-----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, S7vRrARvj+qQ7euwFwF9YpABWgHoePi7QcFwFfO+i3pUa+iK9y6MJHdh5QUjLmsj Ag0Y51jc9Ka03k6FJ3W0hA== 0000950168-98-003572.txt : 19981118 0000950168-98-003572.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950168-98-003572 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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-Q SEC ACT: SEC FILE NUMBER: 000-19599 FILM NUMBER: 98750816 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-Q 1 WORLD ACCEPTANCE CORPORATION 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to ------------------- ----------------- Commission File Number: 0-19599 WORLD ACCEPTANCE CORPORATION ---------------------------- (Exact name of registrant as specified in its charter.) South Carolina 57-0425114 -------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 108 Frederick Street Greenville, South Carolina 29607 -------------------------------- (Address of principal executive offices) (Zip Code) (864) 298-9800 -------------- (registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of issuer's classes of common stock, as of the latest practicable date, November 16, 1998. Common Stock, no par value 19,016,573 -------------------------- ---------- (Class) (Outstanding) This Filing contains 19 pages. The Exhibit Index is on page 17. 1 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1. Consolidated Financial Statements (unaudited): Consolidated Balance Sheets as of September 30, 1998, and March 31, 1998 3 Consolidated Statements of Operations for the three-month periods and six-month periods ended September 30, 1998, and September 30, 1997 4 Consolidated Statements of Shareholders' Equity for the year ended March 31, 1998, and the six-month period ended September 30, 1998 5 Consolidated Statements of Cash Flows for the three-month periods and six-month periods ended September 30, 1998, and September 30, 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the three-month periods and six-month periods ended September 30, 1998, and September 30, 1997 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 4. Submission of Matters to a Vote of Securityholders 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 19 2 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, March 31, 1998 1998 ------------- ------------- ASSETS Cash $ 1,293,885 1,212,611 Gross loans receivable 141,133,490 130,559,256 Less: Unearned interest and fees (30,538,595) (27,173,845) Allowance for loan losses (8,908,102) (8,444,563) ------------- ------------- Loans receivable, net 101,686,793 94,940,848 Property and equipment, net 6,720,509 6,424,757 Other assets, net 6,217,527 6,193,300 Intangible assets, net 9,360,767 9,610,394 ------------- ------------- $ 125,279,481 118,381,910 ============= ============= LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Senior notes payable 58,250,000 53,700,000 Subordinated notes payable 10,000,000 10,000,000 Other note payable 482,000 482,000 Accounts payable and accrued expenses 8,712,273 6,898,630 ------------ ------------ Total liabilities 77,444,273 71,080,630 ------------ ------------ Shareholders' equity: Common stock, no par value -- -- Additional paid-in capital 935,921 864,968 Retained earnings 46,899,287 46,436,312 ------------ ------------ Total shareholders' equity 47,835,208 47,301,280 ------------ ------------ $125,279,481 118,381,910 ============ ============ See accompanying notes to consolidated financial statements. 3 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended Six months ended September 30, September 30, ---------------------------- --------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Interest and fee income $ 19,293,990 17,241,065 37,739,282 33,674,328 Insurance and other income 2,388,103 2,061,042 4,676,420 4,013,963 ------------ ------------ ------------ ------------ Total revenues 21,682,093 19,302,107 42,415,702 37,688,291 ------------ ------------ ------------ ------------ Expenses: Provision for loan losses 3,111,965 2,866,548 5,471,634 4,964,754 ------------ ------------ ------------ ------------ General and administrative expenses: Personnel 8,934,320 7,839,340 17,952,497 15,808,700 Occupancy and equipment 1,697,193 1,631,073 3,191,981 3,051,372 Data processing 368,619 303,639 720,670 599,701 Advertising 841,234 799,801 1,732,258 1,512,283 Legal 5,562,793 102,765 5,687,180 232,715 Amortization of intangible assets 316,391 300,320 627,077 785,793 Other 1,975,397 1,866,336 3,709,092 3,476,499 ------------ ------------ ------------ ------------ 19,695,947 12,843,274 33,620,755 25,467,063 ------------ ------------ ------------ ------------ Interest expense 1,411,655 1,383,406 2,627,338 2,564,882 ------------ ------------ ------------ ------------ Total expenses 24,219,567 17,093,228 41,719,727 32,996,699 ------------ ------------ ------------ ------------ Income (loss) before income taxes (2,537,474) 2,208,879 695,975 4,691,592 Income taxes (benefit) (867,000) 740,000 233,000 1,572,000 ------------ ------------ ------------ ------------ Net income (loss) $ (1,670,474) 1,468,879 462,975 3,119,592 ============ ============ ============ ============ Net Income (loss) per common share: Basic $ (.09) .08 .02 .16 ============ ============ ============ ============ Diluted $ (.09) .08 .02 .16 ============ ============ ============ ============ Weighted average common shares outstanding: Basic 19,006,888 18,952,769 19,005,005 18,945,545 ============ ============ ============ ============ Diluted 19,006,888 19,202,676 19,218,723 19,176,115 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 4 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Additional Paid-in Retained Capital Earnings Total ---------- ---------- ---------- Balances at March 31, 1997 $ 625,592 38,337,871 38,963,463 Proceeds from exercise of stock options (62,000 shares), including tax benefits of $58,543 239,376 -- 239,376 Net income for the year -- 8,098,441 8,098,441 ---------- ---------- ---------- Balances at March 31, 1998 864,968 46,436,312 47,301,280 Proceeds from exercise of stock options (18,000 shares), including tax benefit of $18,453 70,953 -- 70,953 Net income for the six months -- 462,975 462,975 ---------- ---------- ---------- Balances at September 30, 1998 $ 935,921 46,899,287 47,835,208 ========== ========== ==========
See accompanying notes to consolidated financial statements. 5 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended Six months ended September 30, September 30, ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- Cash flows from operating activities: Net income (loss) $(1,670,474) 1,468,879 462,975 3,119,592 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,111,965 2,866,548 5,471,634 4,964,754 Amortization of intangible assets 316,391 300,320 627,077 785,793 Amortization of loan costs and discounts 33,172 31,258 60,693 57,468 Depreciation 376,405 363,649 710,244 718,271 Change in accounts: Other assets, net 171,258 (1,953,420) (84,920) (1,883,130) Accounts payable and accrued expenses 2,794,287 683,769 1,832,096 (1,264,202) --------- ------- --------- ---------- Net cash provided by operating activities 5,133,004 3,761,003 9,079,799 6,498,546 --------- ------- --------- ---------- Cash flows from investing activities: Increase in loans, net (5,786,913) (5,012,704) (11,237,223) (7,977,766) Net assets acquired from office acquisitions, primarily loans (754,725) (4,730,288) (985,275) (5,037,552) Purchases of premises and equipment (697,425) (813,160) (1,001,077) (1,314,610) Purchases of intangible assets (355,100) (939,936) (377,450) (1,076,936) --------- ------- --------- ---------- Net cash used by investing activities (7,594,163) (11,496,088) (13,601,025) (15,406,864) --------- ------- --------- ---------- Cash flows from financing activities: Proceeds (repayment) of senior notes payable, net 2,950,000 (2,250,000) 4,550,000 (350,000) Proceeds from senior subordinated notes -- 10,000,000 -- 10,000,000 Proceeds from exercise of stock options 35,000 17,500 52,500 55,417 --------- ------- --------- ---------- Net cash provided by financing activities 2,985,000 7,767,500 4,602,500 9,705,417 --------- ------- --------- ---------- Increase (decrease) in cash 523,841 32,415 81,274 797,099 Cash, beginning of period 770,044 2,250,757 1,212,611 1,486,073 ----------- ----------- ----------- ----------- Cash, end of period $ 1,293,885 2,283,172 1,293,885 2,283,172 =========== =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest expense $ 1,286,218 899,903 2,773,708 2,363,686 Cash paid for income taxes 2,734,960 1,979,435 3,753,385 3,678,770 Supplemental schedule of noncash financing activities: Tax benefits from exercise of stock options 10,090 7,786 18,453 23,204
See accompanying notes to consolidated financial statements. 6 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements of the Company at September 30, 1998, and for the periods then ended were prepared in accordance with the instructions for Form 10-Q and are unaudited; however, in the opinion of management, all adjustments (consisting only of items of a normal recurring nature) necessary for a fair presentation of the financial position at September 30, 1998, and the results of operations and cash flows for the periods then ended, have been included. The results for the periods ended September 30, 1998, are not necessarily indicative of the results that may be expected for the full year or any other interim period. These consolidated financial statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the Company's audited financial statements and related notes for the year ended March 31, 1998, included in the Company's 1998 Annual Report to Shareholders. NOTE 2 - ALLOWANCE FOR LOAN LOSSES The following is a summary of the changes in the allowance for loan losses for the periods indicated (unaudited):
