other consumer finance companies. The Company generally seeks to open new offices in communities already served by at least one other small-loan consumer finance company. GOVERNMENT REGULATION. Small-loan consumer finance companies are subject to extensive regulation, supervision and licensing under various federal and state statutes, ordinances and regulations. In general, these statutes establish maximum loan amounts and interest rates and the types and maximum amounts of fees, insurance premiums and other costs that may be charged. In addition, state laws regulate collection procedures, the keeping of books and records and other aspects of the operation of small-loan consumer finance companies. Generally, state regulations also establish minimum capital requirements for each local office. State agency approval is required to open new branch offices. Accordingly, the ability of the Company to expand by acquiring existing offices and opening new offices will depend in part on obtaining the necessary regulatory approvals. A Texas regulation requires the approval of the Texas Consumer Credit Commissioner for the acquisition, directly or indirectly, of more than 10% of the voting or common stock of a consumer finance company. A Louisiana statute prohibits any person from acquiring control of 50% or more of the shares of stock of a licensed consumer lender, such as the Company, without first obtaining a license as a consumer lender. The overall effect of these laws, and similar laws in other states, is to make it more difficult to acquire a consumer finance company than it might be to acquire control of a nonregulated corporation. Each of the Company's branch offices is separately licensed under the laws of the state in which the office is located. Licenses granted by the regulatory agencies in these states are subject to renewal every year and may be revoked for failure to comply with applicable state and federal laws and regulations. In the states in which the Company currently operates, licenses may be revoked only after an administrative hearing. The Company and its operations are regulated by several state agencies, including the Industrial Loan Division of the Office of the Georgia Insurance Commissioner, the Consumer Finance Division of the South Carolina Board of Financial Institutions, the South Carolina Department of Consumer Affairs, the Texas Office of the Consumer Credit Commission, the Oklahoma Department of Consumer Credit, the Louisiana Office of Financial Institutions the Tennessee Department of Financial Institutions, the Missouri Division of Finance, the Illinois Consumer Credit Division, Department of Financial Institutions, and the Consumer Credit Bureau of the New Mexico Financial Institutions Division. These state regulatory agencies audit the Company's local offices from time to time and each state agency performs an annual compliance audit of the Company's operations in that state. The Company is also subject to state regulations governing insurance agents in the states in which it sells credit insurance. State insurance regulations require that insurance agents be licensed, govern the commissions that may be paid to agents in connection with the sale of credit insurance and limit the premium amount charged for such insurance. The Company's captive insurance subsidiary is regulated by the insurance authorities of the Turks and Caicos Islands of the British West Indies, where the subsidiary is organized and domiciled. The Company is subject to extensive federal regulation as well, including the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the regulations thereunder and the Federal Trade Commission's Credit Practices Rule. These laws require the Company to provide complete disclosure of the principal terms of each loan to every prospective borrower, prohibit misleading advertising, protect against discriminatory lending practices and proscribe unfair credit practices. Among the principal disclosure items under the Truth-in-Lending Act are the terms of repayment, the final maturity, the total finance charge and the annual percentage rate charged on each loan. The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated 7 under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. The Credit Practices Rule limits the types of property a creditor may accept as collateral to secure a consumer loan. Violations of the statutes and regulations described above may result in actions for damages, claims for refund of payments made, certain fines and penalties, injunctions against certain practices and the potential forfeiture of rights to repayment of loans. Consumer finance companies are affected by changes in state and federal statutes and regulations. The Company actively participates in trade associations and in lobbying efforts in the states in which it operates. Although the Company is not aware of any pending or proposed legislation that would have a material adverse effect on the Company's business, there can be no assurance that future regulatory changes will not adversely affect the Company's lending practices, operations, profitability or prospects. EMPLOYEES. As of March 31, 1998, the Company had approximately 1,237 employees, none of whom were represented by labor unions. The Company considers its relations with its personnel to be good. The Company seeks to hire people who will become long-term employees. The Company experiences a high level of turnover among its entry-level personnel, which the Company believes is typical of the small-loan consumer finance industry. EXECUTIVE OFFICERS. The names and ages, positions, terms of office and periods of service of each of the Company's executive officers are set forth below. The term of office for each executive officer expires upon the earlier of the appointment and qualification of a successor or such officers' death, resignation, retirement or removal. Name and Age Position Period of Service as Executive Officer Charles D. Walters (59) Chairman and Chief Chairman since July 1991; President Executive Officer; since July 1986; CEO since July 1991; Director Director since April 1989 R. Harold Owens (50) President and Chief President since August 1996; Operating Officer; Director Executive Vice President since June 1995; Director since August 1995 A. Alexander McLean, III (47) Executive Vice President; Executive Vice President since August 1996; Chief Financial Officer; Senior Vice President since July 1992; Director CFO and Director since June 1989 Mark C. Roland (42) Senior Vice President, Since January 1996 Eastern Division
ITEM 2. PROPERTIES The Company owns its headquarters facility of approximately 14,000 square feet in Greenville, South Carolina, and all of the furniture, fixtures and computer terminals located in each branch office. As of June 19, 1998, the Company had 365 branch offices, most of which are leased pursuant to short-term operating leases. During the fiscal year ended March 31, 1998, total lease expense was approximately $2.9 million, or an average of approximately $8,275 per office. The Company's leases generally provide for an initial three- to five-year term with renewal options. The Company's branch offices are typically located in shopping centers, malls and the first floors of downtown buildings. Branch offices generally have a uniform physical layout and range in size from 800 to 1,200 square feet. 8 ITEM 3. LEGAL PROCEEDINGS The Company and several of its subsidiaries are named as co-defendants with a number of other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action, that has been consolidated with similar lawsuits 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 Act and RICO violations. The complaint is seeking certification 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, the discovery process is largely completed, and the court is considering the plaintiffs' motion for class certification and motion for partial summary judgement on the Truth-in-Lending Act claims. 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's future earnings could be affected. The Company disputes the allegations made in the complaint, and intends to continue to defend itself vigorously. 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. 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, 1998, 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. 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. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the Company's security holders during the fourth fiscal quarter ended March 31, 1998. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since November 26, 1991, the Company's Common Stock has traded on the NASDAQ National Market System ("NASDAQ") under the symbol WRLD. As of June 19, 1998, there were 169 holders of record of Common Stock. Since April 1989, the Company has not declared or paid any cash dividends on its Common Stock. Its policy has been to retain earnings for use in its business. In the future, the Company's Board of Directors will determine whether to pay cash dividends based on conditions then existing, including the Company's earnings, financial condition, capital requirements and other relevant factors. In addition, the Company's credit agreements with its lenders impose restrictions on the amount of cash dividends that may be paid on its capital stock. Information contained under the caption "Corporate Information--Common Stock" in the Annual Report is incorporated herein by reference in further response to this Item 5. ITEM 6. SELECTED FINANCIAL DATA Information contained under the caption "Selected Consolidated Financial and Other Data" in the Annual Report is incorporated herein by reference in response to this Item 6. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference in response to this Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements for the Company and the Independent Auditors' Report thereon are contained in the Annual Report and are incorporated by reference in response to this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent certified public accountants to report under this Item 9. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference in response to this Item 10. The information in response to this Item 10 regarding the executive officers of the Company is contained in Item 1, Part I hereof under the caption "Executive Officers." 10 ITEM 11. EXECUTIVE COMPENSATION Information contained under the caption "Executive Compensation" in the Proxy Statement, except for the information therein under the subcaption "Joint Report of the Compensation Committee and the Stock Option Committee," is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the captions "Ownership of Shares by Certain Beneficial Owners as of June 19, 1998" and "Ownership of Common Stock of Management as of June 19, 1998" in the Proxy Statement is incorporated by reference herein in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information contained under the heading "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement is incorporated herein by reference in response to this Item 13. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (1) The following consolidated financial statements of the Company and Independent Auditors' Report are contained in the Annual Report and are incorporated herein by reference. CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets at March 31, 1998 and 1997 Consolidated Statements of Operations for the years ended March 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT (2) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the consolidated financial statements. 11 (3) Exhibits The following exhibits are filed as part of this report or, where so indicated, have been previously filed and are incorporated herein by reference. Filed Herewith (*), Non-Applicable (NA), or or Incorporated by Company Exhibit Reference Previous Registration Number Description Exhibit Number No. or Report --------------------------------------------------------------------------------------------------------------- 3.1 Second Amended and Restated Articles of Incorporation of the 3.1 1992 10-K Company 3.2 First Amendment to Second Amended and Restated Articles of 3.2 1995 10-K Incorporation 3.3 Amended Bylaws of the Company 3.4 33-42879 4.1 Specimen Share Certificate 4.1 33-42879 4.2 Articles 3, 4 and 5 of the Form of Company's Second Amended 3.1, 3.2 1995 10-K and Restated Articles of Incorporation (as amended) 4.3 Article II, Section 9 of the Company's Second Amended and 3.2 1995 10-K Restated Bylaws 4.4 Amended and Restated Revolving Credit Agreement, dated as of 4.4 9-30-97 10-Q June 30, 1997, between Harris Trust and Savings Bank, the Banks signatory thereto from time to time and the Company 4.5 Amended and Restated Note Agreement, dated as of June 30, 4.5 9-30-97 10-Q 1997, between Jefferson-Pilot Life Insurance Company and the Company 4.6# Amended and Restated Note Agreement, dated as of June 30, 4.6 9-30-97 10-Q 1997, between Principal Mutual Life Insurance Company and the Company 4.7 Note Agreement, dated as of June 30, 1997, between Principal 4.7 9-30-97 10-Q Mutual Life Insurance Company and the Company re: 10% Senior Subordinated Secured Notes 4.8 Amended and Restated Security Agreement, Pledge and Indenture 4.8 9-30-97 10-Q of Trust, dated as of June 30, 1997, between the Company and Harris Trust and Savings Bank, as Security Trustee 10.1+ Employment Agreement of Charles D. Walters, effective April 1, 10.1 1994 10-K 1994 10.2+ Employment Agreement of A. Alexander McLean, III, effective 10.2 1994 10-K April 1, 1994 10.3+ Employment Agreement of R. Harold Owens, effective June 26, 10.3 1995 10-K 1995 10.4 Securityholders' Agreement dated as of September 19, 1991, 10.5 33-42879 between the Company and certain of its securityholders 12
Filed Herewith (*), Non-Applicable (NA), or or Incorporated by Company Exhibit Reference Previous Registration Number Description Exhibit Number No. or Report --------------------------------------------------------------------------------------------------------------- 10.5+ 1992 Stock Option Plan of the Company 4 33-52166 10.6+ 1994 Stock Option Plan of the Company, as amended 10.6 1995 10-K 10.7+ The Company's Executive Incentive Plan 10.6 1994 10-K 10.8+ The Company's Executive Strategic Incentive Plan 10.8 1995 10-K 10.9+ Amendment No. 1, dated as of April 1, 1996, to the Executive 10.9 1996 10-K Strategic Incentive Plan 13 Excerpts from 1998 Annual Report of the Company, with respect * NA to those portions incorporated by reference into this report 21 Schedule of Company's subsidiaries * NA 23 Consent of KPMG Peat Marwick LLP in connection with the * NA Company's Registration Statements on Form S-8 27 Financial Data Schedule * NA
+ Management Contract or other compensatory plan required to be filed under Item 14(c) of this report and Item 601 of Regulation S-K of the Securities and Exchange Commission. # Omitted from filing - substantially identical to immediately preceding exhibit, except for the parties thereto and the principal amount involved. (4) Reports on Form 8-K During the most recent fiscal quarter, there were no reports filed on Form 8-K. 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ A. Alexander McLean, III ----------------------------- A. Alexander McLean, III Executive Vice President and CFO Date: June 29, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature --------- /s/ Charles D. Walters ------------------------------------------------------ Charles D. Walters, Chairman and Chief Executive Officer (principal executive officer); Director Date: June 29, 1998 /s/ A. Alexander McLean, III - ------------------------------------------------------------ A. Alexander McLean, III, Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer); Director Date: June 29, 1998 /s/ R. Harold Owens - ----------------------------------------------------------- R. Harold Owens, President and Chief Operating Officer (principal operating officer); Director Date: June 29, 1998 /s/ Ken R. Bramlett, Jr. - ----------------------------------------------------------- Ken R. Bramlett, Jr., Director Date: June 29, 1998 14 EX-13 2 EXHIBIT 13 FINANCIAL REVIEW (The following information is listed in graphs as follows:) Contents 5 Selected Consolidated Financial and Other Data 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Consolidated Balance Sheets 17 Consolidated Statements of Operations 18 Consolidated Statements of Shareholders' Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 34 Independent Auditors' Report 94 95 96 97 98 $0.28 $0.41 $0.49 $0.41 $0.42 Diluted Earnings Per Share 94 95 96 97 98 $5.83 $8.71 $11.13 $5.63 $6.63 Market Price Per Common Share at Year End 94 95 96 97 98 $50.7 $58.2 $69.9 $75.3 $83.6 (millions) Total Revenues 94 95 96 97 98 $55.3 $65.4 $77.0 $85.4 $97.3 (millions) Average Loans Receivable 4 WORLD ACCEPTANCE CORPORATION SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (In thousands, except per share amounts)
Years Ended March 31, 1998 1997 1996 1995 1994 --------- --------- --------- --------- ------- STATEMENT OF OPERATIONS DATA: Interest and fee income................................. $ 74,865 $ 67,454 $ 60,265 $ 52,341 $ 45,870 Insurance commissions and other income................. 8,754 7,863 9,608 5,871 4,798 ---------- --------- --------- --------- --------- Total revenues....................................... 83,619 75,317 69,873 58,212 50,668 ---------- --------- --------- --------- --------- Provision for loan losses............................... 12,601 12,114 9,194 5,783 4,275 General and administrative expenses..................... 53,470 46,846 41,023 35,302 33,497 Interest expense........................................ 5,541 4,322 3,498 3,598 3,719 ---------- --------- --------- --------- --------- Total expenses....................................... 71,612 63,282 53,715 44,683 41,491 ---------- --------- --------- --------- --------- Income before income taxes.............................. 12,007 12,035 16,158 13,529 9,177 Income taxes............................................ $ 3,909 3,952 5,602 4,910 3,390 ---------- --------- --------- --------- --------- Net income.............................................. $ 8,098 $ 8,083 $ 10,556 $ 8,619 $ 5,787 ========== ======== ========= ========= ======== Net income per common share (diluted)................... $ .42 $ .41 $ .49 $ .41 $ .28 ========== ======== ======== ======== ======== Diluted weighted average common equivalent shares.................................... 19,172 19,833 21,653 20,787 20,760 ========== ========= ========= ====== ====== BALANCE SHEET DATA (END OF PERIOD): Loans receivable........................................ $ 103,385 $ 89,539 $ 79,624 $ 71,527 $ 58,227 Allowance for loan losses............................... (8,444) (6,283) (5,007) (4,364) (3,479) ---------- -------- --------- ------ --------- Loans receivable, net............................ 94,941 83,256 74,617 67,163 54,748 Total assets............................................ 118,382 104,486 90,572 83,558 73,200 Total debt.............................................. 64,182 58,682 38,232 37,882 36,082 Shareholders' equity.................................... 47,301 38,963 44,880 35,758 26,858 OTHER OPERATING DATA: As a percentage of average loans receivable: Provision for loan losses............................ 13.0% 14.2% 11.9% 8.8% 7.7% Net charge-offs...................................... 12.5% 13.7% 11.2% 7.5% 6.8% Number of offices open at year-end...................... 360 336 282 244 217