Three months Six months ended September 30, ended September 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Balance at beginning of period $ 8,799,019 6,433,534 8,444,563 6,283,459 Provision for loan losses 3,111,965 2,866,548 5,471,634 4,964,754 Loan losses (3,132,470) (2,822,196) (5,479,865) (5,039,398) Recoveries 323,695 245,802 654,518 498,829 Allowance on acquired loans (194,107) 802,764 (182,748) 818,808 ----------- --------- --------- --------- Balance at end of period $ 8,908,102 7,526,452 8,908,102 7,526,452 =========== ========= ========= ========= NOTE 3 - PARADATA FINANCIAL SYSTEMS (PARADATA) The following data for ParaData was included in the Consolidated Statements of Operations for the periods ended September 30, 1998 and 1997 (unaudited): Three months Six months ended September 30, ended September 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Sales and system-support $ 534,912 463,355 1,136,811 870,724 Cost of sales 100,812 75,688 218,220 163,701 --------- --------- --------- --------- Net margin (included in other income) 434,100 387,667 918,591 707,023 --------- --------- --------- --------- General and administrative expenses Personnel 277,806 253,425 571,773 469,285 Occupancy and equipment 35,870 69,011 64,866 135,272 Advertising 1,162 2,575 4,318 2,825 Amortization of intangibles -- 7,189 -- 14,378 Other 44,022 38,708 92,820 78,478 --------- --------- --------- --------- 358,860 370,908 733,777 700,238 --------- --------- --------- --------- Net income before income taxes $ 75,240 16,759 184,814 6,785 ========= ========= ========= =========
7 NOTE 4 - LEGAL EXPENSE Since April 1995, the Company and several of its subsidiaries have been parties to litigation challenging the Company's non-filing insurance practices. Non-filing insurance is an insurance product that lenders like the Company can purchase in lieu of filing a UCC financing statement covering the collateral of their borrowers. The litigation against the Company has been consolidated with other litigation against other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action in the U.S. District Court in Alabama under the caption In re: Consolidated "Non-filing Insurance" Fee Litigation (Multidistrict Litigation Docket No. 1130), U.S. District Court, Middle District of Alabama, Northern Division). On November 11, 1998, the Company and its subsidiaries named in the action entered into a settlement agreement. Pursuant to the settlement agreement, which is subject to the court's approval, the Company has agreed to settle all claims alleged in the litigation involving it and its subsidiaries for an aggregate cash payment of $5 million. In addition, the terms of the settlement will curtail certain non-filing practices by the Company and its subsidiaries and will allow the court to approve criteria defining those circumstances in which the Company's subsidiaries can make non-filing insurance claims going forward. As a result of the settlement, non-filing insurance fees charged to borrowers will be reduced by 25%. The settlement agreement, which includes the settlement by several other defendants in the litigation, including the Company's insurer, is subject to the court's approval because the settlement concerns a class action. The Company anticipates that a hearing will be held by the court during the fourth quarter of its current fiscal year with respect to approval of the settlement. The Company has recorded an accrual for settlement costs, including the expected expenses to comply with the terms of the settlement, of $5.4 million in the quarter ended September 30, 1998. Going forward, the Company expects that the settlement will limit and reduce the coverage for the types of losses with respect to which its subsidiaries will submit claims. The Company cannot predict the amount of this reduction, but believes that the settlement will negatively impact the Company in the near term, but should not have a material adverse effect on the Company's results of operations over time. NOTE 5 - ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD'S (FASB) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 130 In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income (Statement 130). Statement 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statements and display the balance of other comprehensive income separately in the equity section of a statement of financial position. The Company adopted Statement 130 effective April 1, 1998, and no adjustments were necessary and comprehensive income (loss) is equal to net income (loss). 8 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth certain information derived from the Company's consolidated statements of operations and balance sheets, as well as operating data and ratios, for the periods indicated (unaudited):
Three months Six months ended September 30, ended September 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in thousands) Average gross loans receivable (1) $ 139,013 121,206 136,006 118,042 Average loans receivable (2) 108,170 94,086 106,082 91,811 Expenses as a % of total revenue: Provision for loan losses 14.4% 14.9% 12.9% 13.2% General and administrative (3) 90.8% 66.5% 79.3% 67.6% Total interest expense 6.5% 7.2% 6.2% 6.8% Operating margin (4) (5.2)% 18.6% 7.8% 19.3% Return on average assets (annualized) 6.2% 5.4% 6.6% 5.9% Offices opened or acquired, net 8 11 14 24 Total offices (at period end) 374 360 374 360
(1)Average gross loans receivable have been determined by averaging month-end gross loans receivable over the indicated period. (2)Average loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period. (3)Includes $5.4 million accrual for pending legal settlement for the three and six-month periods ended September 30, 1998. Excluding this one time charge, the ratios would have been 65.9% and 66.5% for the three and six-month periods, respectively. (4)Operating margin is computed as total revenues less provision for loan losses and general and administrative expenses, as a percentage of total revenues. Excluding the $5.4 million charge for the pending legal settlement, the operating margins for the three and six-month periods ended September 30, 1998 would have been 19.7% and 20.6%, respectively. Pending Legal Settlement Since April 1995, the Company and several of its subsidiaries have been parties to litigation challenging the Company's non-filing insurance practices. Non-filing insurance is an insurance product that lenders like the Company can purchase in lieu of filing a UCC financing statement covering the collateral of their borrowers. The litigation against the Company has been consolidated with other litigation against other finance companies, jewelry and furniture retailers, and insurance companies in a purported nationwide class action in the U.S. District Court in Alabama under the caption In re: Consolidated "Non-filing Insurance" Fee Litigation (Multidistrict Litigation Docket No. 1130), U.S. District Court, Middle District of Alabama, Northern Division). On November 11, 1998, the Company and its subsidiaries named in the action entered into a settlement agreement. Pursuant to the settlement agreement, which is subject to the court's approval, the Company has agreed to settle all claims alleged in the litigation involving it and its subsidiaries for an aggregate cash payment of $5 million. In addition, the terms of the settlement will curtail certain non-filing practices by the Company and its subsidiaries and will allow the court to approve criteria defining those circumstances in which the Company's subsidiaries can make non-filing insurance claims going forward. As a result of the settlement, non-filing insurance fees charged to borrowers will be reduced by 25%. The settlement agreement, which includes the settlement by several other defendants in the litigation, including the Company's insurer, is subject to the court's approval because the settlement concerns a class action. The Company anticipates that a hearing will be held by the court during the fourth quarter of its current fiscal year with respect to approval of the settlement. 9 The Company has recorded an accrual for settlement costs, including the expected expenses to comply with the terms of the settlement, of $5.4 million in the quarter ended September 30, 1998. Going forward, the Company expects that the settlement will limit and reduce the coverage for the types of losses with respect to which its subsidiaries will submit claims. The Company cannot predict the amount of this reduction, but believes that the settlement will negatively impact the Company in the near term, but should not have a material adverse effect on the Company's results of operations over time. Comparison of Three Months Ended September 30, 1998, Versus Three Months Ended September 30, 1997 For the three months ended September 30, 1998, the Company reported a net loss of $1.7 million. This loss was due to a $5.4 million accrual for legal expenses resulting from a pending settlement of certain litigation (see Pending Legal Settlement). Excluding the effect of this one time charge, offset somewhat by a reduction of income taxes, net income amounted to $1,909,000 for the three months ended September 30, 1998, a 29.9% increase from the $1,469,000 earned during the corresponding three-month period of the previous year. This increase resulted from increases in operating income (revenues less provision for loan losses and general and administrative expenses) of approximately $682,000, or 19.0%, and operating margin percentage, and was offset by slight increases in interest expense and income taxes as described below. Interest and fee income for the quarter ended September 30, 1998, increased by $2.1 million, or 11.9%, over the same period of the prior year. This increase resulted primarily from the $14.1 million increase, or 15.0%, in average loans receivables over the two corresponding periods. The increase in interest and fees was less than the increase in average balances outstanding due to a slight reduction in the overall yield in the loan portfolio, which was due to lower interest rates charged on larger loans made in select offices of the Company. Insurance commissions and other income increased by $327,000, or 15.9%, when comparing the two quarterly periods. Insurance commissions increased by 6.3%, tracking the growth in loans in those states that allow the sale of credit insurance. Other income increased by $247,000, or 31.2%, primarily as the result of gross profit increases at the Company's ParaData subsidiary and the World Class Buying Club. 10 WORLD ACCEPTANCE CORPORATION MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED Comparison of Three Months Ended September 30, 1998, Versus Three Months Ended September 30, 1997, continued Total revenues rose to $21.7 million during the quarter ended September 30, 1998, a 12.3% increase over the $19.3 million in total revenues for the same quarter of the prior year. Revenues from the 336 offices open throughout both three-month periods increased by approximately 4.9%. At September 30, 1998, the Company