WORLD ACCEPTANCE CORPORATION 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, 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 $130.6 million at March 31, 1998. This represents in excess of 16% compounded rate of growth in receivables over the five-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. During this same five-year period, the Company has grown from 191 offices to 360 offices as of March 31, 1998. The Company plans to open or acquire at least 25 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. A large part of these intangibles 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, the "World Class Buying Club," began in Texas in February 1995 and has since been expanded to include Georgia, Tennessee, South Carolina, and Louisiana, with further expansion into New Mexico and Oklahoma expected within the next several months. The Company plans to continue to aggressively market these products, which have provided positive contributions during the past two fiscal years and is expected to continue to enhance revenues in fiscal 1999 and beyond. The Company's ParaData Financial Systems subsidiary provides data processing systems to 103 separate finance companies, including World, and currently supports approximately 920 individual branch offices in 42 states. During fiscal 1998, ParaData contributed a small net profit to the company's operations, but more important, continued to provide state-of-the-art data processing support for the Company's in-house integrated computer system. At the end of the fiscal year, the Company upgraded its software systems, which provided additional functions and features and should help control operating cost during fiscal 1999 and beyond. 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. The Company acquired two larger loan offices, one in Georgia in May 1996, and the other in Tennessee in February 1997. During fiscal 1998, the Company further expanded this product line with three additional acquisitions and several bulk purchases of receivables. The Company also converted three of its traditional small-loan offices into larger loan offices. As of March 31, 1998, the Company had approximately $9.5 million of larger loans outstanding, representing approximately 7.3% of the total loan portfolio. Management believes that these offices can 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 from its small-loan business, it does intend to open additional larger loan offices in future 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 on its small loans in all states in which it operates. 6 WORLD ACCEPTANCE CORPORATION 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, 1998 1997 1996 ---------- ----------- -------- (Dollars in thousands) Average gross loans receivable (1).................................... $ 125,094 $ 109,206 $ 97,302 Average loans receivable (2).......................................... 97,285 85,445 77,037 Expenses as a percentage of total revenue: Provision for loan losses 15.1% 16.1% 13.2% General and administrative........................................ 63.9% 62.2% 58.7% Total interest expense............................................ 6.6% 5.7% 5.0% Operating margin (3).................................................. 21.0% 21.7% 28.1% Return on average assets.............................................. 7.2% 8.2% 11.9% Offices opened and acquired, net...................................... 24 54 38 Total offices (at period end)......................................... 360 336 282
(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 1998 VERSUS FISCAL 1997 Net income was $8.1 million in fiscal 1998, approximately the same as the amount earned during fiscal 1997. Operating income (revenues less the provision for loan losses and general and administrative expenses) was $17.5 million in fiscal 1998, an increase of $1.2 million, or 7.3%, over the $16.3 million in fiscal 1997. This increase was primarily offset by an increase in interest expense. Interest and fee income during fiscal 1998 increased by $7.4 million, or 11.0%, over fiscal 1997. This increase resulted primarily from an increase of $11.8 million, or 13.9%, 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. Both the larger loan portfolio and the sales finance portfolio carry substantially reduced interest rates from the small-loan portfolio, resulting in the reduced overall yield during the fiscal year. Interest and fee income as a percentage of average loans outstanding decreased in fiscal 1998 to 77.0% from 78.9% in fiscal 1997. WORLD ACCEPTANCE CORPORATION 7 MANAGEMENT'S DISCUSSION AND ANALYSIS Insurance commissions and other income increased by $891,000, or 11.3%, over the two fiscal years. Insurance commissions increased by $445,000, or 9.2%, as a result of the corresponding increase in loan volume in states where credit insurance can be sold. Other income increased by $446,000, or 14.8%, primarily as a result of increased sales and profits from the Company's "World Class Buying Club" program, which was expanded to five states during fiscal 1998. Total revenues were $83.6 million during fiscal 1998, an $8.3 million increase, or 11.0%, over the $75.3 million reported during fiscal 1997. Revenues from the 269 offices that were open throughout both fiscal years decreased by approximately 2.5%. At March 31, 1998, the Company had 360 offices in operation, a net increase of 24 offices during the fiscal year. The provision for loan losses during fiscal 1998 increased by $487,000, or 4%, from the previous year. This increase resulted primarily from an increase in net charge-offs over the previous fiscal year. As a percentage of average loans receivable, net charge-offs decreased to 12.5% during fiscal 1998 from 13.7% during fiscal 1997. This decrease represents the first decline in the charge-off ratios in several years, and contributed greatly to the positive results during the fourth quarter of the fiscal year. As a percentage of loans receivable outstanding, the allowance for loan losses increased to 8.2% at March 31, 1998, compared to 7.0% at March 31, 1997. This increase resulted primarily from reserves on acquired loans that were purchased at significant discounts during the fiscal year. General and administrative expenses during fiscal 1998 increased by $6.6 million, or 14.1%, over the previous fiscal year. This increase was due to the cost associated with the 78 net new offices that have been opened or acquired over the two year period beginning March 31, 1996. This increase was partially offset by a decline of $1.6 million of intangible amortization, due to certain intangible assets becoming fully amortized during the fiscal year. Total general and administrative expenses, when divided by average open offices, increased by only .2% when comparing the two fiscal years and as a percentage of total revenues, increased from 62.2% in fiscal 1997 to 63.9% during the most recent fiscal year. Interest expense increased by $1.2 million during fiscal 1998 as a result of increased borrowings outstanding as well as the increased interest rate on the $10.0 million in subordinated debt that was issued during the year. The Company's effective income tax rate decreased slightly to 32.6% during fiscal 1998 from 32.8% the prior fiscal year. The Company continues to benefit from reduced state taxes resulting from a reorganization in fiscal 1996, as well as certain tax benefits from a reinsurance subsidiary. COMPARISON OF FISCAL 1997 VERSUS FISCAL 1996 Net income was $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 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% in fiscal year 1997. 8 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS 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 sale during the period. 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 1997 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 1997 fiscal year from 11.2% for the prior year. 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 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 $16.0 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 fiscal year. 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. WORLD ACCEPTANCE CORPORATION 9 MANAGEMENT'S DISCUSSION AND ANALYSIS The Company maintains an allowance for loan losses in an amount that, in management's opinion, is adequate to cover losses inherent in the existing loan portfolio. The Company charges against current earnings, as a provision for loan losses, amounts added to the allowance to maintain it at levels expected to cover 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, 1998, 1997, and 1996 and the credit loss experience over the indicated periods:
At or for the Years Ended March 31, 1998 1997 1996 --------- --------- ------- (Dollars in thousands) Allowance for loan losses........................................... $ 8,444 $ 6,283 $ 5,007 Percentage of loans receivable...................................... 8.2% 7.0% 6.3% Provision for loan losses........................................... $ 12,601 $ 12,114 $ 9,194 Net charge-offs..................................................... $ 12,150 $ 11,712 $ 8,664 Net charge-offs as a percentage of average loans receivable (1)..... 12.5% 13.7% 11.2%
(1) Average loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period. 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, 1998, 1997, and 1996:
At March 31, 1998 1997 1996 --------- --------- ------- (Dollars in thousands) Recency basis: 60 - 89 days past due............................................. $ 1,901 $ 1,812 $ 1,704 90 - 179 days past due............................................ 712 640 439 -------- ------- ------ Total........................................................... $ 2,613 $ 2,452 $ 2,143 ======== ======= ===== Percentage of period end gross loans receivable..................... 2.0% 2.2% 2.2% Contractual basis: 60 - 89 days past due............................................. $ 2,360 $ 2,227 $ 2,172 90 - 179 days past due............................................ 1,952 1,912 1,662 -------- ------- ------ Total........................................................... $ 4,312 $ 4,139 $ 3,834 ======== ======= ====== Percentage of period end gross loans receivable..................... 3.3% 3.6% 3.9%
10 WORLD ACCEPTANCE CORPORATION 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 periods indicated.
AT OR FOR THE THREE MONTHS ENDED ---------------------------------------------------------------------------------------------- June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1996 1996 1996 1997 1997 1997 1997 1998 --------- -------- -------- -------- -------- -------- -------- --------- (Dollars in thousands) Total revenues....... $17,307 $17,995 $19,169 $20,847 $18,983 $20,134 $21,624 $22,878 Provision for loan losses....... 2,246 3,028 4,198 2,642 2,696 3,698 4,465 1,742 General and administrative expenses.......... 11,007 10,998 12,415 12,426 12,624 12,843 14,318 13,685 Net income........... 2,064 1,931 922 3,166 1,650 1,469 893 4,086 Gross loans receivable........ 103,832 107,692 128,182 113,439 115,916 125,930 143,315 130,559 Number of offices open...... 297 306 342 336 350 359 360 360
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 statement and display the balance of other comprehensive income separately in the equity section of a statement of financial position. Statement 130 is effective for fiscal years beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the provisions of this statement. The Company will adopt Statement 130 effective April 1, 1998. WORLD ACCEPTANCE CORPORATION 11 MANAGEMENT'S DISCUSSION AND ANALYSIS Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131). Statement 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. Statement 131 is effective for financial statements for periods beginning after December 15, 1997. Earlier application is encouraged. In the initial year of application, comparative information for earlier years is to be restated, unless it is impractical to do so. Statement 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. It is not anticipated that his standard will materially effect the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations, acquisitions and office expansion through a combination of cash flow from operations and borrowings from its institutional lenders. 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 $130.6 million at March 31, 1998, net cash provided by operating activities for fiscal years 1996, 1997, and 1998 was $21.7 million, $23.2 million, and $22.0 million, respectively. 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 suspended its stock repurchases in October 1996, but believes stock repurchases to be a viable component of the Company's long-term financial strategy and an excellent use of excess cash when the opportunity arises. In addition, the Company plans to open or acquire at least 25 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 1998. New offices have also required from $100,000 to $400,000 to fund outstanding loans receivable originated during their first 12 months of operation. The Company acquired 9 offices and several loan packages from competitors in eight states in 21 separate transactions during fiscal 1998. Gross loans receivable purchased in these transactions were approximately $11.2 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, 1997, the Company paid the third installment on its 8.5% 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 has $8.0 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. 12 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The Company has a $65.0 million revolving credit facility with a syndicate of banks. The credit facility will expire on September 30, 1999. 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, 1998, the interest rate on borrowings under the revolving credit facility was 7.36%. 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, 1998, $45.7 million was outstanding under this facility, and there was $19.3 million of unused borrowing availability under the borrowing base limitations. On June 30, 1997, the Company issued $10.0 million of Senior Subordinated Secured Notes. These notes mature in five annual installments of $2.0 million beginning June 30, 2000, and ending June 30, 2004, and bear interest at 10.0%, payable quarterly. The notes were issued at a discounted price equal to 99.6936% and may be prepaid subject to certain prepayment penalties. Borrowings under the revolving credit facility, the 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's credit agreements contain a number of financial covenants, including minimum net worth and fixed charge coverage requirements. The credit agreements also contain certain other covenants, including covenants that impose limitations on the Company with respect to (i) declaring or paying dividends or making distributions on or acquiring common or preferred stock or warrants or options, (ii) redeeming or purchasing or prepaying principal or interest on subordinated debt, (iii) incurring additional indebtedness and (iv) entering into a merger, consolidation or sale of substantial assets or subsidiaries. The Term Notes and Senior Subordinated Notes are also subject to prepayment penalties. 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. The Company believes that cash flow from operations and borrowings under its revolving credit facility 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. 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. WORLD ACCEPTANCE CORPORATION 13 MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR 2000 The Company recognizes that there is a business risk in computerized systems as the calendar rolls over into the next century. If the computer systems misinterpret the date, items such as interest calculations on loans may be incorrect. This problem is commonly called the "year 2000 problem." The Company has determined that its primary software package, the "Loan Manager System" developed and maintained by its 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 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 18 months to ensure accuracy of information to the extent possible. The Company believes that the total costs of preparing for the year 2000 are minimal. OTHER MATTERS The Company and several of its subsidiaries are named as co-defendants with a number of other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action, that has been consolidated with similar lawsuits 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 Act and RICO violations. The complaint is seeking certification 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, the discovery process is largely completed, and the court is considering the plaintiffs' motion for class certification and motion for partial summary judgement on the Truth-in-Lending Act claims. 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's future earnings could be affected. The Company disputes the allegations made in the complaint, and intends to continue to defend itself vigorously (See Note 6 of Notes to Consolidated Financial Statements). 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. 14 WORLD ACCEPTANCE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Management's statement of expectation with respect to the litigation described herein 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. 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. WORLD ACCEPTANCE CORPORATION 15 CONSOLIDATED BALANCE SHEETS
March 31, ------------------------------------- 1998 1997 ASSETS Cash............................................................................ $ 1,212,611 1,486,073 Gross loans receivable.......................................................... 130,559,256 113,439,027 Less: Unearned interest and deferred fees........................................ (27,173,845) (23,899,194) Allowance for loan losses.................................................. (8,444,563) (6,283,459) ------------- -------------- Loans receivable, net.................................................. 94,940,848 83,256,374 Property and equipment, net..................................................... 6,424,757 6,102,125 Other assets, net............................................................... 6,193,300 4,524,757 Intangible assets, net.......................................................... 9,610,394 9,117,033 ------------- ------------- $ 118,381,910 104,486,362 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Senior notes payable....................................................... 53,700,000 58,200,000 Subordinated notes payable................................................. 10,000,000 - Other note payable......................................................... 482,000 482,000 Income taxes payable....................................................... 2,795,119 3,176,307 Accounts payable and accrued expenses...................................... 4,103,511 3,664,592 ------------- ------------- Total liabilities...................................................... 71,080,630 65,522,899 ------------- ------------- 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 18,998,573 and 18,936,573 shares at March 31, 1998, and 1997, respectively ............................. - - Additional paid-in capital................................................. 864,968 625,592 Retained earnings.......................................................... 46,436,312 38,337,871 -------------- ------------- Total shareholders' equity............................................. 47,301,280 38,963,463 ------------- ------------- Commitments and contingencies $ 118,381,910 104,486,362 ============= =============