had 374 offices in operation, a net increase of 8 offices during the current quarter, and 14 offices since the beginning of the fiscal year. The provision for loan losses amounted to $3.1 million during the quarter ended September 30, 1998, representing an 8.6% increase over the $2.9 million during the same quarter of fiscal 1998. This increase resulted from increases in the general allowance for loan losses and in loan losses themselves. Although actual net charge-offs during the quarter increased by $232,000, or 9.0%, net charge-offs as a percentage of annualized average loans decreased from 11.0% for the quarter ended September 30, 1997, to 10.4% for the most recent quarter. The continuing improvement in the Company's charge-off ratios has greatly contributed to the Company's enhanced earnings during the past three quarters. There can be no assurance, however, that this trend will continue. Effective with the beginning of the current fiscal year, the Company changed its method of accounting for charge-offs to a net of unearned income basis. Prior to April 1, 1998, all loans were charged-off for the gross amount with any remaining unearned income recognized as interest and fee income. There is no net income effect of the change, but a reclassification between the provision for loan losses and interest and fee income has been made. All prior year numbers have been restated to reflect the change making the corresponding numbers comparable. Excluding the pending legal settlement, general and administrative expenses for the quarter ended September 30, 1998, increased by $1.5 million, or 11.3%, over the same quarter of fiscal 1998. This increase resulted primarily from the additional expenses associated with the 23 new offices opened or acquired between September 30, 1997, and September 30, 1998. During the same 12-month period, the Company has also sold or merged 9 offices with other existing offices. These were offices that had not grown as expected to a profitable size within a reasonable period of time. As a percentage of total revenues, total general and administrative expenses decreased from 66.5% for the quarter ended September 30, 1997, to 65.9% for the most recent quarter. Additionally, excluding the expenses associated with ParaData, overall general and administrative expenses when divided by the average open offices increased by 5.7% when comparing the two periods. Interest expense increased by $28,000, or 2.0%, when comparing the two corresponding quarterly periods. This increase resulted from the slight increase in the level of debt, which grew from $67.9 million at September 30, 1997, to $68.3 million at September 30, 1998. Comparison of Six Months Ended September 30, 1998, Versus Six Months Ended September 30, 1997 For the six-month period ended September 30, 1998, net income amounted to $463,000. Excluding the effects of the $5.4 million pending legal settlement and related income tax benefit, net income amounted to $4.0 million, an increase of $922,000, or 29.6%, from the corresponding six-month period of the prior year. Operating income increased by $1.5 million, or 20.2%, over the two periods. This increase was offset by an increase in both interest expense and income taxes. Total revenues amounted to $42.4 million during the current six-month period, an increase of $4.7 million, or 12.5%, over the prior-year period. This increase resulted from an increase in interest and fee income of 12.1% combined with an increase in insurance and other income of 16.5%. Revenues from the 336 offices open throughout both six-month periods increased approximately 4.9%. 11 WORLD ACCEPTANCE CORPORATION MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED Comparison of Six Months Ended September 30, 1998, Versus Six Months Ended September 30, 1997, continued Interest and fee income rose by $4.1 million, or 12.1%, during the two corresponding six-month periods primarily as a result of increases in loan balances outstanding. Average loans receivable were $106.1 million during the six months ended September 30, 1998, representing a 15.5% increase over the average balances of the prior year. Other income increased by 16.5% due to increased insurance commissions, as well as increased gross profits from ParaData and WCBC sales. The provision for loan losses increased by $507,000, or 10.2%, during the current six-month period when compared to the same period of fiscal 1998. This increase resulted in an increase in the general reserve for loan losses, which is a function of gross loans outstanding, as well as an increase in loan losses. Net charge-offs increased by $285,000, or 6.3%, when comparing the two six-month periods. As an annualized percentage of average loans, this represented a decrease to 9.1% during the current six-month period compared to 9.9% for the same period of the prior fiscal year. General and administrative, excluding the pending legal settlement, expenses increased by $2,754,000, or 10.8%, during the most recent six-month period. As a percentage of total revenues, these expenses decreased from 67.6% during the prior year six-month period to 66.5% during the current period. The Company's expense ratios have benefited from the merger or sale of nine