See accompanying notes to consolidated financial statements. 16 WORLD ACCEPTANCE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, --------------------------------------------------- 1998 1997 1996 Revenues: Interest and fee income.................................... $ 74,865,275 67,454,576 60,265,321 Insurance commissions and other income..................... 8,753,768 7,863,196 9,608,177 ------------ ------------- ------------- Total revenues................................. 83,619,043 75,317,772 69,873,498 ------------ ------------- ------------- Expenses: Provision for loan losses.................................. 12,601,031 12,114,374 9,194,422 ------------ ------------- ------------- General and administrative expenses: Personnel.............................................. 32,922,691 28,161,923 24,808,100 Occupancy and equipment......................................... 6,099,711 5,037,019 4,278,456 Data processing................................................. 1,309,845 1,027,590 948,542 Advertising .................................................. 4,179,616 2,897,659 2,576,112 Amortization of intangible assets...................... 1,432,076 3,020,259 2,723,580 Other.................................................. 7,525,630 6,701,258 5,687,731 ------------ ------------- ------------- 53,469,569 46,845,708 41,022,521 ------------ ------------- ---------- Interest expense........................................... 5,541,002 4,322,351 3,498,497 ------------ ------------- ------------- Total expenses.................................... 71,611,602 63,282,433 53,715,440 ------------ ------------- ------------- Income before income taxes...................................... 12,007,441 12,035,339 16,158,058 Income taxes.................................................... 3,909,000 3,952,000 5,602,000 ------------ ------------- ------------- Net income...................................................... $ 8,098,441 8,083,339 10,556,058 ============ ============= ============= Net income per common share Basic...................................................... $ .43 .41 .51 ============ ============= ============= Diluted.................................................... $ .42 .41 .49 ============= ============= ============= Weighted average common equivalent shares outstanding Basic...................................................... 18,959,348 19,492,086 20,817,917 ============== ============= ============= Diluted.................................................... 19,172,456 19,832,525 21,653,096 ============== ============= =============
See accompanying notes to consolidated financial statements. WORLD ACCEPTANCE CORPORATION 17 CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Additional Paid-in Retained Capital Earnings Total 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 Proceeds from exercise of stock options (62,000 shares), including tax benefits of $58,543.............................. 239,376 - 239,376 Net income........................................................ - 8,098,441 8,098,441 ----------- ------------ ------------ Balances at March 31, 1998........................................ $ 864,968 46,436,312 47,301,280 =========== ============ ============
See accompanying notes to consolidated financial statements. 18 WORLD ACCEPTANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, ------------------------------------------------ 1998 1997 1996 Cash flows from operating activities: Net income ...................................................... $8,098,441 8,083,339 10,556,058 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets .............................. 1,432,076 3,020,259 2,723,580 Amortization of loan costs and discounts............................. 73,636 80,841 86,054 Provision for loan losses............................................ 12,601,031 12,114,374 9,194,422 Depreciation ....................................................... 1,456,052 1,319,667 1,063,772 Change in accounts: Other assets, net............................................. (1,742,179) (847,269) (1,530,812) Income taxes payable................................................. (322,645) (217,680) (727,459) Accounts payable and accrued expenses................................ 438,919 (334,850) 371,976 ------------ ------------ ------------ Net cash provided by operating activities................. 22,035,331 23,218,681 21,737,591 ------------ ------------ ------------ Cash flows from investing activities: Increase in loans receivable, net................................. (16,850,483) (8,146,358) (14,870,228) Net assets acquired from office acquisitions, primarily loans..... (7,450,022) (12,688,099) (1,839,174) Increase in intangible assets from acquisitions................... (1,925,437) (7,277,485) (973,500) Costs of organizing new subsidiaries.............................. - - (96,360) Purchases of property and equipment, net.......................... (1,763,684) (1,698,400) (2,247,785) ------------ ------------ ------------ Net cash used by investing activities................................ (27,989,626) (29,810,342) (20,027,047) ------------ ----------- ----------- Cash flows from financing activities: Proceeds (repayments) of senior revolving notes payable, net................................................... (500,000) 24,450,000 4,350,000 Repayment of senior term notes payable............................ (4,000,000) (4,000,000) (4,000,000) Proceeds from senior subordinated notes........................... 10,000,000 - - Proceeds from exercise of stock options........................... 180,833 192,825 202,028 Repurchase of common stock........................................ - (14,258,838) (1,760,524) ------------ ----------- ------------ Net cash provided by (used in) financing activities......... 5,680,833 6,383,987 (1,208,496) ------------ ------------ ------------- Increase (decrease) in cash.......................................... (273,462) (207,674) 502,048 Cash at beginning of year............................................ 1,486,073 1,693,747 1,191,699 ------------ ------------ ------------ Cash at end of year.................................................. $ 1,212,611 1,486,073 1,693,747 ============ ============ ============
See accompanying notes to consolidated financial statements. WORLD ACCEPTANCE CORPORATION 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's accounting and reporting policies are in accordance with 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 1998, 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. 20 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At March 31, 1998 and 1997, 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 less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful life of the related asset as follows: building, 40 years; furniture and fixtures, 5 to 10 years; equipment, 3 to 7 years; and vehicles, 3 years. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease. Additions to premises and equipment and major replacements or betterments are added at cost. Maintenance, repairs, and minor replacements are charged to operating expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. 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 $352,671 and $104,351 at March 31, 1998 and 1997, 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. WORLD ACCEPTANCE CORPORATION 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED INSURANCE PREMIUMS Insurance premiums for credit life, accident and health, property and unemployment insurance written in connection with certain loans, net of refunds and applicable advance insurance commissions retained by the Company, are remitted monthly to an insurance company. All commissions are credited to unearned insurance commissions and recognized as income over the life of the related insurance contracts, using a method similar to that used for the recognition of interest income. NON-FILE INSURANCE Non-file 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. 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, 1998, 1997, and 1996, the Company paid interest of $5,391,147, $4,302,473, and $3,473,149, respectively. For the years ended March 31, 1998, 1997, and 1996, the Company paid income taxes of $5,406,645, $5,343,680, and $6,981,463, respectively. 22 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Supplemental non-cash financing activities for the years ended March 31, 1998, 1997, and 1996, consist of:
1998 1997 1996 ---------- ----------- -------- Tax benefits from exercise of stock options.................. $ 58,543 66,469 124,140
EARNINGS PER SHARE Earnings per share are computed in accordance with SFAS No. 128, "Earnings per Share". SFAS No. 128 replaces Accounting Principles Board (APB) Opinion 15, "Earnings Per Share," and simplifies the computation of earnings per share (EPS) by replacing the presentations of primary EPS with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company. Common stock equivalents included in the diluted EPS computation consist of stock options which are computed using the treasury stock method. Share and per share data have been restated to reflect all 5% stock distributions. 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 1997 and 1996 to conform with fiscal 1998 presentation. There was no impact on shareholders' equity or net income as a result of these reclassifications. WORLD ACCEPTANCE CORPORATION 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 1998, 1997, and 1996: March 31,