unprofitable offices during the year, as well as the opening of fewer new offices during the current fiscal year. Excluding the expenses associated with ParaData, overall general and administrative expenses, when divided by the average open offices, increased by 5.3% when comparing the two six-month periods. Interest expense increased by $62,000 when comparing the two six-month periods, an increase of only 2.4%. This reflects the small increase in overall debt from September 1997 to the end of the current quarter, a period during which the Company's generated excess cash while growing total assets by 9.3% and total debt by only 0.6%. The effective income tax rate remained constant at 33.5% during the six months ended September 30, 1998, from the same period ended September 30, 1997. Liquidity and Capital Resources The Company's primary sources of funds are cash flow from operations and borrowings under its revolving credit agreement. The Company's primary ongoing cash requirements are funding the opening and operation of new offices, funding overall growth of loans outstanding (including acquisitions), the legal settlement and the repayment of existing debt. The Company has a $65.0 million revolving credit agreement, $8.0 million of senior term notes, and $10.0 million of subordinated notes. The revolving credit facility expires on September 30, 1999, and bears interest, at the Company's option, at the agent's prime rate or LIBOR plus 1.60%. At September 30, 1998, the interest rate under the facility was 7.17%, and the Company's outstanding balance was $50.25 million, leaving $14.75 million in borrowing availability under existing borrowing base limitations (based on eligible loans receivable). The senior term notes provide for interest payments to be made semi-annually at a fixed rate of 8.5%, with annual principal payments of $4.0 million to be made on December 1, 1998 and 1999. The subordinated notes provide for interest payments to be made quarterly at a fixed rate of 10.0%. Annual principal payments of $2.0 million will be due beginning June 1, 1999, with a final maturity date of June 1, 2004. Borrowings under the revolving credit agreement, the senior term notes, and the subordinated notes are secured by a lien on substantially all the tangible and intangible assets of the Company and its subsidiaries pursuant to various security agreements. The Company believes that cash flow from operations and borrowings under its revolving credit facility will be adequate to fund the cost of the pending legal settlement, to fund the principal payment due under the senior term and subordinated notes as well as fund the expected costs of opening and operating new offices, including funding initial operating losses of new offices, acquired offices and funding loans receivable originated by those offices and the Company's other offices. 12 WORLD ACCEPTANCE CORPORATION MANAGEMENTS' DISCUSSION AND ANALYSIS, CONTINUED Inflation The Company does not believe that inflation has a material adverse effect on its financial condition or results of operations. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. While increases in operating costs would adversely affect the Company's operations, the consumer lending laws of three of the six states in which the Company currently operates allow indexing of maximum loan amounts to the Consumer Price Index. These provisions will allow the Company to make larger loans at existing interest rates, which could partially offset the effect of inflationary increases in operating costs. Quarterly Information and Seasonality The Company's loan volume and corresponding loans receivable follow seasonal trends. The Company's highest loan demand occurs each year from October through December, its third fiscal quarter. Loan demand is generally the lowest and loan repayment is highest from January to March, its fourth fiscal quarter. Loan volume and average balances remain relatively level during the remainder of the year. This seasonal trend causes fluctuations in the Company's cash needs and quarterly operating performance through corresponding fluctuations in interest and fee income and insurance commissions earned, since unearned interest and insurance income are accreted to income on a collection method. Consequently, operating results for the Company's third fiscal quarter are significantly lower than in other quarters and operating results for its fourth fiscal quarter are generally higher than in other quarters. Year 2000 The Company recognizes that there is a business risk in computerized systems and products as the calendar rolls over into the next century. Failure of these systems and products to correctly process the date could cause miscalculations, unpredictable or inconsistent results, or complete system failures. This problem is commonly called the "year 2000 problem." In particular, in the Company's line of business, the year 2000 problem could cause results such as miscalculations of interest on loans or other significant problems. The Company has determined that its primary software package, the "Loan Manager System" developed and maintained by its wholly owned subsidiary, ParaData Financial Systems, is year 2000 compliant. The Company is also dependent