1998 1997 1996 ------------ ----------- -------- Balance at the beginning of the year....................... $ 6,283,459 5,006,703 4,363,612 Provision for loan losses.................................. 12,601,031 12,114,374 9,194,422 Loan losses................................................ (13,428,776) (12,659,683) (9,345,509) Recoveries................................................. 1,278,616 947,999 681,030 Allowance on acquired loans................................ 1,710,233 874,066 113,148 ------------ ----------- ------------ Balance at the end of the year............................. $ 8,444,563 6,283,459 5,006,703 ============ =========== ============
(3) PROPERTY AND EQUIPMENT Summaries of property and equipment follow:
March 31, 1998 1997 ------------ --------- Land.................................................................$ 325,443 269,443 Buildings and leasehold improvements................................. 2,788,518 2,367,432 Furniture and equipment.............................................. 8,296,239 7,342,971 ------------ ------------ 11,410,200 9,979,846 Less accumulated depreciation and amortization....................... 4,985,443 3,877,721 ------------ ------------ Total........................................................... $ 6,424,757 6,102,125 ============ ============
(4) INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, consist of:
March 31, 1998 1997 ------------ --------- Cost of acquiring existing customers................................. $ 1,150,626 390,804 Value assigned to noncompete agreements.............................. 6,564,982 6,587,458 Goodwill............................................................. 1,437,499 1,603,364 Other................................................................ 457,287 535,407 ------------ ------------ Total........................................................... $ 9,610,394 9,117,033 ============ ============
24 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) NOTES PAYABLE Summaries of the Company's notes payable follow: SENIOR CREDIT FACILITIES $8,000,000 Senior Secured Term Notes -- These notes mature in two annual installments of $4,000,000 due December 1, 1998 and 1999, and bear interest at 8.5%, payable semi-annually. The notes may be prepaid subject to certain prepayment penalties. $65,000,000 Revolving Credit Facility - This facility provides for borrowings of up to $65.0 million (increased from $20.0 million to $25.0 million in September 1994, to $35.0 million in September 1995, to $50.0 million in June 1996, and $65.0 million in July 1997), subject to a borrowing base formula. The maximum borrowings were temporarily increased to $70.0 million for the period December 15, 1997, to February 15, 1998. The Company may borrow, at its option, at the rate of prime or LIBOR plus 1.60%. At March 31, 1998, the Company's interest rate was 7.36% and the unused amount available under the revolver was $19,300,000. The revolving credit facility has a commitment fee of 3/8 of 1% on the unused portion of the commitment. Borrowings under the revolving credit facility mature on September 30, 1999. On June 30, 1997, the Company issued $10.0 million of Senior Subordinated Secured Notes. These notes mature in five annual installments of $2.0 million beginning June 30, 2000 and ending June 30, 2004, and bear interest at 10.0%, payable quarterly. The notes were issued at a discounted price equal to 99.6936% and may be prepaid subject to certain prepayment penalties. Substantially all of the Company's assets are pledged as collateral for borrowings under the senior credit agreements. The Company's assets are also be pledged as collateral for the senior subordinated 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, 1998, approximately $4,387,000 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, 1998, are as follows: 1999, $4,000,000; 2000, $50,182,000; 2001, $2,000,000; 2002, $2,000,000; 2003, $2,000,000; thereafter, $4,000,000. WORLD ACCEPTANCE CORPORATION 25 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, 1998, 1997, and 1996:
1998 1997 1996 ------------- ----------- -------- Insurance premiums written................ $ 3,257,517 3,566,960 3,787,289 Recoveries on claims paid................. $ 334,812 315,112 313,703 Claims paid............................... $ (3,267,005) (3,971,106) (4,228,665)
(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 noncancelable operating leases as of March 31, 1998, are as follows:
1999..................................................................... $ 2,525,839 2000..................................................................... 1,757,468 2001..................................................................... 866,566 2002 .................................................................... 339,170 2003 .................................................................... 149,797 Thereafter............................................................... 132,725 Total future minimum lease payments............................. $ 5,771,566 =========
Rental expense for cancelable and noncancelable operating leases for the years ended March 31, 1998, 1997, and 1996 was $2,929,002, $2,345,068, and $2,000,352, respectively. (8) INCOME TAXES Income tax expense for the years ended March 31, 1998, 1997, and 1996, consists of:
1998 1997 1996 ---------- ----------- -------- Current: Federal.......................................................$ 4,845,000 4,834,000 6,084,000 State......................................................... 209,000 292,000 627,000 ---------- ----------- ----------- Total..................................................... 5,054,000 5,126,000 6,711,000 ---------- ----------- ----------- Deferred: Federal....................................................... (1,073,000) (1,107,000) (1,047,000) State......................................................... (72,000) (67,000) (62,000) ---------- ----------- ----------- Total..................................................... (1,145,000) (1,174,000) (1,109,000) ---------- ----------- ----------- $ 3,909,000 3,952,000 5,602,000 ========== =========== ===========
26 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) INCOME TAXES, CONTINUED The income tax expense for the years ended March 31, 1998, 1997, and 1996 differs from the amount computed by applying the U.S. Federal income tax rate of 35% as a result of the following:
1998 1997 1996 ---------- ----------- -------- Computed "expected" income tax expense............................ $ 4,202,000 4,212,000 5,655,000 Increase resulting from: State income tax, net of Federal benefit..................... 89,000 146,000 368,000 Amortization of goodwill..................................... 58,000 19,000 13,000 Insurance income exclusion................................... (278,000) (235,000) (238,000) Other, net................................................... (162,000) (190,000) (196,000) ---------- ----------- ----------- Total income tax expense.......................................... $ 3,909,000 3,952,000 5,602,000 ========== =========== ===========
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, 1998 and 1997, and 1996, relate to the following:
1998 1997 1996 ------------- ----------- -------- Deferred tax assets: Allowance for doubtful accounts.............................. $ 3,082,000 2,293,000 1,953,000 Unearned insurance commissions............................... 617,000 501,000 465,000 Accounts payable and accrued expenses primarily related to employee benefits............................. 189,000 193,000 213,000 Accrued state taxes.......................................... - - 55,000 Tax over book accrued interest receivable.................... 537,000 333,000 - Other........................................................ 283,000 110,000 29,000 ---------- ----------- ----------- Gross deferred tax assets......................................... 4,708,000 3,430,000 2,715,000 Less valuation allowance.......................................... (94,000) (30,000) (29,000) ---------- ---------- ---------- Net deferred tax assets........................................... 4,614,000 3,400,000 2,686,000 ---------- ----------- ----------- Deferred tax liabilities: Discount on purchased loans.................................. (526,000) - - Intangible assets............................................ - - (1,051,000) Deferred net loan origination fees........................... (379,000) (325,000) (323,000) Purchase accounting adjustments.............................. - (448,000) - Other........................................................ (241,000) (304,000) (163,000) ---------- ----------- ----------- Gross deferred tax liabilities.................................... (1,146,000) (1,077,000) (1,537,000) ---------- ----------- ----------- Net deferred tax assets........................................... $ 3,468,000 2,323,000 1,149,000 ========== =========== ===========
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. The Internal Revenue Service is examining the Company's federal income tax returns for the fiscal years 1994 through 1996. Tax returns for fiscal 1997 and subsequent years are subject to examination by the taxing authorities. WORLD ACCEPTANCE CORPORATION 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) EARNINGS PER SHARE The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS), for the years ended March 31, 1998, 1997 and 1996. The presentation of primary and fully-diluted EPS have been replaced with a presentation of basic and diluted EPS. All prior-period EPS data has been restated to reflect the adoption of SFAS No. 128. The following is a reconciliation of the numerators and denominators of the basic and diluted EPS calculations.