upon several outside vendors for processing information such as payroll, general ledger, benefits administration, etc. Inquiries have been made of and assurances received from, each of these providers that these systems are also prepared for the year 2000. Nevertheless, the Company intends to conduct tests of all primary and secondary systems during the next 12 months to ensure the accuracy of information to the extent possible. The Company believes that its total costs of addressing the year 2000 problem has been, and will continue to be, immaterial. The Company believes the most reasonably likely worst case year 2000 scenario would be the failure of key suppliers (e.g. utility providers, phone and data communication vendors, banks, etc.) to achieve year 2000 compliance, resulting in lost revenues due to forced office closings or loss of communications for extended periods of time. Currently, based on responses obtained from third parties to date, the Company is not aware of any material third parties that do not expect to be year 2000 compliant. However, due to the uncertainty surrounding the readiness of third parties, the Company is unable to determine whether the consequences of year 2000 failures will materially affect the Company's financial condition or results of operations. The Company maintains a contingency plan that allows individual offices to operate in a manual environment for short periods of time; however, these alternatives would not be sufficient should year 2000 failures cause blackouts for extended periods. The year 2000 disclosure set forth above should be read in connection with "Forward-Looking Information," which follows. 13 Forward-Looking Information This report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain various "forward-looking statements," within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on management's belief and assumptions, as well as information currently available to management. Specifically, management's statements of expectations with respect to the litigation and pending settlement (the "Settlement") described above in "--Pending Legal Settlement" the litigation described below in "Legal Proceedings," and the matters discussed above in "--Year 2000," may be deemed forward-looking statements. When used in this document, the words "anticipate," "estimate," "expect," and similar expressions may identify forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected. Among the key factors that could cause the Company's actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: changes in interest rates; risks inherent in making loans, including repayment risks and value of collateral; recently-enacted or proposed legislation; whether, and the terms upon which, court approval of the Settlement is obtained; the occurrence of non-filing claims at historical levels in circumstances validated by the Settlement; the timing and amount of revenues that may be recognized by the Company; changes in current revenue and expense trends (including trends affecting charge-offs); changes in the Company's markets and general changes in the economy (particularly in the markets served by the Company); the ability of the Company and third parties with whom the Company deals to achieve year 2000 compliance; the unpredictable nature of litigation; and other matters discusses in this Report and the Company's other filings with the Securities and Exchange Commission. Legal Proceedings The Company is a party to certain legal proceedings. See Part II, Item 1. 14 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings In addition to the litigation discusses in "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company has been named as a defendant in an action, Turner v. World Acceptance Corp. pending in District Court for the Fourteenth Judicial District, Tulsa County, Oklahoma (No. CJ-97-1921). The action, commenced against the Company on May 20, 1997, names numerous other consumer finance companies as defendants, and seeks certification as a statewide class action. The action alleges that the Company and other consumer finance defendants collected excess finance charges in connection with refinancing certain consumer finance loans in Oklahoma and seeks money damages and an injunction against further collection of such charges. The Company has filed an answer in the action denying liability, and discovery is proceeding. The plaintiff's claim is based on a recent opinion of the Oklahoma Attorney General interpreting a provision of the Oklahoma Consumer Credit Code with respect to the permitted amount of certain loan refinance charges in a manner contrary to prior regulatory practice in existence in Oklahoma since 1969. Enforcement of the Oklahoma Attorney General's opinion has been enjoined, and such action is currently pending before the Oklahoma Supreme Court. In addition, the State of Oklahoma has recently enacted legislation to clarify the interpretation of the disputed provision of the Oklahoma Consumer Credit Code consistent with prior regulatory practice. The Company intends to defend this action vigorously. From time to time the Company is involved in other routine litigation relating to claims arising out of its operations in the normal course of business. The Company believes that it is not presently a party to any such other pending legal proceedings that would have a material adverse effect on its financial condition. Item 2. Changes in Securities None. The Company's credit agreements contain certain restrictions on the payment of cash dividends on its capital stock. 