For the year ended March 31, 1998 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount BASIC EPS Income available to common shareholders.................. $ 8,098,441 18,959,348 .43 ==== EFFECT OF DILUTIVE SECURITIES Options.................................................. $ - 213,108 ---------- ----------- DILUTED EPS Income available to common shareholders plus assumed conversions............................... $ 8,098,441 19,172,456 .42 ========== =========== ==== For the year ended March 31, 1997 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount BASIC EPS Income available to common shareholders.................. $ 8,083,339 19,492,086 .41 ==== EFFECT OF DILUTIVE SECURITIES Options.................................................. $ - 340,439 ---------- ----------- DILUTED EPS Income available to common shareholders plus assumed conversions............................... $ 8,083,339 19,832,525 .41 ========== =========== ==== For the year ended March 31, 1996 ---------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount BASIC EPS Income available to common shareholders.................. $ 10,556,058 20,817,917 .51 ==== EFFECT OF DILUTIVE SECURITIES Options.................................................. $ - 835,179 ----------- ----------- DILUTED EPS Income available to common shareholders plus assumed conversions............................... $ 10,556,058 21,653,096 .49 ========== =========== ====
Options to purchase 1,938,669, 1,672,669 and 1,953,192 shares of common stock at various prices were outstanding during years ended March 31, 1998, 1997 and 1996, respectively, but were not included in the computation of diluted EPS because the option exercise price was greater than the average market price of the common shares. The options, which expire on various dates, were still outstanding as of March 31, 1998. 28 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) 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 $284,925, $268,214, and $258,240 for the years ended March 31, 1998, 1997, and 1996, respectively. STOCK OPTION PLANS The Company has a 1992 Stock Option Plan and a 1994 Stock Option Plan for the benefit of certain directors, officers, and key employees. Under these plans, 3,750,000 shares of authorized common stock have been reserved for issuance pursuant to grants approved by the Stock Option Committee. The options have a maximum duration of 10 years, may be subject to certain vesting requirements, and are priced at the market value of the Company's common stock on the date of grant of the option. The Company applies APB Opinion 25 in accounting for the stock option plans which are described in the preceding paragraph. Accordingly, no compensation expense has been recognized for the stock-based option plans. Had compensation cost been recognized for the stock option plans applying the fair-value-based method as prescribed by SFAS 123, the Company's net income and earning per share would have been reduced to the pro forma amounts indicated below:
($ in thousands except per share amounts) 1998 1997 1996 ----------- ----------- -------- Net Income As reported................................................. $ 8,098 8,083 10,556 Pro forma................................................... 7,553 7,639 10,338 Basic earnings per share As reported................................................. $ .43 .41 .51 === === ====== Pro forma................................................... $ .40 .39 .50 === === ====== Diluted earnings per share As reported................................................. $ .42 .41 .49 === === ====== Pro forma................................................... $ .39 .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 1998, 1997 and 1996, respectively: dividend yield of zero; expected volatility of 43%, 44% and 44%; risk-free interest rate of 5.82%, 6.63% and 6.63%; and expected lives of 10 years for all plans in all three years. WORLD ACCEPTANCE CORPORATION 29 STOCK OPTION PLANS, CONTINUED At March 31, 1998, the Company had the following options outstanding:
SHARES SHARES SHARES PRICE GRANT DATE GRANTED EXERCISABLE EXERCISED PER SHARE EXPIRATION DATE April 22, 1992 150,000 150,000 - $ 2.98 April 22, 2002 April 30, 1992 24,000 24,000 6,000 $ 3.04 April 30, 2002 October 20, 1992 358,500 358,500 200,500 $ 2.92 October 20, 2002 January 20, 1993 30,000 30,000 - $ 5.04 January 20, 2003 April 7, 1993 90,000 72,000 4,000 $ 6.33 April 7, 2003 April 30, 1993 18,000 18,000 - $ 5.54 April 30, 2003 October 19, 1993 373,500 301,800 13,500 $ 6.88 October 19, 2003 April 30, 1994 24,000 24,000 - $ 5.75 April 30, 2004 October 13, 1994 534,000 328,800 6,000 $ 7.48 October 13, 2004 April 1,1995 211,692 211,692 - $ 8.63 April 1, 2005 April 30, 1995 24,000 24,000 - $ 9.50 April 30, 2005 June 26, 1995 75,000 30,000 - $ 11.33 June 26, 2005 October 31, 1995 123,500 51,200 - $ 13.00 October 31, 2005 January 23, 1996 15,000 6,000 - $ 10.25 January 23, 2006 April 1, 1996 196,177 130,785 - $ 10.75 April 1, 2006 April 1, 1996 40,200 26,800 - $ 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 204,500 40,900 - $ 6.69 October 25, 2006 January 27, 1997 36,000 7,200 - $ 5.94 January 27, 2007 March 31, 1997 33,000 11,000 - $ 5.41 March 31, 2007 April 1, 1997 78,662 26,221 - $ 5.41 April 1, 2007 April 29, 1997 24,000 24,000 - $ 5.18 April 29, 2007 April 30, 1997 24,000 24,000 - $ 5.16 April 30, 2007 October 28, 1997 260,000 - - $ 5.19 October 28, 2007 ---------- ---------- --------- Total 2,986,331 1,959,498 230,000 ========= ========= =========
On April 1, 1998, the Company granted options for an additional 73,309 shares under the plans to certain executives and 44,100 shares to certain branch managers and on April 30, 1998, an additional 24,000 shares under the plans were granted to non-management directors pursuant to the terms of the plan, leaving 622,260 shares of common stock available for future grants. No expense has been recorded relative to stock options granted to date. 30 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) ACQUISITIONS During fiscal 1998, the Company purchased the net assets of twenty-seven consumer loan offices for a total consideration of $9,338,522. Total net loans receivable acquired amounted to $7,450,022, and the Company paid $1,925,437 for non-compete agreements with predecessor owners and other intangible assets. Eighteen of the twenty-seven offices acquired were merged into existing offices. 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. (12) 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, 1998, 1997 and 1996:
Years Ended March 31, -------------------------------------------------- 1998 1997 1996 ---- ---- ---- Sales and system support............................ $ 1,892,231 1,760,270 6,632,897 Cost of sales....................................... 433,289 324,650 3,209,818 ----------- ------------ ----------- Net margin...................................... 1,458,942 1,435,620 3,423,079 --------- ------------ ----------- General and administrative expenses: Personnel....................................... 973,302 1,026,172 974,299 Occupancy and equipment......................... 278,124 276,342 256,843 Advertising..................................... 9,449 7,601 5,729 Amortization of intangibles..................... 28,733 28,756 28,754 Other........................................... 155,909 181,575 214,819 ----------- ------------ ----------- 1,445,517 1,520,446 1,480,444 Interest expense.................................... - - 23,898 ----------- ------------ ----------- Net income (loss) before income taxes............... $ 13,425 (84,826) 1,918,737 =========== ============ ===========
WORLD ACCEPTANCE CORPORATION 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) QUARTERLY INFORMATION (UNAUDITED) The following sets forth selected quarterly operating data:
1998 1997 ---------------------------------- --------------------------------- First Second Third Fourth First Second Third Fourth (in thousands, except earnings per share date) Total revenues............................. $ 18,983 20,134 21,624 22,878 17,307 17,995 19,169 20,847 Provision for loan losses.................. 2,696 3,698 4,465 1,742 2,246 3,028 4,198 2,642 General and administrative expenses........ 12,624 12,843 14,318 13,685 11,007 10,998 12,415 12,426 Interest expense........................... 1,181 1,384 1,453 1,523 880 997 1,138 1,308 Income tax expense ........................ 832 740 495 1,842 1,110 1,041 496 1,305 -------- ------- ------- ------ ------- ------- ------- ------ Net income............................ 1,650 1,469 893 4,086 2,064 1,931 922 3,166 ======== ======= ======= ====== ======= ======= ======= ====== Earnings per share: Basic................................. $ .09 .08 .05 .22 .10 .10 .05 .17 ========= ======== ======= ====== ======= ======= ======= ====== Diluted............................... $ .09 .08 .05 .21 .10 .10 .05 .17 ======== ======= ======= ====== ======= ======= ======= ======
(14) LITIGATION The Company and several of its subsidiaries are named as co-defendants with a number of other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action, that has been consolidated with similar lawsuits 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 Act and RICO violations. The complaint is seeking certification 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, the discovery process is largely completed, and the court is considering the plaintiffs' motion for class certification and motion for partial summary judgement on the Truth-in-Lending Act claims. 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's future earnings could be affected. The Company disputes the allegations made in the complaint, and intends to continue to defend itself vigorously (See Note 6 of Notes to Consolidated Financial Statements). 32 WORLD ACCEPTANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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, 1998, 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. (15) 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 $545,400, 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. WORLD ACCEPTANCE CORPORATION 33 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, 1998 and 1997, 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, 1998. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of World Acceptance Corporation and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1998, in conformity with generally accepted accounting principles. Greenville, South Carolina April 23, 1998 34 WORLD ACCEPTANCE CORPORATION CORPORATE INFORMATION COMMON STOCK World Acceptance Corporation's common stock trades on the NASDAQ Stock Market under the symbol: WRLD. As of June 19, 1998, there were approximately 169 shareholders of record and approximately 2,500 persons or entities who hold their stock in nominee or "street" names through various brokerage firms. On this date there were 19,004,573 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 19, 1998, was 5 13/16. MARKET PRICE OF COMMON STOCK* 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 Fiscal 1998 -------------------------------------- Quarter High Low First $ 7 $ 5 1/8 Second 7 5 3/4 Third 6 1/2 4 25/32 Fourth 7 26/32 4 15/16 *All market prices have been adjusted to reflect 3-for1 stock split in August 1995. EX-21 3 EXHIBIT 21 Exhibit 21 SUBSIDIARIES of WORLD ACCEPTANCE CORPORATION
Jurisdiction of Incorporation Corporate Name or Organization - ------------------------------------------- ------------------------------ World Acceptance Corporation South Carolina World Finance Corporation of South Carolina, Inc. South Carolina World Finance Corporation of Georgia Georgia World Finance Corporation of Texas Texas World Acceptance Corporation of Oklahoma, Inc. Oklahoma World Finance Corporation of Louisiana Louisiana World Acceptance Corporation of Missouri Missouri World Finance Corporation of Tennessee Tennessee World Acceptance Corporation of Alabama Alabama WAC Insurance Company, Ltd. Turks & Caicos Islands WFC Limited Partnership Texas, but not Inc. WFC of South Carolina, Inc. South Carolina World Finance Corporation of Illinois Illinois World Finance Corporation of New Mexico New Mexico
EX-23 4 EXHIBIT 23 INDEPENDENT AUDITORS'CONSENT The Board of Directors World Acceptance Corporation We consent in incorporation by reference in registration statements (Nos. 33-52166 and 33-98938) on Form S-8 of World Acceptance Corporation of our report dated April 23, 1998, relating to the consolidated balance sheets of World Acceptance Corporation and subsidiaries as of March 31, 1998 and 1997 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, 1998, which report appears in the March 31, 1998 annual report on Form 10-K of World Acceptance Corporation. KPMG Peat Marwick LLP EX-27 5 FDS -- WORLD ACCEPTANCE CORPORATION
5 1,000 3-MOS 6-MOS 9-MOS 12-MOS MAR-31-1998 MAR-31-1998 MAR-31-1998 MAR-31-1998 APR-01-1997 APR-01-1997 APR-01-1997 APR-01-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 MAR-31-1998 2,251 2,283 1,302 1,213 0 0 0 0 90,864 98,819 111,649 103,385 6,434 7,527 8,398 8,445 0 0 0 0 86,681 93,575 104,553 96,153 6,249 6,714 6,485 6,425 0 0 0 0 103,804 113,724 124,632 118,382 2,554 3,230 3,609 6,899 60,582 68,332 77,932 64,182 0 0 0 0 0 0 0 0 40,668 42,162 43,091 47,301 0 0 0 0 103,804 113,724 124,632 118,382 0 0 0 0 18,984 39,117 60,741 83,619 0 0 0 0 0 0 0 0 12,624 25,467 39,785 53,470 2,696 6,394 10,859 12,601 1,181 2,565 4,018 5,541 2,483 4,691 6,079 12,007 832 1,572 2,067 3,909 1,651 3,119 4,012 8,098 0 0 0 0 0 0 0 0 0 0 0 0 1,651 3,119 4,012 8,098 0.09 0.16 0.21 0.43 0.09 0.16 0.21 0.42 EPS-BASIC
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