15 Item 4. Submission of Matters to a Vote of Securityholders (a) The 1998 Annual Meeting of Shareholders was held on August 4, 1998. (b) Pursuant to Instruction 3 to Item 4, this paragraph need not be answered. (c) At the 1998 Annual Meeting of Shareholders, the following two matters were voted upon and passed. The tabulation of votes was: (1) The election of seven Directors to serve until the 1999 Annual Meeting of Shareholders: VOTES IN FAVOR VOTES WITHHELD* Ken R. Bramlett, Jr. 15,025,240 61,885 --------------------- --------- James R. Gilreath 15,019,240 67,885 --------------------- --------- William S. Hummers III 15,025,240 61,885 --------------------- --------- A. Alexander McLean III 15,025,240 61,885 --------------------- --------- R. Harold Owens 15,019,240 67,885 --------------------- --------- Charles D. Walters 15,056,990 30,135 --------------------- --------- Charles D. Way 15,024,940 62,185 --------------------- --------- (2) The ratification of the selection of KPMG Peat Marwick as Independent Auditors: VOTES IN FAVOR VOTES AGAINST ABSTENTIONS* -------------- ------------- ------------ 15,087,125 7,050 51,250 ---------- ----- ------ *There were no broker non-votes on these routine items. 16 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION, CONTINUED Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
Filed Herewith (*) or Previous Company Exhibit Exhibit Registration Number Description Number No. or Report - -------------------------------------------------------------------------------------------------------------- 3.1 Second Amended and Restated Articles of Incorporation of the 3.1 1992 10-K Company 3.2 First Amendment to Second Amended and Restated Articles 3.2 1995 10-K of Incorporation 3.3 Amended Bylaws of the Company 3.4 33-42879 4.1 Specimen Share Certificate 4.1 33-42879 4.2 Articles 3, 4 and 5 of the Form of Company's Second 3.1, 3.2 1995 10-K Amended and Restated Articles of Incorporation (as amended) 4.3 Article II, Section 9 of the Company's Second Amended 3.2 1995 10-K and Restated Bylaws 4.4 Amended and Restated Revolving Credit Agreement, dated as 4.4 9-30-97 10-Q of June 30, 1997, between Harris Trust and Savings Bank, the Banks signatory thereto from time to time and the Company 4.5 Amended and Restated Note Agreements, dated as of June 30, 1997, 4.5 9-30-97 10-Q between Jefferson-Pilot Life Insurance Company and the Company 4.6# Amended and Restated Note Agreement, dated as of June 30, 1997, 4.6 9-30-97 10-Q between Principal Mutual Life Insurance Company and the Company 4.7 Note Agreement, dated as of June 30, 1997, between Principal 4.7 9-30-97 10-Q Mutual Life Insurance Company and the Company re: 10% Senior Subordinated Secured Notes 4.8 Amended and Restated Security Agreement, Pledge and Indenture 4.8 9-30-97 10-Q of Trust, dated as of June 30, 1997, between the Company and Harris Trust and Savings Bank, as Security Trustee 10.1 Employment Agreement of Charles D. Walters, effective April 1, 10.1 1994 10-K 1994 10.2 Employment Agreement of A. Alexander McLean, III, effective 10.2 1994 10-K April 1, 1994 10.3 Employment Agreement of R. Harold Owens, effective June 26, 10.3 1995 10-K 1995 17 10.4 Securityholders' Agreement, dated as of September 19, 1991, 10.5 33-42879 between the Company and certain of its securityholders 10.5 1992 Stock Option Plan of the Company 4 33-52166 10.6 1994 Stock Option Plan of the Company, as amended 10.6 1995 10-K 10.7 The Company's Executive Incentive Plan 10.6 1994 10-K 10.8 The Company's Executive Strategic Incentive Plan 10.8 1995 10-K 10.9+ Amendment No. 1, dated as of April 1, 1996, to the Executive 10.9 1996 10-K Strategic Incentive Plan 27 Financial Data Schedules (for SEC purposes only)
# Omitted from filing -- substantially identical to immediately preceding exhibits, except for the parties thereto and the principal amount involved. (b) Reports on Form 8-K. There were no reports filed on Form 8-K during the quarter ended September 30, 1998. 18 WORLD ACCEPTANCE CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WORLD ACCEPTANCE CORPORATION Dated: November 16, 1998 /s/ C. D. Walters ------------------------------------------ C. D. Walters, Chief Executive Officer Dated: November 16, 1998 /s/ A. A. McLean III ------------------------------------------ A. A. McLean III, Executive Vice President and Chief Financial Officer 19 EX-27 2 EXHIBIT 27-WORLD ACCEPTANCE CORP FDS
5 0000108385 WORLD ACCEPTANCE CORPORATION 1,000 3-MOS 6-MOS MAR-31-1999 MAR-31-1999 APR-01-1998 APR-01-1998 JUN-30-1998 SEP-30-1998 770 1,294 0 0 107,061 110,595 8,799 8,908 0 0 99,032 102,981 6,395 6,721 0 0 121,171 125,279 5,928 8,712 65,782 68,732 0 0 0 0 49,461 47,835 0 0 121,171 125,279 0 0 20,734 42,416 0 0 0 0 13,925 33,621 2,360 5,472 1,216 2,627 3,233 696 1,100 233 2,133 463 0 0 0 0 0 0 2,133 463 0.11 0.02 0.11 0.02
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